Lots of reasons not to replace property taxes with higher sales taxes

05/01/2014 5:37 PM

05/01/2014 5:39 PM

I wrote a few weeks back about talk of possible changes ahead for the state and local sales tax in Texas, and now I’ve been reminded of a 2012 study that details how difficult one of those changes would be.

It’s an idea that has surfaced in the race for state comptroller. The Republican nominee, state Sen. Glenn Hegar from Katy, has suggested that the state abolish the $40 billion a year brought in by local property taxes and replace that revenue by revising and increasing the sales tax.

Hegar hasn’t raised the idea much since he touted it at a January Tea Party rally in Longview. His campaign office has said any such change would be years away.

Still, it’s an idea that has been popular in some circles in Austin for several years. Some people believe taxing the goods and services you consume is philosophically better than taxing what you own.

Philosophy can be a long way from practicality. At least that’s the strong conclusion from a 2012 study by Billy Hamilton, a tax policy expert in Austin for more than 40 years, including a total of more than 20 years at the state comptroller’s office.

When he did the study for an organization called Texas Tax TRUTH, he was a private consultant.

Last year, he moved on to be the executive vice chancellor and chief financial officer of the Texas A&M University System.

Hamilton ticks off eight major reasons why it would be a bad idea to swap property taxes for revised sales taxes. I’ll hit the high points.

First is an “uncharted waters” argument:

“Taking away the one critical funding option that is common to all local governments would be a mistake,” the study says. “It is not possible to eliminate this funding without major disruptions to local governments across the state.”

Next, and perhaps the most serious objection from my point of view, would be loss of local control.

Property tax rates are set and revenue collected by local cities, counties, school districts and special districts, all controlled by locally elected officials.

But a huge share of sales tax revenue comes from large Texas cities and their suburbs, where the bulk of the state’s people and retail establishments are.

Substituting sales taxes for property taxes means the Legislature would have to decide how to parcel out total sales tax revenue across the state.

Take school funding: “Once the Legislature stepped in to decide the allocation of local sales taxes for education,” Hamilton’s study says, “it would effectively control virtually all of the funding for public schools, and the idea of local control of public schools would be over.”

To balance out revenue from eliminating property taxes, the current sales tax rate (6.25 percent for the state plus up to 2 percent for local entities) would go up to somewhere between 19.85 and 25 percent, the study says.

The rate would be less if the tax were broadened to goods and services now excluded or exempt, but such additions (like taxing the purchase of a home) have been unpopular in the past.

Finally, there would be side effects.

Sales tax revenue is much more volatile than property tax revenue, meaning an economic downturn would take a big bite out of local government budgets.

A high sales tax rate would lead some people to shop for major purchases in neighboring states.

It could bring an upswing in the underground economy, where goods are bartered or sold for cash and sales not reported to the state.

Some businesses might leave Texas. More than 40 percent of current sales tax revenue comes from business-to-business sales.

Hamilton’s conclusion: Swapping property taxes for higher sales taxes is “a ‘big idea’ that’s bad for Texas.”

About Mike Norman

Mike Norman

@mnorman9

Take an issue that's full of sometimes-complicated details like Texas public school finance, throw in an element of urgency like the need for better transportation solutions in Dallas-Fort Worth, add a healthy helping of local interest spiced with some controversy and you have the perfect assignment for Mike Norman to examine in depth. Mike is the newspaper's editorial director.

Email Mike at mnorman@star-telegram.com.

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