State Tax Limits and Municipal Property Tax Adjustment in Texas

• In Event: Property Taxation and Local Fiscal Health

Abstract

For nearly four decades, Texas municipalities operated under a largely stable property tax limitation framework in which the rollback threshold was effectively set at 8 percent. Senate Bill 2, enacted in 2019, marked a major reform by replacing that older framework with the voter-approval rate and lowering the key maintenance and operations growth threshold to 3.5 percent for most cities. This was not a minor administrative change. It altered how cities could convert rising property values into revenue, increased the political salience of local tax-setting decisions, and changed the institutional relationship between state-imposed tax limits and local fiscal discretion. This paper examines how SB2 affected municipal property tax rates and levy growth in Texas, and whether those effects differed across cities with different levels of fiscal capacity.

The study uses an original Texas municipality-year panel for 2016 to 2024 constructed from annual city-level Truth-in-Taxation records published by the Texas Comptroller and merged with population and socioeconomic data. The final unbalanced panel contains 9,744 municipality-year observations across 1,101 cities. The main outcomes are adopted total municipal property tax rates and levy growth. To estimate the effects of SB2, the analysis uses municipality and year fixed-effects models with clustered standard errors, along with difference-in-differences models that test whether post-reform changes differ across baseline fiscal-capacity groups. Separate analyses also focus on cities with populations above 30,000, where SB2’s voter-approval framework was more binding.

The results suggest that SB2 had real policy effects. Following the reform, adopted municipal property tax rates declined in both the statewide sample and the larger cities where the law was most binding. On average, adopted rates fell by about 2.7 cents per $100 of taxable value statewide and by about 3.2 cents per $100 in cities with populations above 30,000. Levy growth also slowed, with annual levy-per-capita growth falling by roughly 1.6 percentage points statewide and 1.3 percentage points in the 30,000-plus sample. The heterogeneity analysis shows that poorer cities compressed tax rates more sharply than comparison groups, while richer cities maintained relatively stronger levy-per-capita outcomes after SB2. However, the richer-city levy estimates should be interpreted cautiously because pre-reform trend differences weaken a strong causal reading.

These findings suggest that SB2 functioned as a meaningful state-level institutional constraint rather than a symbolic reform. The law appears to have reduced visible tax-rate growth and slowed the pass-through of appraisal-driven tax-base gains into municipal levy growth, especially where the policy was most binding. At the same time, it did not eliminate underlying differences in local revenue capacity. The paper contributes to research on tax and expenditure limitations, fiscal illusion, and principal-agent dynamics by showing how a single state reform can reshape local fiscal behavior while producing uneven adjustment across municipalities with different resource bases. For APPAM audiences, the study speaks directly to the consequences of state policy variation within a federal system, and to the distributive stakes of state tax reforms that are imposed uniformly but absorbed unevenly on the ground.

Author

• Salman Bin Habib, University of Texas, Dallas
  Presenting Author