As state political campaigns gear up across the country, tax cuts are again taking center stage. In Texas, Governor Greg Abbott (R) has proposed eliminating the school property tax for homeowners and capping appraisal and local spending growth, with the state’s budget surplus intended to backfill school funding. But using a temporary surplus to replace an ongoing obligation could leave school districts vulnerable when state revenues slow.

Texas has already increased homeowner property tax relief in recent years

Like many states, Texas offers homestead exemptions for properties that serve as owners’ primary residences. Homestead exemptions reduce taxable property value subject to property taxes.

In 2023, Texas increased the homestead exemption from $40,000 to $100,000 and then from $100,000 to $140,000 in 2025—with an additional $60,000 for homeowners who have a disability or are over age 65. For example, for a non‑senior homeowner without a disability, if a home is appraised at $300,000, the school district’s property tax only applies to $160,000 of assessed value.  

Who benefits from exemptions for owner-occupied primary residences?

A fixed exemption below median home value reduces taxable value by a larger percentage for lower value homes. But if assessment practices are regressive, with lower-value homes over-assessed relative to higher-value homes, the exemption only partially offsets that inequity without addressing its cause.  

In addition, the benefits accrue only to homeowners. Renters, nearly 40 percent of Texans, don’t benefit from homestead exemptions. And fully exempting homesteads would push the benefits even further upmarket, disproportionately benefiting wealthy homeowners in very expensive homes. 

How might full homestead exemption work in practice? 

Texas has a “hold harmless” provision to replace school-district revenue lost to property tax changes using state general revenue. If that were to continue with the current proposal, it could be an enormous new state obligation. 

To illustrate, Texas school districts collected about $42 billion in property taxes in 2024, with about 45 to 50 percent coming from homesteads. Fully exempting all homesteads would therefore create an annual budget gap close to $20 billion, or $40 billion over the two-year budget cycle. 

By comparison, in its last two fiscal years (2024-2025), Texas collected $143.9 billion in taxes and ran a roughly $36 billion general revenue surplus—in line with the 2022-2023 surplus but substantially higher than average prior surpluses ($6.2 billion biennial surplus over 2014-2021). Even at today’s elevated levels, the surplus would fall short of covering the full cost of replacing homestead property tax revenue.

Will the budget surplus last?

States across the country have seen recent budget surpluses, often due to temporary factors like American Rescue Plan Act (ARPA) funds or stock market gains and higher consumer spending pushing up tax collections. Most states, including Texas, expect weaker revenue growth in the upcoming budget cycle. 

If the state exhausts its surplus, it will face a choice between increasing taxes or cutting spending to maintain the property tax break. Because Texas is a sales tax reliant state, both options would disproportionately affect lower-income residents. 

Texas public schools don’t have a lot of room to maneuver. Per student funding has been consistently falling and the prospect of federal funding freezes puts additional strain on the system.

There are other ways to offer tax relief to Texans

Fully exempting homesteads would represent a shift away from locally raised school revenue and toward greater state school funding. That may be manageable while Texas is running large surpluses, but it could backfire quickly if revenues slow and the state reduces transfers.

Instead, Texas could target relief to homeowners who are equity-rich but income-poor with an income-capped property tax credit, for which homeowners up to a certain income level would be eligible. That approach would come with administrative hurdles, but it would focus assistance on homeowners who are most likely to struggle with rising property tax bills. 

Importantly, property tax relief does not benefit renters who tend to struggle more in paying for basic needs. To provide relief to this more vulnerable group, Texas could create a renters’ tax credit which would help the poorest families afford housing.

When designed well, property tax relief can be beneficial to residents and the state. When pursuing this goal, states like Texas should consider more targeted approaches that do not put state coffers at risk.