The Surprising Impact of the 20% Appraisal Cap in Texas

Executive Summary

This research paper examines the circuit breaker limitation on appraised value (appraisal cap) for ad valorem property tax enacted by the Texas Legislature in 2023 as part of SB 2 (88th Leg., 2nd C.S.). With some exceptions, the new law limits any assessed tax value increase to 20% over the prior year for all non-homestead properties valued at $5 million or under and applies regardless of taxpayer income. This paper explores the impact of the new limit on both taxpayers and local government revenues. In order to best represent the state’s economy, the authors of this paper analyzed the operation of the appraisal cap in five distinct Texas counties: Collin, Harris, Midland, Moore and Smith.

Data Highlights

In 2024, a total of $4.2 billion in property value was removed from the property tax roll in the five analyzed counties as a result of the appraisal cap. However, since the appraisal cap was relatively limited in operation, the $4.2 billion of value removed was only 0.4% of the total taxable value that would have been realized in the absence of the 20% appraisal cap. This total includes value removed from the tax rolls of the school districts, cities, and special purpose districts within the five counties.

Inconsistencies were encountered in the application of the appraisal cap by the five central appraisal districts (CADs). The inconsistencies cut both ways, sometimes removing too little value from the appraisal roll and sometimes removing too much.

The analysis revealed that the CADs for the five counties removed $924 million less value from the appraisal rolls than the statute and the Comptroller’s formula for calculating lost value implied. This constituted a 21.8% understatement of lost value.

The CADs for the five counties also sometimes applied the appraisal cap to properties that appeared to be ineligible for the cap, according to the statutory criteria and CAD data. Approximately $1.3 billion in property value was removed from the appraisal rolls of the five counties for these properties. In various instances among the five counties, the appraisal cap was mistakenly applied to 1) homesteads; 2) mobile homes classified as personal property; 3) property that had different owners on Jan. 1, 2023 and Jan. 1, 2024; and 4) property with a market value over $5 million.

Impact on Local Tax Rates

The 20% appraisal cap led to higher tax rates in all five counties examined. This occurred because, when property value is removed from the appraisal roll, Texas law allows taxing units to maintain a constant level of property tax revenue by raising tax rates to offset the reduction in taxable value. The cap resulted in slight increases in the no-new-revenue tax rate (NNRTR) and voter-approval tax rate (VATR) of each county. Assuming revenue neutrality shows that the appraisal cap resulted in slightly higher adopted tax rates for each county.

For capped properties, the appraisal cap led to a decrease of $12.8 million in assessed taxes for capped properties and an increase of $14.2 million in assessed taxes for uncapped properties in the five counties. Netting the tax decrease for capped properties and the tax increase for uncapped properties yields an increase of $1.4 million in taxes in the five counties. The cap resulted in a tax increase on the median home value, including homesteads, ranging from $1.36 in Collin County to $31.08 in Smith County.

Although the increase in the NNRTR, VATR, adopted tax rate, and tax levies on uncapped properties was relatively small, that is because the value removed from the tax roll as a result of the 20% appraisal cap was relatively small. As noted above, only 0.4% of taxable value was removed from the tax rolls of the five counties by the cap. However, if the appraisal cap had been lower than 20%, or if more properties had been eligible for the cap, significantly more value would have been removed from the appraisal rolls and the increase in tax rates and tax levies on uncapped properties, including homesteads, would have been more pronounced.

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