Overall Vote Recommendation

Vote No; Amend

Principle Criteria

Free Enterprise

Property Rights

Personal Responsibility

Limited Government

Individual Liberty

Digest

SB 2541 modifies the formula and underlying definitions used to calculate the “unused increment rate” for property tax purposes under Section 26.013 of the Texas Tax Code. The unused increment rate allows a taxing unit to retain a portion of its unused capacity to raise taxes in future years, and this rate is factored into the voter-approval tax rate calculation. The bill revises how that carryforward amount is calculated by updating the definitions of “Year 1” and “Year 2” and eliminating “Year 3” from the formula altogether.

Under current law, the unused increment rate is based on the foregone tax revenue from the three tax years preceding the current tax year. SB 2541 compresses this window by redefining "Year 1" as the second preceding tax year (instead of the third) and "Year 2" as the immediately preceding year (instead of the second). The bill repeals the inclusion of the third year’s foregone revenue, effectively reducing the amount of prior tax capacity a taxing unit may apply in a future year.

The changes apply only to tax years beginning on or after January 1, 2027, giving local governments time to adjust. The act itself takes effect on January 1, 2026. By narrowing the carryforward window and reducing the accumulation of unused tax rate authority, SB 2541 intends to limit the potential for sudden tax increases and reinforce more disciplined budgeting practices among taxing entities.

The originally filed version of SB 2541 proposed a full repeal of the unused increment rate provisions in Texas property tax law. It sought to eliminate Section 26.013 of the Tax Code entirely—this section being the statutory framework that defines and calculates the unused increment rate, a mechanism that allows taxing units to retain a portion of unused taxing capacity from prior years. In addition to repealing Section 26.013, the original bill proposed amendments to numerous other sections of the Tax Code and Water Code to strike references to the unused increment rate in formulas used to determine voter-approval tax rates. In essence, the original bill would have abolished the concept and usage of the unused increment rate across all relevant statutes.

By contrast, the Committee Substitute for SB 2541 does not repeal the unused increment rate outright. Instead, it significantly narrows its scope by amending the definitions and calculation formula in Section 26.013. Specifically, it redefines the years used in the calculation: “Year 1” now means the second tax year before the current year (previously the third), and “Year 2” is the year immediately preceding the current year (previously the second). It also repeals the inclusion of "Year 3" in the calculation formula. This change effectively shortens the window in which foregone revenue can be carried forward, thereby limiting the magnitude of any unused increment rate a taxing unit might accumulate.

In summary, while the originally filed bill proposed a total repeal of the unused increment rate, the committee substitute takes a more moderate approach by preserving the mechanism but reducing its impact and simplifying its calculation. This reflects a legislative compromise, seeking to maintain local budget flexibility while curbing the long-term accumulation of tax capacity that can lead to unpredictable tax rate increases.

Author (1)

Paul Bettencourt

Sponsor (1)

Cody Vasut

Contact the Author

Sen. Paul Bettencourt

Capitol Phone:

(512) 463-0107

Capitol Office:

CAP 3E.16

E-Mail:

[email protected]

Visit Official Website

Fiscal Notes

According to the Legislative Budget Board (LBB), the fiscal implications of SB 2541 are primarily local in nature, with no anticipated fiscal impact to the state government. The bill modifies the formula used to calculate the "unused increment rate," a component in determining a taxing unit’s voter-approval tax rate. Specifically, the bill shortens the carryforward window by removing the third preceding year’s foregone revenue from the calculation. This adjustment effectively reduces the amount of unused tax rate capacity that a local taxing unit can apply in a given year.

For local governments, particularly those with significant unused increment rates, this change could result in a lower voter-approval tax rate, thereby lowering the threshold at which a taxing unit must hold an election to exceed that rate. In practice, this could constrain some local entities from increasing property tax revenues without voter approval, potentially affecting their budgets. However, the Legislative Budget Board notes that it is not possible to estimate how many or which taxing units would alter their tax rate decisions as a result of this change.

In summary, while SB 2541 does not affect state finances, it could subtly influence local taxing behavior by limiting long-term accumulation of taxing authority. The extent of local fiscal impact will depend on how many taxing units have historically relied on the third year of foregone revenue in their tax planning and whether this change affects their decision to trigger voter-approval elections.

Vote Recommendation Notes

The Committee Substitute for SB 2541 proposes a partial reform of the unused increment rate by reducing the banking window from three years to two, aiming to simplify the property tax rate calculation and reduce some of the volatility in tax bills. While this effort appears to address transparency and predictability concerns raised by taxpayers and taxing unit officials, it ultimately falls short of correcting the core problem: allowing tax rate increases without direct voter approval.

The unused increment rate was originally introduced to reward taxing units that adopted rates below their voter-approval tax rate by allowing them to “bank” the difference and apply it in future years. However, this has created unintended consequences. Taxpayers—particularly homeowners and small businesses—can still face unexpected increases in tax bills when those banked rates are applied to inflated property values. Even with a shortened lookback window, the retained mechanism continues to undermine the voter-approval framework established in SB 2 (2019), which was designed to give taxpayers a stronger voice in property tax decisions.

While the Committee Substitute marginally improves the system, it preserves a structure that enables tax hikes without voter consent, contrary to the core liberty principles of individual liberty, limited government, and property rights. A more principled and effective solution lies in the original filed version of SB 2541, which proposed a full repeal of the unused increment rate and all associated references in statute.

Therefore, Texas Policy Research encourages lawmakers to vote NO on SB 2541 unless amended to revert the bill to its originally filed form. This would eliminate the unused increment rate entirely, restore the integrity of the voter-approval tax rate system, and ensure that any property tax increase beyond the baseline is subject to full transparency and direct democratic consent. Such a change would fully align the bill with the spirit of taxpayer protection, fiscal restraint, and limited government.

Individual Liberty: Taxpayers’ right to be free from government overreach includes the ability to consent to taxation. The voter-approval tax rate framework was created to ensure that significant increases in property taxes are subject to a vote. The bill, in its current form, preserves a structure (the unused increment rate) that permits tax increases without voter approval, just on a slightly smaller scale. This compromises individual liberty by sustaining a pathway for taxation without direct democratic consent.
Personal Responsibility: The continued allowance for taxing units to bank unused taxing authority and apply it in future years blurs fiscal accountability. It allows local governments to delay the political consequences of raising taxes. If a taxing unit wishes to exceed the no-new-revenue rate, it should justify that need in the present, not rely on past capacity. Retaining any increment banking undermines responsible budgeting tied to current-year transparency.
Free Enterprise: Businesses benefit from predictable and transparent tax environments. While reducing the increment rate window from three to two years may slightly improve forecasting, the retained mechanism still allows rate spikes tied to past decisions. This can result in surprise tax increases for business owners, especially during high appraisal cycles. Therefore, while the bill marginally supports free enterprise through simplification, it doesn't fully address the risk imposed on commercial property holders.
Private Property Rights: Property ownership is undermined when tax burdens can be increased without current consent or transparency. The unused increment rate—whether it’s two years or three—allows local governments to extract more revenue from the same property without going back to voters. This directly threatens the principle that property owners should have clarity and protection from arbitrary or retroactive tax increases.
Limited Government: The bill reduces—but does not eliminate—the capacity of government to exceed revenue-neutral tax levels without voter involvement. By preserving the unused increment rate, it still provides taxing units with tools to expand their reach under the guise of prior-year restraint. Truly limited government would require eliminating any authority that bypasses the vote of the people. The original version of the bill upheld this principle more faithfully by proposing full repeal.

References

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