AUSTIN, Texas — More than 130 Texas cities must freeze their property tax rates after the Texas Attorney General’s Office determined they failed to meet state audit requirements, enforcing a new law that bars municipalities from increasing property tax collections if they are behind on annual financial audits.
The enforcement action, announced last month by Attorney General Ken Paxton, affects mostly smaller cities with populations under 10,000. The law, passed by the Texas Legislature in 2025, requires cities to complete annual audits and publish financial statements on time before they can increase property tax revenue.
City officials said the measure places additional financial pressure on municipalities that are already struggling to complete overdue audits because of staffing shortages, management turnover and budget constraints.
In Howe, a city of about 3,700 residents north of Dallas, City Manager Monte Walker said the city inherited a backlog of audits after years of administrative turnover. Since he took office in 2023, Howe has worked to catch up on the required reviews.
However, the city received notice from the Attorney General’s Office that it must freeze its property tax rate until it complies with the law.
Walker said the city faces the challenge of paying for multiple audits while being restricted from generating additional property tax revenue.
State law has long required municipalities to conduct annual independent audits of their finances. Before the new legislation took effect, cities faced no direct penalty for missing audit deadlines.
State Sen. Robert Nichols, the bill’s author, said the measure ensures cities understand their financial condition before seeking additional tax revenue from property owners.
“You shouldn’t be raising taxes on people unless you understand your numbers and you feel very comfortable with your numbers,” Nichols said.
City officials generally agreed that audits should be completed on time but argued that the tax restriction may make compliance more difficult. They noted that audits can be expensive relative to municipal budgets.
Walker said Howe spends about $40,000 per audit from an operating budget of approximately $7 million.
Officials also said cities that fall behind on audits risk losing access to grants and other funding opportunities. Howe, for example, lost eligibility for a $10 million state water grant because its audits remained incomplete.
In Manvel, Mayor Dan Davis estimated the city would have lost roughly $485,000 in expected property tax revenue under the restriction, or about 3.5% of its projected collections.
Davis said the loss could have delayed infrastructure improvements and reduced funding for public safety and drainage projects.
Officials in several cities cited staffing challenges as a major reason for falling behind on audits. Smaller communities often struggle to recruit finance directors and other specialized personnel, particularly after leadership changes.
In Alpine, City Manager Henry Arredondo said the city was already two years behind on audits when he assumed the position earlier this year. He attributed the delays in part to turnover among senior staff.
Other municipalities said they appeared on the attorney general’s list for procedural reasons. Officials in Cuero said they completed their audit shortly after a state deadline. Officials in Port Lavaca said a communication issue with the Attorney General’s Office led to the city’s inclusion on the list and that they plan to appeal.
Nichols said some confusion was expected during the first year of implementation but maintained that the law provides an incentive for cities to meet obligations they already have under state law.
“We’re not making them do an audit that they’re not already required to do,” Nichols said.
Davis said accountability measures are appropriate but argued that state officials should work more closely with local governments to address compliance issues rather than relying primarily on penalties.
The affected cities will learn later this year how the property tax restrictions will affect their budgets after local appraisal districts complete property value assessments and municipalities calculate tax rates for the next fiscal year.
