The 84th Texas Legislature, which convenes in less than two months, should consider a proposal that would benefit all Texans: the elimination of local property taxes.
To replace this lost tax revenue in a way that would be least costly to taxpayers and boost the Texas economy in the process, lawmakers should reform sales taxes.
A study led by the prominent economist Arthur Laffer recommends raising the total sales tax rate, which includes the state and local portions totaling 8.25 percent, to 11 percent. This plan would also broaden the tax base by taxing property and all goods and services taxed in at least one other state.
So how would this “tax swap” affect Texas?
According to the study, total personal income would likely increase by at least $23 billion during the five years after the swap compared with the current tax structure. That rise in economic opportunity — the result of more dollars available to purchase capital and other goods and services — could create more than 200,000 net nonfarm jobs during this five-year period and many more thereafter.
That seems like a win for all Texans.
Critics claim that this proposal would disproportionately harm lower-income Texans because sales taxes are regressive. They say raising the sales tax rate would make a bad situation worse.
Every tax in Texas is regressive. At least that’s what the Texas comptroller says.
Historically, the property tax burden on the average Texan’s income has grown from about 1 percent in the early 1980s to nearly 3 percent today. This rising cost on property owners is causing some Texans to struggle to put food on the table and others to lose their homes altogether.
According to a report from the comptroller, those in the lowest quintile of household income, earning less than $31,771 per year, pay slightly less than 6 percent of their income in school property taxes. The highest quintile, made up of those earning more than $136,297, pay 2 percent of their income in these taxes.
Clearly, eliminating property taxes would benefit the lowest-income individuals the most. With such a high level of regressivity, it seems that everyone across the political spectrum would agree that property taxes should be abolished. Though the sales tax is also regressive, Texans would be better off if they were paying fewer regressive taxes.
A higher total sales tax could offset the lost property tax revenue because it’s the broadest tax, thereby helping to keep the rate relatively low and allowing all citizens to have some skin in the game. It’s also transparent — clearly marked on receipts and efficient to administer relative to the property tax, which has over 4,000 taxing entities statewide.
This may give critics an opportunity to argue in favor of their favorite economic proposal, the personal income tax, which can be made progressive by taxing upper incomes at a higher rate. This would be a mistake.
The best way to fund essential government services and infrastructure is by limiting the number of taxes to the most efficient tax available, and that is the sales tax.
The Texas Legislature would be wise next session to consider different options to increase opportunity for all Texans. A good place to start would be to eliminate, or lower, property taxes.
Talmadge Heflin is the director of the Center for Fiscal Policy at the Texas Public Policy Foundation.