San Antonio City Council reviewed two possible adjustments for future property tax bills on Wednesday: reducing the city’s property tax rate and increasing homestead exemptions next year.
Council won’t consider implementing these changes until later this year, but City Manager Erik Walsh said he wanted to get a head start on these conversations ahead of those processes.
“We wanted to start putting [this] out on the council’s radar screen now,” Walsh said.
Property tax revenue from existing properties in the city next year is expected to meet or exceed a new 3.5% annual increase cap established by the Texas Legislature, he said.
The city would have to ask voters for permission to exceed that cap — a measure that would likely fail. To avoid an election, the city would have no choice but to reduce the city’s portion of the property tax rate.
Gov. Greg Abbott signed the new law, Senate Bill 2, in 2019 and it took effect in 2021, when the city’s property tax revenues increased by 3.1%. The city’s revenues for 2022 is 2.1%. Only property taxes levied on existing properties, not new developments, count toward the revenue growth calculation.
“As we start looking at the economy opening up and hotels having higher occupancy, then we’re thinking that commercial [property] value is going to increase as well,” said Troy Elliott, the city’s deputy chief financial officer. “So we’re going to be bumping up to 3.5% [in 2023 or] possibly exceeding that.”
If history is any indication, the city will continue to exceed the cap. On average, property tax revenue since 2011 has increased more than 5% each year. Before 2021, it hasn’t dropped below 3.5% since 2014.
Previously, the cap was set at 8%, which allowed the city to build its budget during “good years” or times of growth, Deputy City Manager María Villagómez. “In bad years, when there’s a recession or a pandemic and there’s negative growth, … we were able to grow our revenues in previous years. With this new law, we can’t do that anymore.”
Next year’s tax rolls will be certified in July — that’s when a decision about the tax rate will need to take place, Walsh said. “We [will] have to do the reverse math, change the tax rate down in order to get to the 3.5%.”
Until that “reverse math” is complete, it’s unclear what the full impact of the cap will be on the city’s budget or property rate.
“This is a change in financial dynamics for us. … We’re going to have to live within our means,” Walsh said.
The city, which currently receives about 22% of collected property taxes, hasn’t increased its property tax rate for 29 years, but has decreased it seven times during that period. The city’s tax rate has been at nearly $0.56 since 2016.
If the city reduces its tax rate, it would need the approval of council as it adopts is budget in September and it would take effect on Jan. 1 2023.
Councilmen Clayton Perry (D10) and John Courage (D9) requested last year that the council start the homestead exemption conversation early this year — and that started Wednesday.
If San Antonio wants to expand its current homestead exemption, City Council must approve such a measure by July 1.
“This city can afford to give more back to our homeowners in this town through a property homestead exemption,” Perry said, noting that the city saw an increase of $20 million in property taxes from 2020 to 2021. “Dadgummit, we can afford this.”
San Antonio implemented its first homestead exemption, the minimum allowed by the state, in 2020. It shaves 0.01% — which amounts to the $5,000 minimum — off the appraised values of homes that are the primary residence of a property owner. The average homeowner saves an estimated $28 per year.
Homestead exemptions in other cities provide more substantial relief; Houston, Dallas, and Fort Worth have a 20% exemption – the maximum allowed by the state. Austin’s is 10%.
Those cities, however, do not provide a valuation tax freeze for senior citizens as San Antonio does. In fiscal year 2022, the City will forgo approximately $72.4 million in property tax revenue from various exemptions.
Homestead exemption is a “very regressive tool,” Walsh said.
The homeowners that would see the greatest reduction to tax bills have the highest home values. For instance, a homeowner with a home worth $100,000 would not see an additional benefit (beyond the 0.01% benefit) if the exemption were increased to 5%, while someone with a $600,000 home would see an additional $167 off their bill.
A 5% exemption would mean the city wouldn’t collect an estimated $14.8 million.
“I just don’t see how [an increased homestead exemption] can be equitable with the tools that the state has given us right now,” said Councilwoman Ana Sandoval (D7), noting that state law prohibits targeted exemptions based on location or home value. “We have a lot of renters who are housing burdened in San Antonio, and this doesn’t do anything for them.”
There are alternatives for property tax relief that the city will pursue, City Attorney Andy Segovia said.
“Homestead exemption is just one tool,” Segovia said. “We will work with the [Office of] Equity team to see whether we can come up with tools and maybe look … at other models across the country that we can come up with that hopefully wouldn’t require a change in the state law.”
Generally positive budget outlook
The city’s first-quarter budget report indicates a generally positive outlook for the year, though Walsh stressed that staff took a cautious, conservative approach to estimates; taking into account the economic uncertainty that comes with an ongoing pandemic and historic inflation.
“Today was not a budget surplus. It’s just a first-quarter report,” Walsh said. “We’re not declaring any sort of victory.”
The general fund is $26.2 million over budget for the first quarter and that is projected to grow to $36.4 million by the end of the year. Most of that is from better-than-expected sales tax and CPS Energy revenue.
The Hotel Occupancy Tax brought in $4 million more than expected, but still hasn’t recovered to pre-pandemic levels. In 2019, $126 million was collected, and $105 million is estimated for 2022.
In addition to starting the property tax conversation early, Walsh is going to start the budget process early this year and in subsequent years.
Council will meet to set its budget priorities in mid-April, giving it and the community about a month and a half more time to provide input.
“It’s going to give us more time to get public input. It’s going to give us more time to meet with our colleagues and have more in-depth conversations about our priorities,” Councilman Mario Bravo (D1) said.