Last Updated: April 2026
Texas is one of nine US states with no state income tax, making it a popular destination for businesses and high earners seeking to reduce their tax burden. However, the Texas tax picture is more nuanced than 'no income tax': Texas property taxes are among the highest in the nation at an effective rate of approximately 1.60%, and the 8.25% combined sales tax rate applies broadly to purchases.
This guide provides a complete picture of Texas taxation: the property tax system (including the 2023 homestead exemption increase), how school district taxes drive property tax bills, the state sales tax, the Texas franchise tax for businesses, and why Texas's total tax burden for homeowners is often higher than states with moderate income taxes.
Texas property taxes are set by local taxing entities — school districts, counties, cities, and special districts. Each property receives a Notice of Appraised Value and a separate tax bill from each taxing entity. The school district levy is typically the largest component, often 40–60% of the total property tax bill.
| Metro Area | Effective Rate (approx) | Annual Tax on $400K Home |
|---|---|---|
| Houston (Harris County) | 1.82% | ~$7,280 |
| Dallas (Dallas County) | 1.85% | ~$7,400 |
| Austin (Travis County) | 1.92% | ~$7,680 |
| San Antonio (Bexar) | 1.75% | ~$7,000 |
| Fort Worth (Tarrant) | 1.78% | ~$7,120 |
Texas voters approved Proposition 4 in November 2023, raising the homestead exemption for school district taxes from $40,000 to $100,000. For a typical Travis County homeowner in 2024: saving approximately $1,100–1,400/year compared to pre-2023 taxes. The additional $10,000 exemption for disabled persons and those 65+ also increased. Homestead exemption application must be filed with the county appraisal district by April 30 in the year you occupy the property as your primary residence.
Texas law caps annual increases in appraised value for homesteaded properties at 10% per year — not the actual market value increase. In rapidly appreciating markets (Austin, Dallas, Houston during 2020–2022), this cap prevented many homeowners from facing even larger tax increases. The appraisal cap only applies to homesteaded properties; investment properties, commercial properties, and non-homesteaded residential properties face unlimited appraisal increases.
Texas state sales tax is 6.25%. Cities, counties, and transit authorities add up to 2% in local sales tax — maximum combined rate is 8.25%. Most major Texas cities are at or near 8.25%: Austin 8.25%; Dallas 8.25%; Houston 8.25%; San Antonio 8.25%. Sales tax applies to tangible personal property, most services, and digital goods. Exempt: food and food ingredients for home preparation (groceries); prescription drugs; agricultural and ranching equipment; manufacturing equipment and supplies; residential utilities.
Texas does not have a corporate income tax but does levy a franchise tax (often called the 'margin tax') on most businesses operating in Texas. Rate: 0.75% of taxable margin (reduced rate 0.375% for qualifying wholesale/retail businesses). Threshold: businesses with total revenue below $2.47M (2024) owe no franchise tax (pay $0 with a No Tax Due report still required). Taxable margin is calculated as the lesser of: (1) 70% of total revenue; (2) Total revenue minus cost of goods sold; (3) Total revenue minus compensation; (4) Total revenue minus $1M. For most small businesses and pass-through entities (LLCs, S-corps): the franchise tax may apply depending on revenue level. C-corporations: franchise tax replaces corporate income tax.
The 'no income tax' narrative for Texas requires context — property taxes significantly offset the income tax savings for homeowners:
| Scenario | Texas | California | New York |
|---|---|---|---|
| Income tax on $150,000 | $0 | ~$12,000 | ~$12,000 |
| Property tax on $500,000 home | ~$9,000 | ~$5,000 | ~$9,500 |
| Sales tax on $40,000 spending | ~$3,300 | ~$3,900 | ~$3,300 |
| Total state/local tax burden | ~$12,300 | ~$20,900 | ~$24,800 |
Texas is clearly cheaper for higher earners — the income tax savings exceed the property tax premium for those earning above approximately $100,000. But for renters (no homestead exemption), or those in very expensive Texas homes, the comparison narrows. California's Proposition 13 caps property taxes at 1% of purchase price with 2% annual growth — a long-term California homeowner in a $1M home may pay only $5,000/year in property tax, while the same Texas home pays $18,000. The California vs Texas comparison tilts Texas for earners but California for long-term homeowners at higher values.
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Questions about Texas property tax protests, homestead exemption applications, franchise tax, or establishing Texas domicile? TaxHub connects you with licensed CPAs who specialise in Texas state taxes.
Talk to a Texas CPA About Your Taxes →To claim the Texas homestead exemption: (1) Own the property and use it as your principal residence on January 1 of the tax year; (2) Submit the Residence Homestead Exemption Application (Form 50-114) to your county central appraisal district by April 30 (late applications accepted for 2 years prior under certain conditions); (3) Provide your Texas driver's licence or state ID reflecting the property address, or a signed affidavit if not yet changed. Once approved, the exemption automatically renews each year — you don't need to reapply unless your situation changes. The $100,000 school district exemption ($40,000 before November 2023) reduces the taxable value of your home for school district purposes. Additional $10,000 exemption for disabled homeowners or those 65+. The 10% appraisal cap also kicks in only for homesteaded properties.
Texas has the 2nd highest effective property tax rate in the USA at approximately 1.60% — compared to New Jersey (2.23%), Illinois (2.08%), Connecticut (1.79%), Wisconsin (1.61%), Nebraska (1.49%), and the national average of approximately 1.07%. Lower property tax states: Hawaii (0.28%), Alabama (0.41%), Louisiana (0.55%), Wyoming (0.57%), Colorado (0.60%). Why are Texas property taxes so high? Texas funds local services (schools, libraries, roads) almost entirely through property taxes and sales tax — in the absence of an income tax, property tax carries a heavier share of local government funding. Texas has used property tax relief bills (including the 2023 homestead exemption increase and rate compression) to moderate the burden, but the fundamental reliance on property tax continues.
For high earners (above $150,000), Texas is generally significantly cheaper in total state/local tax burden than California or New York. For median-income households or renters, the difference is smaller — California and New York have progressive income taxes that collect less from moderate incomes, while Texas's property and sales taxes are more regressive. For home buyers: Texas homes in Austin and Dallas appreciated rapidly from 2020–2022 and now carry high property tax bills. A $700,000 Austin home carries approximately $13,000/year in property taxes ($1,100/month). The same home in California at $700,000 might have property tax of $7,000–8,500/year depending on when it was purchased (Prop 13 protection). Long-term California homeowners have built up significant Prop 13 protection that Texas does not offer to the same degree — Texas caps appraisal increases at 10% per year, but this is less protective over decades than California's 2% cap.
Texas businesses pay: Texas Franchise Tax ('Margin Tax') — 0.75% on taxable margin for most businesses; 0.375% for wholesale/retail; no tax for businesses with total revenue under $2.47M; Sales tax collection — businesses must register and collect Texas sales tax on taxable sales; Federal income tax on business profits — Texas passes this through to owners (for LLCs and S-corps) or C-corps pay federal corporate income tax (21%); Property tax on business property — tangible personal property (equipment, inventory, furniture) is taxable in Texas; Unemployment Insurance (Texas TWC) — employer state unemployment tax applies. Texas does not have a separate corporate income tax — the franchise tax is structured as a gross receipts equivalent, not a net income tax. For most small businesses with revenue under $2.47M, Texas is an attractive business location with minimal state tax compliance burden.
Texas has no state income tax, so all retirement income — Social Security benefits, pension income, 401(k) and IRA distributions, investment income, rental income — is exempt from state tax. Retirees in Texas pay only federal income tax on these sources. This makes Texas particularly attractive for retirees with significant pension or investment distributions. The main considerations for Texas retirees are: property taxes (which can be substantial; the homestead exemption + 65+ exemption + senior freeze helps significantly); Medicare and Medigap premiums (federal, not state); and the general cost of living. The senior property tax freeze: homeowners 65+ can apply for a property tax freeze that locks their school district tax at the current year's level — even if appraisals rise, the school portion of their tax bill cannot increase. This is a major benefit for elderly homeowners on fixed incomes.