The primary sources of local tax revenue in Texas are, in order of size, the property tax, the local sales tax, the hotel occupancy tax, and utility franchise fees. Property tax alone funds the bulk of school district budgets and a large share of what cities and counties spend. The other three fill in around it, each with its own rules on who pays and what the money can be used for.
Property Tax
The property tax, formally an ad valorem tax, is the single biggest revenue source for Texas cities, counties, school districts, and special districts. It applies to real estate and to business personal property. Each county’s appraisal district determines the market value of every taxable property as of January 1, following Tax Code Section 23.01.1Texas Comptroller. Valuing Property
Once values are certified, each local taxing unit sets its own rate. Your city council, county commissioners court, school board, and any special districts that overlap your property each adopt a separate rate, and those rates stack on the same property value. The appraisal district does not set your tax bill. It sets the value. The bill depends on the rates your locally elected officials approve.2Texas Comptroller of Public Accounts. Appraisal Protests and Appeals
Businesses pay property tax not only on real estate but also on tangible personal property used to produce income: furniture, equipment, computers, inventory, and vehicles. Businesses with $125,000 or less in total appraised personal property qualify for a full exemption under Tax Code Section 11.145.3Texas Comptroller of Public Accounts. Business Personal Property Rendition of Taxable Property
Exemptions That Reduce What You Owe
Several homestead exemptions cut the taxable value of a primary residence, and failing to apply is one of the most common ways Texas homeowners overpay.
- School districts must exempt $140,000 of a primary residence’s appraised value under Tax Code Section 11.13(b). A $300,000 home is taxed by the school district as if it were worth $160,000.
- Homeowners who are 65 or older, or disabled, get an additional $60,000 school district exemption under Section 11.13(c), stacking with the general homestead for a combined $200,000.
- Any taxing unit may adopt a local option exemption of up to 20 percent of appraised value, with a $5,000 floor, under Section 11.13(n). Many cities and counties offer it; not all do.
You apply through your county appraisal district. The exemptions cover only your primary residence, not rental properties, vacation homes, or commercial real estate.4Texas Comptroller. Property Tax Exemptions
How Rate Increases Are Controlled
Tax Code Chapter 26 governs how local governments adopt rates. Two benchmarks drive the process. The no-new-revenue rate would generate roughly the same total property tax revenue as the prior year from the same properties, so when values rise across the board, this rate drops. The voter-approval rate is the ceiling a taxing unit can adopt without triggering an automatic election. For most cities, counties, and special districts, that ceiling allows no more than a 3.5 percent increase in revenue over the no-new-revenue amount. Certain special taxing units, including hospital districts, use an 8 percent threshold.
Before adopting a rate above the no-new-revenue rate, governing bodies must hold public hearings. If a taxing unit tries to exceed the voter-approval rate, state law requires an election.5State of Texas. Texas Tax Code 26.09 – Calculation of Tax
Protesting Your Appraisal
If your appraised value looks too high, you can challenge it before the appraisal review board at no cost. When the appraisal district raises your value from the prior year, it must send a notice of appraised value with instructions for filing a protest. You file Form 50-132, and the typical deadline is May 15, with exceptions for certain property types.6Texas Comptroller of Public Accounts. Property Owner’s Notice of Protest
The strongest protests lean on recent sales prices of comparable homes, photos documenting condition problems, and corrections to the district’s records, such as wrong square footage or a bathroom that doesn’t exist. The board can only change your value, not your rate.
Local Sales Tax
Local sales tax is the next largest revenue source for many Texas cities, counties, and special districts. Texas imposes a 6.25 percent state sales and use tax on most retail goods and taxable services. Local jurisdictions can add up to 2 percent on top, capping the combined rate at 8.25 percent.7Texas Comptroller. Sales and Use Tax
That 2 percent gets divided among the taxing jurisdictions that overlap a given location. Cities, counties, transit authorities, and special purpose districts like economic development corporations each claim a portion. Rural areas with fewer overlapping jurisdictions often charge less than the cap. The money flows directly into local budgets for general operations, infrastructure, and district-specific projects.
Hotel Occupancy Tax
Cities and counties collect a hotel occupancy tax from guests at hotels, motels, bed-and-breakfasts, and similar short-term lodging. The state’s own hotel tax runs 6 percent of the room price, and local governments add their own rates, with a combined cap of 17 percent.
What sets this one apart is how tightly the law restricts its use. Revenue from the local hotel occupancy tax, under Tax Code Chapters 351 and 352, must promote tourism and the convention and hotel industry. Allowable spending includes convention center construction and maintenance, tourism advertising, arts programming, and historical preservation. Local governments cannot move hotel tax money into their general funds or spend it on unrelated services.
Utility Franchise Fees
Cities collect franchise fees from utility providers that use public rights-of-way to deliver service, including electric, gas, telecommunications, cable, and water companies. The fees compensate the city for use of public land and infrastructure.
Cable and video service providers holding a state-issued certificate of franchise authority pay 5 percent of their gross revenues to each municipality where they operate.8State of Texas. Texas Utilities Code 66.005 – Franchise Fee Other utility types negotiate franchise agreements with individual cities, so structures vary. For many smaller cities, franchise fees are a meaningful share of the general fund without a direct tax on residents.
Federal Deduction for Texas Local Taxes
Texas has no state income tax, so the federal state and local tax (SALT) deduction here is mainly about property tax and sales tax. If you itemize, you can deduct local property taxes plus either state and local sales taxes, but not both. Under legislation signed in 2025, the SALT deduction cap rose to $40,000, up from the $10,000 limit in place since 2018. The cap increases by 1 percent annually through 2029, putting the 2026 limit at roughly $40,400. The benefit phases out once income exceeds $500,000.
Itemizing only pays off if your total itemized deductions beat the standard deduction. For many Texas homeowners with significant property tax bills across stacked jurisdictions, the higher cap makes itemizing worth running the numbers on again.