Texas 5% Plan to End Property Taxes - Better for Renters
Will Renters Win or Lose Under Texas’s 5% Plan?
A rigorous look at the empirical evidence on rent pass-through, who is actually exempt from property taxes today, and why a uniform statewide replacement changes everything critics claim to know about landlord behavior.
When the conversation turns to replacing Texas property taxes with a flat sales tax, one objection surfaces reliably: “Landlords won’t lower rents. Renters will just pay twice.” It is a serious objection that deserves a serious answer — not a dismissal, not a slogan. This article examines the empirical evidence on both sides, identifies the specific subset of Texas landlords for whom that concern has some validity, and explains why the statewide, uniform structure of Texas’s 5% Plan fundamentally changes the economics compared to every prior scenario critics draw on.
The short answer: the concern is real but smaller than critics claim, applies primarily to a specific class of already-exempt landlords whose exemptions represent a documented governance problem of their own, and the competitive pressure of a simultaneous statewide reform creates market dynamics that no local or partial reform has ever produced.
The Question Being Asked
The 5% Plan proposes to eliminate all Texas property taxes — school district, county, city, and special district levies totaling $86.6 billion in 2024[1] — and replace them with a uniform 5% sales tax on all transactions, using the full gross sales base of the Texas economy rather than the current narrow taxable base. The plan is designed to be revenue-positive: 5% of approximately $3.47 trillion in annual gross sales generates roughly $173.4 billion — a $30.6 billion buffer above the full replacement need.[2]
Because Texas property taxes currently constitute approximately 20 cents of every rent dollar paid by Texas tenants,[3] the critical policy question for renters is: if landlords no longer pay property taxes, will they reduce rents — or simply pocket the savings while renters pay a new sales tax on top of unchanged rent?
What the Research Actually Shows
Federal Reserve Bank of Philadelphia (2025–2026): The Most Current Evidence
The most recent peer-reviewed empirical work on this question comes from Sarah Baker at the Federal Reserve Bank of Philadelphia, presented at the Syracuse–Chicago Center for Policy Research Webinar in February 2026.[4] Baker used California’s Proposition 13 — which created large, quasi-random variation in property tax burdens among otherwise identical neighboring rental units — as a natural experiment. Her findings:
- Landlords pass through $0.50 to $0.89 of every $1 of property tax to new-tenant rents[4]
- This result holds after controlling for landlord size, renovations, location, and purchase price
- More financially sophisticated landlords reflect actual costs more precisely; less sophisticated ones use simpler heuristics — but the directional effect is consistent across both groups
- The result violates the classical “law of one price,” demonstrating that landlord cost heterogeneity does affect rent-setting in practice
This finding is directly symmetric: if landlords raise rents when property taxes rise, the same mechanism will lower rents when property taxes fall — especially when all landlords’ costs fall at once and no competitor retains a structural cost advantage.
Carroll & Yinger (1994): The Short-Run Case for Skepticism
The most-cited empirical anchor for the skeptic position is Carroll and Yinger (1994), which analyzed Boston-area communities using 1980 Census data and found that a $1 increase in property taxes resulted in only a $0.15 increase in rent — landlords absorbing $0.85 of the burden.[5] This is the legitimate empirical foundation for the “rents won’t fall” argument.
Two important caveats apply. First, this is a short-run, localized estimate — measuring what happens in the months following a single-jurisdiction tax change, before markets fully adjust. Second, by the same logic, landlords who absorb most of a tax increase would dramatically improve their competitive position if that cost burden is removed — precisely the mechanism driving medium-run adjustment.
German Panel Evidence: Time Horizon Is Everything
The most methodologically rigorous time-series evidence comes from two German studies analyzing over 20 years of municipal property tax variation.[6][7] Their findings resolve the apparent contradiction between the Philadelphia Fed and Carroll & Yinger:
Short run (0–2 years): Landlords absorb the tax change. Rents move little.
Medium run (4–6 years): Supply adjusts, competition intensifies, and full shifting occurs — rents return to equilibrium reflecting the new cost structure.[6]
Tight urban markets: Landlords pass the full burden to tenants. Supply-elastic markets: Landlords absorb more initially, but the supply response ultimately drives rents toward the competitive equilibrium regardless.
The critical insight: the time horizon and market supply elasticity — not the direction of the tax change alone — determine who ultimately bears the cost. For a reform the size of the 5% Plan, both conditions are unusually favorable in Texas right now.
Why Texas’s Current Market Strengthens the Competitive Argument
Every study finding that landlords retain tax savings was conducted in markets with constrained housing supply. Texas’s major metros in 2025–2026 are in the opposite condition:
- Approximately 120,000 new apartments delivered statewide in 2024 — roughly 5% of the existing inventory added in a single year[8]
- Vacancy rates in multiple metros climbed toward 7–8% — the threshold above which rents stabilize or fall[9]
- Austin rents fell nearly 10% year-over-year; Dallas rents fell approximately 4.4% year-over-year[9]
“It really all comes down to supply and demand in each local market. If the market is tight and there’s still not enough housing, it’s probably not going to matter.”
— Lynn Krebs, Economist, Texas Real Estate Research Center, Texas A&M University[3]
Krebs’s caveat — “if the market is tight” — is significant precisely because Texas’s major rental markets are not tight right now. Any landlord who retains the full property tax saving as profit while a competitor offers lower rent forfeits tenants in an environment where new units are actively competing for occupancy.
The Statewide Scope Is the Decisive Difference
Every prior study on rent pass-through — and every argument that landlords retain tax savings — was conducted in a context of localized or partial tax changes. A uniform, simultaneous, statewide elimination changes every one of these conditions:
- Every landlord’s largest operating cost drops to zero at the same moment. No competitor has lower costs because all face the same new cost structure.
- There is no structural advantage to retaining savings. A landlord who keeps the full $0.20-per-rent-dollar while a competitor offers a 10% reduction loses tenants in an oversupplied market.
- Competitive pressure is at its theoretical maximum. Baker’s finding that landlord cost heterogeneity affects rent-setting becomes the mechanism for rent reduction — not a reason to doubt it.
- Supply response is unconstrained by local policy. New construction economics improve uniformly statewide, accelerating the long-run equilibrium adjustment.
Projected Rent Adjustment by Timeframe — Full Statewide Property Tax Elimination
| Timeframe | Expected Outcome for Market-Rate Renters | Primary Driver |
|---|---|---|
| Short run (0–2 yrs) | Rent payments exempt from the 5% sales tax during this window under the proposed transition provision — all renters fully shielded while the market adjusts | 2-year implementation buffer: landlords acquire sales tax licenses; cities calibrate rates; competitive adjustment begins |
| Medium run (3–6 yrs) | Substantial rent reduction in competitive, supply-elastic markets | Full competitive pass-through as all landlords share the same new cost structure[6][4] |
| Long run (6+ yrs) | Full or near-full pass-through of tax elimination benefit | Supply-side equilibrium; Baker’s $0.50–$0.89 symmetric pass-through rate[4] |
| Tight submarkets | Partial or delayed reduction | Supply inelasticity limits competitive pressure in specific constrained areas |
The Exempt-Landlord Problem — and Its True Scale
Under the 5% Plan’s proposed transition framework, rent payments will be fully excluded from the sales tax base for the first two years following implementation. This provision directly addresses the timing asymmetry that critics raise: it ensures that no renter pays a new sales tax on rent until the competitive market has had sufficient time to begin adjusting — and until every landlord has had the opportunity to obtain a sales tax license and every city has had time to calibrate its local sales tax rates to meet its budgetary requirements within the new fiscal structure.
After the two-year window, rent enters the tax base on the same footing as all other transactions. By that point, the property-tax cost elimination will have begun propagating through market rents, and taxing entities will have fully transitioned their revenue structures.
The most legitimate version of the “renters will pay more” argument applies to a specific category of Texas rental housing: properties that already pay zero property taxes. For these landlords, eliminating property taxes provides no cost reduction — but a sales tax applied to rent would be a new cost for their tenants with no offsetting benefit.
Who Pays No Property Taxes Today?
Texas Tax Code Chapter 11 and related Local Government Code provisions create well-defined statutory pathways for full property tax exemption. These are not ordinary private landlords — they require government entity ownership or a qualifying nonprofit structure:
Categories of Tax-Exempt Residential Rental Landlords in Texas
| Category | Legal Basis | Core Requirement | Estimated Scale |
|---|---|---|---|
| Tax Exempt Private Partnerships (TEPPs) | LGC §303.042(f); §392; §394 via Tax Code §11.11 | Public entity (PFC, HFC, or PHA) holds legal or equitable title; private developer operates under long-term ground lease | Dominant category. Travis County alone: 152 properties, 34,800+ units, $5.6B appraised value[10] |
| Community Housing Development Organizations (CHDOs) | Tax Code §11.182 | Must rent without profit to low-to-moderate income families; activities exclusively housing-focused[11] | Small relative to TEPPs; concentrated in genuine nonprofits |
| Nonprofit Housing Constructors | Tax Code §11.1825 | 501(c)(3) status for 3+ years; 50%+ units income-restricted; rents capped; annual independent audit required[12] | Included in broader count; approximately 288,000 total HUD-assisted units statewide[13] |
| Public Housing Authorities (PHAs) | Tax Code §11.11 public property | Direct government ownership; full public property exemption automatic | Included in HUD-assisted total |
| Community Land Trusts | Tax Code §11.1827 | CLT retains land ownership for low-moderate income housing; taxing unit must adopt the exemption by July 1[14] | Small but growing category |
Ordinary private landlords — individual investors, LLCs, and corporations owning rental property without a qualifying public entity as title holder — are expressly excluded from all of these exemptions. The homestead exemption applies only to an owner’s primary residence; it cannot be claimed by any landlord on a rental unit under any circumstances.[15]
The TEPP Scandal: Documented Abuse at Scale
The TEPP structure is the dominant and most problematic exempt-landlord category. A 2025 University of Texas School of Law Housing Policy Clinic report on Travis County documented the scope:
- 152 TEPP properties operating in Travis County as of 2024[10]
- More than 34,800 rental units — nearly one-fifth of all multifamily rental units in Travis County — under TEPP structure paying zero property tax[10]
- Aggregate appraised value exceeding $5.6 billion[10]
- Approximately $109 million per year in property taxes owed but uncollected in Travis County alone[10]
“Only 1% of tax-exempt units in Houston actually targeted very low-income renters — even as the Houston Housing Authority collected over $53 million in fees from private developer-partners through the program.”
— Texas Standard, reporting on Houston Housing Authority internal audit, 2024[16]
The TEPP program was designed for one purpose — affordable housing — and has been systematically used for another: delivering market-rate apartment development with a 100% property tax exemption. A 2020 UT analysis found that only 4% of units in then-current TEPP developments actually served the lowest-income households the program nominally targeted.[17] The Texas Legislature addressed this in HB 21 (signed May 28, 2025), imposing geographic restrictions on Housing Finance Corporations, eliminating traveling HFCs that financed projects statewide without local approval, and tightening affordability requirements. Existing non-compliant TEPP deals must obtain local approval by January 1, 2027, or lose their exemption.[18]
Why the Competitive Market Argument Addresses the TEPP Problem Too
Critics use the existence of TEPP landlords to argue that a property tax replacement would harm renters: TEPP landlords pay no property tax and thus have no cost reduction to pass through, while their tenants would face a new 5% sales tax on rent with no offsetting benefit. This argument has a structural flaw worth examining carefully.
- TEPP tenants pay a new 5% sales tax on rent
- TEPP landlord has no cost reduction — pays $0 in property tax before and after elimination
- No competitive incentive for TEPP landlord to reduce rent
- Sales tax is immediate; competitive market adjustment takes years
- TEPP landlords charging near-market rents face competitive pressure from landlords with now-zero property tax costs
- In Texas’s oversupplied market, losing a tenant to a cheaper market-rate unit is economically worse than matching that rent reduction
- Market-wide rent reduction propagates to all competing units, including TEPPs
- TEPPs charge near-market rents because the market sets the ceiling — when that ceiling falls, they must follow[10]
The timing asymmetry — sales tax immediate, competitive rent adjustment over 3–6 years — is a legitimate policy design concern and one the 5% Plan directly addresses. The proposed implementation includes a two-year transition window during which rent payments are fully excluded from the sales tax base. This gives every landlord time to obtain a sales tax license, allows cities and taxing entities to calibrate their local sales tax rates to meet their budgetary needs within the new structure, and permits the rental market sufficient runway to achieve competitive equilibrium before any sales tax obligation attaches to rent. The $30.6 billion structural surplus built into the 5% Plan provides exactly the fiscal flexibility needed to fund this transition period without compromising revenue adequacy.
Critically, ending property taxes eliminates the entire economic incentive for TEPP-style structures. These arrangements exist to capture a property tax exemption via the public entity title-holding mechanism. When property taxes no longer exist, there is nothing to exempt — and the distortive, fraud-prone structure becomes economically pointless. The reform that critics argue would harm TEPP tenants is precisely the reform that ends the regulatory framework enabling TEPP abuse.
Policy Conclusion
The 5% Plan Favors Renters — With One Important Transition Design Requirement
A complete, statewide elimination of all Texas property taxes — replaced by a uniform 5% sales tax on all transactions — would, over the medium run, exert strong downward competitive pressure on rents across the market-rate residential sector. For the vast majority of Texas renters, the net effect is favorable: their landlord’s largest operating cost disappears, competitive dynamics prevent its permanent retention as profit, and the 5% sales tax on their rent is substantially smaller than the approximately 20% of rent it effectively replaces in the current system.
The narrow exception — TEPP and other already-exempt landlords — represents a documented governance problem larger than most reform discussions acknowledge. These structures, particularly the TEPP framework, have been extensively exploited to deliver market-rate housing with zero property tax obligations. Ending property taxes eliminates the economic incentive for these structures entirely, which is a benefit of the reform rather than a cost.
The one legitimate design requirement this analysis identifies is a phased implementation timeline — specifically, a two-year period during which rent payments are fully excluded from the new sales tax base. This window allows landlords to obtain their sales tax licenses, gives cities and taxing entities time to calibrate their local rates within the new structure to meet their budgetary needs, and permits the competitive rental market time to adjust before any 5% obligation attaches to rent. The $30.6 billion structural surplus built into the 5% Plan provides the fiscal flexibility to absorb this transition period without compromising revenue adequacy.
The skeptic’s objection is not wrong about the short-run mechanics. It is wrong about what those mechanics imply for the long-run outcome of a reform this comprehensive and uniform in scope.