The main focus of the 2025 session was the biennial budgets and the projected $16 billion funding shortfall over the next four years. The Legislature focused much energy on closing that gap and the majority Democrats wanted to do so with a combination of reductions and new revenue options, particularly new more progressive revenue.

Property tax cap revision

Revising the outdated 1% property tax revenue cap for state and local governments was a consistent feature of revenue discussions in both the House and the Senate. Multiple bills were introduced to revise the cap to tie it to inflation and population growth – HB 1334, HB 2049, SB 5812, and SB 5798. While revising the cap has been a city goal for more than 20 years, we have never gotten our hopes too high. But this session seemed different.

Unfortunately on around day 95 of the 105-day session, we got the news the Governor Ferguson was not supportive of revising the cap. After that, the Legislature dropped the proposals to revise the cap from their revenue package. It was a disappointing end to a lot of hard work and effort on the part of city officials from around the state. We especially want to thank those who were able to testify in support of the various proposals and everyone who signed on to our letter of support and engaged with your legislators.

While the Legislature did end up passing a version of HB 2049, it did not include revising the property tax cap for state and local governments.

Unfortunately, we are not optimistic that 2026 will be a year when the Legislature will be willing to take up revising property tax cap given the uncertainty and the election year environment. However, AWC continues our work with city officials on continued education, messaging, and tools about how property taxes work and what vital community services they fund.

Other city finance impacts

In the end the Legislature passed new revenue proposals generating about $9 billion in new funding over the next four years and balanced the remaining shortfall with spending reductions and shifts and sweeps of funds – including sweeping $288 million from the Public Works Assistance Account. However, besides the sweep of those funds, much of the funding for cities was left intact and no changes were made to other state shared revenues.

You can find more information about the budget via our detailed budget matrix.

One of the bright spots in the budget and finance arena was the inclusion of $100 million for public safety grants and the creation of a new local councilmanic sales tax authority for public safety. You can read more about that in the public safety and criminal justice section.

Of the many revenue proposals introduced, the bills that ultimately passed to fund some of the budget gap included:

• Sales tax on selected services (SB 5814)
• Surcharges on B&O taxes (HB 2081)
• Capital gains and estate tax surcharges on large tax transactions (SB 5813)
• Repeal of obsolete and ineffective tax exemptions and preferences (SB 5794)
• Excise tax on pooling, banking, and sale of surplus electric car (zero emission vehicle/ZEV) credits by car manufacturers (HB 2077)

SB 5814, which applies the sales tax to some new services, will have some positive impacts on city sales tax collections. The full extent of those impacts are yet to be determined. Additionally, cities may have to pay more sales tax for services like using temporary employment companies.

With more economic uncertainty ahead and concerns about federal funding, 2026 is likely to again be a session focused on fiscal issues. AWC will be working with cities to explore other fiscal sustainability options.