The 3.5% property tax limit, explained

You've probably heard about how the city of Austin is subject to a 3.5% property tax limit. What does that mean?

Let's take a step back. Local governments in Texas have two property tax rates: one for maintenance and operations and one for debt service.

M&O is the portion of your tax bill that funds the city's operations budget, which is mostly taken up by salaries and benefits for city employees (cops, firefighters, parks workers, etc).

The debt service rate pays for the debt the city has issued to build infrastructure. Most of this debt is authorized by voters through general obligation bonds.

There is no limit on the amount of debt a city can take on and there is no limit on the taxes it can raise to pay off the debt.

However, state law caps the amount of revenue a city can raise through M&O taxes. Specifically, a city can only increase revenue by 3.5% from the same properties that were taxed the previous year. What that means is that new development is exempt from the cap, allowing a city to collect more revenue to pay for growth.

Example

Let's say there were 100 properties in Austin, and the city raised $100 from them in taxes in Year 1 to fund city government operations. In Year 2 the city would be allowed to collect $103.50 from those same properties. 

However, the city can raise more than $103.50 in total if there is new development. So if two new homes were built in Year 2, then the city can tax them and get a couple extra bucks. This process repeats each year.

It's the revenue, not the rates

State law does not regulate property tax rates. It regulates the rate of revenue growth. The city simply sets the rate to collect the amount of revenue it wants or needs based on property values. Whether property values go up or down, the city is able to collect the amount of revenue it wants.