Chapter 325A — Texas Property Tax Reform Bill

Chapter 325A creates a new statewide framework for reducing and ultimately replacing municipal and county maintenance and operations (M&O) property taxes with revenue generated through economic activity rather than property ownership. The Bill establishes an additional 2.75% state sales and use tax and directs the Texas Comptroller to attribute the revenue according to where taxable transactions occur. For transactions within a municipality, 2.00 percentage points are attributed to the municipality and 0.75 percentage points to the county; transactions outside municipal boundaries attribute the full 2.75 percentage points to the county. The system maintains separate municipal and county allocations and requires corresponding M&O property tax rate compression as certified replacement revenue is provided.

The principle behind Chapter 325A is simple: Texas should increasingly fund local government operations through the strength of its economy instead of continually increasing the tax burden on homes and property. The Bill protects local government operations through stabilization reserves, provides equalization for jurisdictions where locally generated replacement revenue is insufficient, and establishes a separately funded sales tax credit for qualifying low-income households. No municipality or county may receive more than 100% of its certified M&O replacement amount, and once replacement obligations, stabilization reserves, reconciliation, and equalization requirements have been satisfied, excess revenue is identified for review of a possible reduction in the additional sales tax rate. Chapter 325A therefore creates a measured, accountable path toward lower M&O property taxes while preserving essential local services and allowing Texas taxpayers to benefit from continued economic growth.

A New Approach to Property Tax Reform

The Texas Property Tax Reform Bill creates a new approach to reducing municipal and county maintenance and operations (M&O) property taxes by shifting a portion of local government funding from property ownership to statewide economic activity. The proposal establishes an additional 2.75% state sales and use tax and returns that revenue based primarily on where taxable economic activity occurs. Revenue generated within a municipality is attributed to that municipality and its county, while revenue generated outside municipal boundaries is attributed to the county. As replacement revenue is distributed, participating cities and counties are required to reduce their M&O property tax rates accordingly.

The goal is straightforward: as Texas grows, reliance on property taxes should decline. The Bill creates separate municipal and county revenue structures, provides stabilization reserves to protect against economic downturns, establishes equalization mechanisms for communities that cannot generate sufficient replacement revenue on their own, and provides a separately funded credit for qualifying low-income households. No community may receive more than 100% of its certified M&O replacement amount, and once replacement, reserve, reconciliation, and equalization requirements have been satisfied, excess revenue triggers a review of whether the additional sales tax rate can be reduced. The result is a structured path toward replacing M&O property taxes while protecting essential local services and maintaining fiscal accountability.

Key Points

The Bill's stated purpose is to reduce reliance on county and municipal M&O property taxes while allocating replacement revenue according to where taxable economic activity occurs.

1. Establishes an additional 2.75% statewide sales and use tax dedicated by statute to the property-tax replacement system.
2. Uses origin-based attribution, meaning replacement revenue begins with the jurisdiction where the taxable economic activity occurs.
3. Allocates 2.00 percentage points to municipalities and 0.75 percentage points to counties for taxable transactions occurring inside a municipality.
4. Allocates the full 2.75 percentage points to counties for taxable transactions occurring in unincorporated areas.
5. Keeps county and municipal revenue separately accounted for, generally prohibiting one allocation subaccount from being used to satisfy obligations of the other.
6. Requires replacement revenue to reduce M&O property taxes rather than becoming unrestricted additional local-government revenue.
7. Establishes a Certified Replacement Amount (CRA) representing the maximum eligible M&O property-tax requirement that may be replaced.
8. Calculates the Certified Replacement Amount (CRA) before Chapter 325A compression, preventing the Bill's own property-tax reductions from automatically shrinking future replacement eligibility.
9. Establishes a Certified Replacement Distribution (CRD) representing the amount actually certified for direct M&O replacement.
10. Caps total eligible M&O replacement at 100% of CRA, preventing replacement revenue from exceeding the applicable M&O requirement.
11. Requires mandatory M&O tax-rate compression when a county or municipality receives certified replacement revenue.
12. Protects debt-service taxes, keeping bonded indebtedness and other non-M&O obligations outside the primary replacement program.
13. Creates separate stabilization reserves to help protect the system from normal fluctuations in sales-tax revenue.
14. Caps stabilization reserves at 10% of the succeeding fiscal year's aggregate CRA, preventing unlimited reserve accumulation.
15. Uses a fixed equalization formula — Equalization Need = CRA − CRD — rather than allowing the Comptroller to create discretionary population, rural, or geographic weighting systems.
16. Provides a refundable low-income sales-tax credit for qualifying Texas households at or below 130% of the federal poverty guidelines, funded through a separate legislative appropriation.
17. Requires excess revenue to trigger a tax-rate sufficiency review, allowing the Comptroller to recommend whether the 2.75% rate could be reduced once replacement, stabilization, reconciliation, and equalization obligations are satisfied.

Economic activity→Lower M&O taxes