Texas is one of nine states that does not require its citizens to pay a state income tax. That does not mean, however, that people live tax-free in Texas. Since state governments need funding in order to govern the state, Texas funds its needs through ad valorem taxes, which were first used in the United States in the early 1800s when, instead of land being assessed strictly by quantity, it was assessed according to its value. Compared to many states, ad valorem taxes are quite high in Texas, so high in fact that in March of 2022, Texans voted to increase exemptions for some property taxes.
Definition
The Latin phrase, ad valorem, means “according to value.” Instead of goods or services being taxed at the same rate, they are taxed according to their assessed value. They are calculated as a percentage of the value of the product, as opposed to being calculated according to quantity, size, or weight. Ad valorem taxes are indirect taxes and include property taxes on real estate and business personal property, which are assessed by the county and paid annually.
Because the value of an item will increase or decrease based on inflation and the economy, ad valorem taxes may vary from one year to the next.
Recent Changes
Texans recently voted overwhelmingly for two propositions which increased exemptions from ad valorem taxes for many of its citizens. Proposition One states:
“The constitutional amendment authorizing the legislature to provide for the reduction of the amount of a limitation on the total amount of ad valorem taxes that may be imposed for general elementary and secondary public school purposes on the residence homestead of a person who is elderly or disabled to reflect any statutory reduction from the preceding tax year in the maximum compressed rate of the maintenance and operations taxes imposed for those purposes on the homestead.”
Simply stated, this proposition, which passed with almost 87% of the vote, provides a lower property tax rate for the elderly and the disabled.
Also on the ballot was Proposition Two, which states:
“The constitutional amendment authorizing the legislature to provide for the reduction of the amount of a limitation on the total amount of ad valorem taxes that may be imposed for general elementary and secondary public school purposes on the residence homestead of a person who is elderly or disabled to reflect any statutory reduction from the preceding tax year in the maximum compressed rate of the maintenance and operations taxes imposed for those purposes on the homestead.”
This proposition easily passed with 85% of voters’ support and allows elderly or disabled homeowners to reduce the market value of their homes, thereby decreasing their property taxes. By increasing the homestead exemption and decreasing the school property tax bills, each household is projected to save $175 per household annually.
Two other recent changes to ad valorem taxes went into effect in January of 2022. Senate Bill 1449 increases exemptions for income-producing tangible personal property by adjusting the exemption for inflation. Originally, the exemption applied to property valued at less than $500, an amount that had been in place for more than two decades. SB 1449 increased the exemption to include property valued at up to $2500. In addition to SB 1449, Senate Bill 794 is now in effect, which states that veterans classified as 100% disabled are exempt from homestead taxes.
Because ad valorem taxes are high in Texas, taking advantage of all exemptions may save a sizeable amount of money annually. An experienced attorney will help clients determine the ad valorem tax exemptions for which they qualify as well as whether and how ad valorem taxes may be reduced.
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