Houston’s next mayor almost certainly will face an economic cliff sometime after their first year in office.
For years, Houston has struggled annually to pass a balanced budget. City expenditures often outweigh revenues, with one-time funding sources like federal COVID-19 relief money and land sales being used as stop-gap measures.
Mayor Sylvester Turner has built up the city’s reserve funds during his time in office to help offset future imbalances, but that money is not projected to last long, particularly with the end of federal COVID spending via the American Rescue Plan Act.
The situation has reignited conversations among city leaders about scrapping or modifying the city’s property tax revenue cap, which has deferred $1.4 billion from city coffers since 2014.
The idea also has gained traction among residents. A majority of Houstonians said they were open to changing the city’s revenue cap to increase funding for essential services, according to a recent Kinder Institute for Urban Research survey.
So, what is the city’s property tax revenue cap, and would removing it solve Houston’s financial woes?
To better understand the answers to these questions and more, Houston Landing asked economic experts to weigh in.
What is Houston’s property tax revenue cap?
Houston’s property tax revenue cap is a limit on the amount of money the city is able to collect each year in property taxes.
Each year, the cap is defined by the lower of two possible numbers:
- the prior year’s cap, plus population and inflation growth, or;
- the prior year’s revenues plus 4.5 percent.
This revenue cap was instituted by voters in 2004, but the city did not hit the revenue cap until 2014. The city has had to reduce its property tax rate nine times in the last 10 years to keep from exceeding the limit.
The revenue cap has saved the typical homeowner a cumulative $950 from 2013 to 2022, according to a Houston Chronicle report, but most homeowners still pay more in city taxes each year because of rising home values.
This fiscal year, the revenue cap is about $1.4 billion, an $89.4 million increase from last year, according to the city’s budget.
Each year, the city conducts multiple calculations to determine the lower of the two possible revenue caps, and to ensure proposed revenues do not exceed the lower of those two numbers, said Melissa Dubowski, Houston’s deputy director of treasury and capital management.
Along with ensuring the legality of its tax revenues, the city also must ensure its tax rate is in compliance with Texas law. Under a 2019 state law, a local government’s tax rate cannot increase more than 3.5 percent in a given year without voter approval.
The math can be confusing, Dubowski said, but the city tries to make its work as transparent as possible by publishing calculations online with the Harris County Tax Office.
Changing or removing the cap
Under the charter language approved by voters in 2004, removing or raising the city’s tax revenue cap would require voter approval.
Residents have done so once since the institution of the 2004 revenue cap, voting in 2006 to allow an extra $90 million to be collected annually and used for public safety purposes.
Steven Craig, an economics professor at the University of Houston, cautioned that removing the cap may not be a Holy-Grail solution.
If residents think their tax bills are disproportionately higher than the services provided by the city with that tax money, they could move outside city limits in search of lower taxes, he said.
That would nullify any increase in the city’s revenue cap, Craig said, since the taxable population would decrease, resulting in less tax money being collected.
Dubowski, however, said the city has a large and diverse tax base, with taxable values increasing 13 percent year over year.
Even if voters were to raise or remove the city’s revenue cap, Houston still would need to abide by the state law limiting local tax rate increases.
Dubowski said she has not spoken with any mayoral candidates about their views on changing the revenue cap, but her office is actively looking at the city’s revenues and expenditures in preparation for balancing the budget of a new mayoral administration.
Current legal woes and what happens next
The city’s revenue cap has been at the center of a 20-year legal battle.
In 2004, two separate revenue caps were up for a vote, identified as Proposition 1 and Proposition 2.
Proposition 2 was a ballot initiative backed by anti-tax advocates that would have limited the city’s tax revenue to the sum of inflation and population growth.
Proposition 1, presented by then-Mayor Bill White as a less stringent alternative to Proposition 2, is the revenue cap currently enforced by the city. The ballot initiative included language that it would take precedence over Proposition 2 if it passed with more votes.
Bruce Hotze, one of the backers of Proposition 2, has fought the city in court for nearly two decades since Proposition 1 became law.
Earlier this year, the Texas Supreme Court ruled in Hotze’s favor, saying the city ordinance that allowed Proposition 1 to be implemented because it received more votes than Proposition 2 violates state law.
Justice Jane Bland sent the case back to trial court, which she tasked with determining whether the dueling revenue caps can be unified, and how to accomplish that.
If a trial court finds the two caps can be unified, the city may be forced to enact a stricter revenue cap going forward. A court date has not yet been set for that trial.