Texas now requires cities to do an audit before raising property taxes. Some small towns can’t afford it.

By Joshua Fechter, The Texas Tribune
June 4, 2026

When Monte Walker took the reins as city manager of Howe, a town with a population of 3,686 some 50 miles north of Dallas, the city hadn’t audited its books for two years — even though state law says they must be done annually. The town had seen turnover in its management, and past officials hadn’t gotten those audits done before he took the job in 2023, Walker said.

Some three years later, Howe is nearly caught up, Walker said.

But last month, Howe got a letter from Texas Attorney General Ken Paxton: because the city’s behind on its audits, the attorney general had effectively frozen the city’s property tax rate for the foreseeable future. That’s owing to a new state law that forbids cities from raising property taxes if they’re not up-to-date on their financial audits — a law that appears to be falling disproportionately on smaller Texas towns as cities everywhere face tightening budgets.

Howe wasn’t the only one. Last month, Paxton told more than 130 Texas cities, most with fewer than 10,000 residents, to freeze their property taxes because they’re breaking that law.

That determination leaves Howe in a bind, Walker said — looking for funds in an already slim city budget to pay for multiple audits while the state tells the town it can’t seek more revenue.

“It’s kind of a Catch-22,” Walker said.

Howe is on a new front in Texas Republicans’ war to rein in the state’s high property taxes: cities and towns that haven’t kept their books up to date.

State law requires cities to audit their finances each year, requiring an independent reviewer to go over cities’ financial records to make sure its monies are accounted for. Cities must also meet a deadline to release a financial statement based on that audit to the public. Before last year, there was no direct penalty for cities that didn’t follow the law. Then, Texas legislators quietly passed a new law barring cities from raising more in property taxes than they did the previous year if they don’t perform an audit.

“You’ve got a reasonable amount of time to get your audit in,” said state Sen. Robert Nichols, an East Texas Republican who carried the bill. “You shouldn’t be raising taxes on people unless you understand your numbers and you feel very comfortable with your numbers.”

City officials interviewed by The Texas Tribune agree: they should have their books in order, and they’re working to get current, but the new cap on their taxes puts them under further financial strain. The cost of performing an audit can be high relative to a small city’s budget. For Howe, an audit costs about $40,000 against a $7 million operating budget, Walker said.

Already, being late on their audits makes cities ineligible for state grants and federal funds for needed infrastructure projects. Howe lost out on a $10 million state water grant because their audits aren’t complete, Walker said.

The restriction on collecting more in taxes could threaten services and delay getting up-to-date on their audits — though cities won’t know exactly how much of a disadvantage for a few months. Appraisal districts will calculate the size of the cities’ tax bases over the summer, after which those cities will calculate the property tax rate that will allow them to collect the same amount of tax revenue as they did the previous year.

Manvel, a fast growing town of about 20,000 about half an hour south of Houston, would have lost about $485,000, about 3.5% of the city’s expected property tax revenue in its current budget, had the attorney general’s order been in effect in time for this year’s budget, Mayor Dan Davis said. That would’ve likely meant fewer law enforcement hires, less money for drainage and road work, and other delayed improvements the city has been trying to make, he said.

“This is not just a political talking point,” Davis said. “This has a real life impact on essential services for cities like Manvel that are still very much rapid growth cities.”

Officials representing cities whose taxes the attorney general froze faced circumstances unique to smaller towns that put them behind on their audits, making it difficult to meet the new requirements of the law, they said.

Like Howe, some cities have seen staffing churn and difficulty courting qualified finance staff to move to a small town to replace them. In a small town, it can be difficult to find a replacement if a key executive like a city manager or finance director leaves, officials said. Alpine, a West Texas town about 25 miles east of Marfa, was two years behind on its audits when Henry Arredondo became city manager in January, he said. Alpine’s last city manager had previously been the finance director, so when they left last year, they took their know-how of the city’s books with them, Arredondo said.

Arredondo saw something similar when he worked as Dilley’s city manager. That city advertised for a finance director for four years but could never hire one, he said.

“You don’t have layers of knowledge,” Arredondo said. “You have the finance director, you have the city administrator [or] the city manager, and when those two positions turn over, then the next level people are clerks.”

Manvel has been on-time with its audits in the past, Davis said. This year, officials discovered that past audits failed to add new infrastructure, spurred by the city’s growth, to the city’s balance sheets, he said. That put them behind on the city’s current audit, which Davis anticipates the Manvel City Council will adopt sometime this summer. After that, the hope is to ask the attorney general’s office to repeal their decision, Davis said.

Nichols said that’s not allowed. The attorney general’s office did not return a request for comment.

Other cities wound up on Paxton’s list for other reasons. Officials in Cuero, a town of about 8,300 some 90 miles southeast of San Antonio, completed their audit just days after a late March deadline to publish the audit that triggered the attorney general’s order, City Manager Wayne Berger said. Port Lavaca completed its audit on time but wound up on the attorney general’s list owing to a miscommunication between the city and the attorney general’s office, City Manager Joanna Weaver said. Port Lavaca officials intend to appeal the decision, Weaver said.

Nichols says confusion comes with any law’s initial implementation. It wouldn’t make sense to carve out every special situation a city might face, or risk weakening the law, said Nichols, who did not seek reelection and will leave office next year. Now that these cities know they face penalties for not getting their audits done, they’ll make sure they’re done on time, he said.

“We’re not making them do an audit that they’re not already required to do,” Nichols said. “We’re just trying to say, ‘hey, you need some kind of a nudge to get your business straight and to get the audit done.’”

Davis, the Manvel mayor, sees the law as the latest in a long series of moves by state lawmakers to target local governments.

“There should be consequences, there should be ramifications, but the way that I parent my kids is through discussion and dialogue,” Davis said. “We don’t just come down and just constantly punish them, because that creates resentment, that creates distrust. And unfortunately, that’s what we continue to see from the state.”

This article first appeared on The Texas Tribune.