Read blog post with figures here.
Texans pay state and local taxes in one form or another. Given Texans desire prosperity and liberty, an optimal tax system creates the least burden on economic activity while funding limited government spending. While the details of taxation can get complicated quickly, core principles of sound taxation include a tax that’s simple, flat, and broad-based.
Taxes may redirect you from consuming with a sales tax, push you out of your home with a property tax, or incentivize you to purchase less gasoline with an excise tax to fund government spending. Fortunately, Texas is one of only nine states without a costly state or local personal income tax. The table below shows that the 9 states without this tax perform much better economically than those states with the highest personal income tax rates.
State taxes in Texas include the dominant sales and use tax, but there are also the franchise tax, motor fuels tax, and other taxes. The more than 4,100 local taxing jurisdictions statewide collect primarily property taxes, but cities, counties, and special purpose districts can also collect a sales tax.
Achieving an optimal tax system begins with the derivation of taxation. First, politicians determine government provisions from voter demand and rent-seeking activity to win votes. Second, those provisions require government spending. Third, government spending requires some form of funding mechanism, hence taxation.
Therefore, a key to an optimal tax system is to educate voters on the costs and benefits of government provisions while effectively limiting government spending, which can be done by putting laws in place to add budget transparency and reduce rent-seeking behaviors while strengthening limitson government spending.
While the Texas Legislature has appropriately restrained government spending below the key measure of population growth plus inflation in the last two budgets, the state budget is up 7.9 percent above this measure since 2004, meaning taxes are higher and economic growth is lower today than otherwise. So, further spending restraint is necessary to help Texans be more prosperous and Texas more competitive. This could be achieved by limiting state spending to 4 percent and using state surplus dollars to provide tax relief, such as eliminating school M&O property taxes over time, until we can get to an efficient sales tax.
According to the Tax Foundation and noted in the figure below, Texas has the 10th highest reliance on sales taxes in the nation, but the 5th least burdensome state-local tax burden. While a sales tax should apply to the broadest base possible, Texas has sales tax loopholes of about $45 billion in FY 2018. These loopholes should be reduced or eliminated to follow sound taxation with the broadest base and lowest rate possible.
The Texas Comptroller notes that sales and property taxes in Texas are regressive. A flat tax rate results in higher income people paying a lower share of their income on taxes than lower-income people, but higher income people pay much more in taxes. The costs of property taxes are substantial, with businesses and individuals each paying about half for school M&O property taxes, and they hurt lower-income property owners and even renters as these taxes subjectively skyrocket.
Sales taxes, on the other hand, allow people freedom with their money to spend or save, do not have to tax capital, and are transparent. Individuals pay about 60 percent of sales taxes collected while businesses submit the rest, but businesses don't ultimately pay taxes as they pass costs along to people through higher prices, lower wages, and fewer jobs. An example of this is the recent U.S. Supreme Court ruling that allows Texas to expand the sales tax base to all online transactions, which most are already taxed online at places like Amazon and WalMart, but any additional tax revenue should be used for tax relief because Texas state and local governments already spend too much.
A sales tax is pro-growth because it allows individuals to choose what’s best for themselves. Other forms of taxes that try to socially engineer behavior, such as a gas tax or carbon tax, end up distorting economic activity and hurting lower-income households most.
In conclusion, by effectively limiting government spending that allows a move to an optimal tax system based on a sales tax of final goods and services, Texans will flourish and other states will have an optimal system to follow.
The result of taxing something is that you will get less of it. That's simple, correct? But the details of how to best collect taxpayer dollars to fund limited roles for government gets complicated. I try to break this down simply at the video above.
According to the Texas Comptroller, property taxes and sales taxes are both regressive. Any time you have a flat tax rate, higher income people will pay a lower share of their income on taxes than lower income people. But the costs of property taxes are substantial, with businesses and individuals each paying about half for school M&O property taxes. Sales taxes, on the other hand, allow people the freedom to decide how to spend their money, don not have to tax real estate (capital formation and accumulation--keys to wealth of nations), and are transparent. Individuals pay about 60% of sales taxes collected while businesses submit about 40%, but we know that businesses don't ultimately pay taxes because they just pass those costs along to consumers (us) in the form of higher prices, lower wages, and fewer jobs available over time.
As noted in Episode 8, I have long supported the elimination of property taxes in Texas. There are multiple ways to do so by possibly swapping them (sales tax rates are lower now because of expanded economic growth since these rates were calculated) with a reformed sales tax and/or buying them down over time. The key is to limit government spending so that the burden of government can be reduced.
We know that sin taxes (e.g. carbon tax or cigarette tax) or tariffs are poor forms of taxation. Income taxes are also a terrible form of taxation. Check out the table below that provides information for the 9 states without a personal income tax and the 9 states with the highest personal income tax rates. Those states without a personal income tax blow the others out of the water regarding multiple economic indicators.
Of course, the key is limiting spending. Let's move to a tax system with just a sales tax for more economic prosperity.
This commentary was originally featured in the Odessa American on March 8, 2018.
Imagine: You own a business. You love what you do, the opportunity to employ people, and satisfying customers. But the cost of doing business is escalating as local property taxes increase.
Down the road, a large corporation started construction of a new building. They considered other locations before choosing your community. That corporation received a tax abatement with the school district. That means for 10 years, they will pay only a small portion of taxes due without abatement. Meanwhile, your business does not benefit from a tax abatement, and you will likely pay higher property taxes every year.
Even worse, that new corporation may compete directly or indirectly with your business.
If that sounds frustrating, or outright unfair, it should. Yet, it happens often using Chapter 313 of the Texas Tax Code.
Actually, it could soon happen in your backyard.
The Ector County Independent School District Board of Trustees received a request by 174 Power Global Corporation to conduct a public hearing on an application under that chapter, also known as the Texas Economic Development Act. The company seeks a 10-year, 100 percent tax abatement for a solar energy project that may bring a $50 million investment and create two full-time jobs, according to documents submitted to the school district.
Tax abatements like this are nothing new and are justified under the guise of economic development.
The Texas Comptroller reports that 53 percent of these tax abatements in 2016 were for renewable energy. Renewable energy projects received 25 percent of the total estimated gross tax benefits but represented only 11 percent of jobs committed for creation.
Supporters argue tax abatements increase tax revenue and foster job creation through new investment by businesses. However, these tax abatements exemplify why we should pay close attention to not only effects that are seen, but also those that are unseen.
If these new businesses create permanent jobs, demand for basic government services may grow. If the businesses responsible for this demand pay lower taxes than existing businesses, current businesses – and individual taxpayers – foot the bill.
In addition, the exempted property value under such an agreement is excluded from school finance formulas that determine much of the funding for school districts. The Legislature generally covers declines in a district’s revenue, thereby forcing taxpayers statewide to pay more for certain districts that provide tax breaks to favored businesses.
School districts can also negotiate “supplemental payments” from businesses applying for an abatement. These payments are paid outside the school finance system.
Hence, school districts are incentivized to accept all tax abatement applications because they can replace lost local revenues with state dollars and can get supplemental payments.
And what do communities gain by offering such tax incentives? It’s probably not as much as they may think.
A recent study by Dr. Nathan Jensen of the University of Texas at Austin examined the bargaining power between school districts and businesses with plans to expand or relocate in Texas. Using supplemental payments as a percentage of the preferential tax treatment businesses were ready to give up, and a survey of economic development professionals, he concluded that around 85 percent of these businesses would have come without an abatement.
A bill passed last session tried to remedy another problem resulting from such tax abatements.
The legislation modified Chapter 313 to prevent wind energy companies from receiving tax abatements for wind turbines built within 25 nautical miles of military aviation bases. Offering preferential tax treatments in areas close to these bases often encouraged businesses, including wind energy businesses, to locate there despite challenges for flight operations, such as radar interference.
These costs to taxpayers highlight why government, including your school district, shouldn’t be in the business of economic development. Government should preserve liberty, not favor a few, politically connected businesses at the expense of all other taxpayers
Texas should repeal tax abatements like these and other corporate welfare programs while focusing on reducing government spending and tax burdens so everyone has more opportunity to prosper.
I appreciated the opportunity to testify before the Texas House Ways & Means Committee regarding eliminating property taxes in Texas and replacing them with a reformed sales tax that would have a sufficiently broad base for the lowest rate, along with making structural reforms to local spending.
House Bill 285 would eliminate school district M&O property taxes and replace them with a 12 percent sales tax rate, which would leave other property taxes in place that have risen at a faster rate while not expanding the tax base to achieve a lower rate. Regardless, the Foundation is encouraged with the discussion about eliminating property taxes.
But there are ways to improve this bill and others discussed at the hearing that would take only a piecemeal approach in eliminating property taxes, which both property taxes and sales taxes should never be on property. The elimination of all property taxes should be combined with structural reforms to student-centered funding in public education and spending limits on local governments, which excessive spending is the true driver of higher tax burdens.
I provided in-depth research and data on these issues to hopefully move the ball toward eliminating burdensome property taxes on Texans once and for all.
Check out the press release here: http://mailchi.mp/texaspolicy/today-tppfs-vance-ginn-to-testify-on-eliminating-property-taxes-in-texas.
Below is my written testimony with links to data and other research:
This commentary was originally featured in Austin American-Statesman on August 1, 2017.
Gov. Greg Abbott’s supplemental call for a special session includes instruction to structurally reform Texas’ escalating property tax burden.
From 2000 to 2015, property taxes levied statewide soared by 132 percent, outpacing combined population growth and inflation that grew just 82 percent.
Critics have been quick to attack the governor’s push for property tax reform, claiming that the problem can be solved by increasing state government spending on public education. Most reasonable people recognize that throwing money at Texas’ property tax problem, regardless of source, isn’t an actual solution.
The answer lies in structural property tax reform that emphasizes accountability and transparency, at least until officials can replace the property tax system entirely with a more efficient, reformed sales tax.
It’s only by changing the nature of the system, both incrementally and in radical fashion, that Texans will find real relief. That’s something that can’t happen soon enough, considering some of the recent trends.
Excessive property tax levy increases have been partially fueled by the mammoth number of property taxing jurisdictions here in Texas. Today, more than 4,100 local governments that levy a property tax collect more than $52 billion from homeowners and businesses statewide. That translates into a burden of roughly $1,900 per Texan or about $8,000 for a family of four.
While it’s true that most of this burden — 54 percent — can be traced to school districts, it’s a mistake to think that pouring even more state tax dollars into public education will solve the problem.
Already, the state spends roughly 40 percent of the funds it has discretion over on public education. An increase would shift the already-excessive government burden from local to state. It could exacerbate the problem by giving school districts breathing room to raise taxes even higher to pay for wish-list items, like multimillion-dollar football stadiums.
Let’s be clear: School district property taxes are a big part of your property tax bill — but they aren’t the only part, nor are they the fastest-growing portion.
From 2005 to 2015, total property taxes levied statewide increased by 4.9 percent on an average annually. Separating levies into major categories of property taxes, average annual growth increases were: 7 percent by special purpose districts, 6.3 percent by counties, 5.6 percent by cities and 4 percent by school districts.
Clearly, there is room for reform across the board.
Two bills discussed during the regular session would have provided long-term property tax relief. Senate Bill 2 would have set the automatic rollback election to 4 percent for cities, counties, and special purpose districts — those that had the largest growth rates during the last decade. Senate Bill 669 would have enhanced property tax transparency.
The reforms encompassed in these bills should be the target for lawmakers in the special session. Over the long-term, lawmakers should be thinking about how to achieve the ultimate prosperity-generating reform: the elimination of property taxes entirely.
In tandem, these reforms will not only be good for taxpayers, but also great for the economic health and prosperity of Texas.
Read the entire post with figures here: https://www.texaspolicy.com/blog/detail/spending-more-wont-solve-school-finance-or-property-tax-flaws-in-texas
Watch my explanation of the Conservative Texas Budget, school finance reform, property tax reform, and more in the @TXCapTonight interview at time 4:30 here: http://www.twcnews.com/tx/austin/capital-tonight/2017/06/13/capital-tonight-june-13--a-day-in-the-life-of-a-cps-caseworker.html
Quintero and Ginn: Give voters more control of property taxes
Far too many Texans are getting pummeled by property taxes.
In 2015, more than 4,100 local governments levied property taxes totaling $52.2 billion, or roughly $1,900 for every man, woman, and child in the Lone Star State. That’s a jump in the tax levy of more than $3 billion from the prior year and almost $12 billion compared with just five years ago.
Texans’ property tax bills aren’t just big — they’re also growing quickly. From 2000 to 2015, property tax levies soared statewide by 132 percent. Over the same period, standard economic measures like population growth and inflation increased just 79 percent.
These data reinforce what everyone already knows — that Texas’ property tax system is broken and needs an overhaul lest more people lose their homes, businesses, and futures.
Fortunately, the problem has not gone unnoticed at the Capitol where legislators are debating a number of different fixes, with one particular solution looking more and more likely.
In short, the Legislature looks poised to require cities, counties, and special districts to get permission from voters if already-high property taxes grow too fast in any one year. That focus on voter approval could be a real game-changer.
Today, Texans must know and understand what a rollback tax rate is, wait for one of their many local governments to exceed it, and then be ready to quickly obtain a sizable number of signatures to petition for an election. That’s a lot to ask from families who are busy working, raising kids, and generally dealing with life’s challenges.
To simplify the process and level the playing field, lawmakers are proposing to reduce the rollback rate by half and require an election to be held automatically if local officials want their budgets to grow by more.
By drawing a line in the sand and requiring an election if it’s crossed, Texans can expect future property tax bills to grow more slowly while still allowing local officials an avenue to raise tax revenue if they can make a sufficient case to the public. This not only puts more control in the hands of local voters but also creates a greater level of accountability.
Some critics have sought to cast these good government reforms in a bad light by suggesting that it would harm public safety. But as has been documented time-and-again, there’s plenty of waste, fat, and abuse in city budgets that can be better prioritized before we even get close to that point.
If the current legislative effort is deficient in any way, it’s that it excludes school district property taxes — a major driver of the problem. However, it’s excluded for a good reason: the school finance system is ridiculously complex and should be addressed separately.
Given these structural property tax reforms take effect, they would dramatically alter the local landscape for the better. However, these should only be considered intermediate reforms.
The ultimate prosperity- generating reform is to eventually eliminate property taxes, which another bill — HB 1050, which has yet to receive a hearing — proposes to do. Research undergirding the bill shows that this can be done in a revenue-neutral way by enacting a reformed sales tax that broadens the tax base and increases the rate from 8.25 percent to around 11 percent. This wouldn’t just be a tax swap but rather a much more efficient tax system that would contribute to higher incomes and more jobs created, and allow you to actually own your property.
Texans want more control over their livelihood instead of giving it to local officials that may unnecessarily raise their taxes to pay for excessive spending. These common sense structural reforms would enhance local control by voters.
James Quintero is director of the Center for Local Governance and leads the Think Local Liberty Project at the Texas Public Policy Foundation and Vance Ginn, Ph.D., is an economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a nonprofit, free-market research institute based in Austin.
The Tax Foundation recently released their 2017 State Business Tax Climate Index report detailing the rankings of all fifty states. The overall score is determined by the burdens of each state’s corporate income tax, individual income tax, sales tax, unemployment insurance, and property tax. The purpose of the report is to “show how well states structure their tax systems, and provides a roadmap for improvement.”
Chart 1 shows the ranking of each state. A common factor between a majority of the top performing states is the absence of at least one major tax, such as the individual income tax, and for states that do levy all the major taxes, they do so with low rates and broad bases. States ranked in the bottom bracket share similar shortcomings such as complex non-neutral taxes and comparatively high tax rates.
Texas’ overall ranking declined one position to 14th nationwide. While Texas excels in the unemployment insurance and individual income tax categories, the overall ranking decline can be attributed to poor scores for corporate income and property taxes.
Although the 2015 Texas Legislature cut the business franchise (margin) rates by 25 percent for a total value of $2.6 billion, the relative ranking of the corporate income tax remained unchanged at 49th, or second worst! This is due to the fact that the business tax is a gross receipts-style tax that is costly to comply with and pay. The Tax Foundation published a previous paper that finds the state’s overall business tax climate would increase to 3rd if the margin tax was eliminated. Moreover, the Texas Public Policy Foundation and the Legislative Budget Board (LBB) have estimated large economic gains from eliminating this onerous tax.
The Tax Foundation also notes that Texas’ local property taxes is a thorn in taxpayers’ side as the relative ranking of property taxes declined from 33rd to 37th, or 14th worst! Its structural complexity, unwarrantedly high rates, and lack of voter oversight continue to confuse and burden taxpayers. The 84th Legislature took steps to lower this burden by increasing the homestead exemption for school districts by $10,000 to $25,000. However, as the LBB recently noted, although homeowners paid a lower property tax amount than without the exemption increase, most homeowners paid more for their property taxes this year.
To overcome the overwhelming burden of local property taxes statewide, the Texas Public Policy Foundation published a paper highlighting key reforms that should be made in the short run and long run. Specifically, structural reforms should be made in the short run by giving voters a stronger voice in the growth of property taxes by requiring an automatic election for any local government whose revenues increase above a certain limit in any one year. In the longer run, we imagine Texas with substantially more economic growth and job creation from replacing the inefficient property tax system with a higher, broader-based efficient sales tax.
The 85th Legislature should take these rankings by the Tax Foundation and other reports into consideration to improve the state’s business tax climate. The goal is not necessarily to beat other states, but to give Texans the best chance to prosper, which can happen if we improve our rankings to encourage more new businesses and job creation.
This commentary originally appeared in the Austin American-Statesman on April 25, 2016.
You’ve likely recently received this year’s property tax appraisal. If you own property in Travis County, after picking your chin up off the floor from the massive increase, there could have been a sense of delight or frustration.
It’s nice that home values are reported to have increased, on average, 9 percent countywide for those looking to sell their home soon. But the vast majority of Austinites not looking to sell their home stress about paying more for inflated property taxes.
Fortunately, there are measures that state and local officials could take to put taxpayers back in the driver’s seat instead of local taxing jurisdictions and appraisal districts. The ultimate long-term solution must be to allow Texans the freedom to own their home by eliminating property taxes.
Last November, voters overwhelmingly approved a constitutional amendment passed by the Texas Legislature that increased the homestead exemption for property taxes supporting school districts by $10,000 to $25,000. This helps to provide welcome tax relief in a state that has the 14th most burdensome property tax system in the nation.
However, as values continue to rise this measure just lowers their property tax bill temporarily at best.
Consider an Austin home valued at $285,000. Given tax rates by each local jurisdiction and the appropriate exemptions, this home would need to increase by no more than 2 percent for no change in tax liability. However, the average 9 percent increase would force this homeowner to pay about $450 more.
Local property taxes levied statewide increased by 101 percent compared with only a 70 percent increase in compounded population growth plus inflation from 2000 to 2013. With soaring property taxes, homeowners deserve to have a greater voice in taming this burden.
A way to give them that voice is by reforming the rollback provision. This would require an automatic local election to approve tax rates that would increase property tax revenue by more than the lesser of either population growth plus inflation or 4 percent. This approach is gaining traction in the Legislature as it will provide greater budget transparency and help limit the rising tax burden.
Although raising the homestead exemption and reforming the rollback provision are good steps, this leaves the problem of paying rent to the government forever.
Republican primary voters noted their frustration with this burden by their response to a proposition last month that read: “Texas should replace the property tax system with an alternative other than an income tax and require voter approval to increase the overall tax burden.” It passed by a wide margin with 69.5 percent in favor.
Clearly, Texans want more control over their livelihood instead of giving it to local officials that may unnecessarily raise their taxes to pay for excessive spending. In addition, this would allow homeowners to be delighted when they receive notice that their home value increased because they get to reap the rewards instead of stressing about paying higher taxes.
To replace property tax revenues in the most efficient way, research shows that the most simple, transparent, and economic enhancing option would be to enact a reformed sales tax. If the sale of property and services taxed in at least one other state were added to the current sales tax base, then the rate would increase from 8.25 percent to 11 percent. Not much of a change when you consider that you get to keep substantially more money as a homeowner and renter without property taxes.
This swap would provide meaningful tax relief for property owners, and it would have the added benefit of strengthening the state’s economy by encouraging capital investment — the primary driver of economic growth and job creation. Estimates show that this could create as much as $63 billion more in personal income and 337,000 net new jobs over five years compared with the status quo.
A sales tax would also have the added benefit of resisting excessive growth in local governments while still paying for essential services that property taxes support today. For example, state sales tax collections increased by only 86 percent compared with the 101 percent increase in property taxes from 2000 to 2013.
Bottom line: There are solutions to reducing excessive property taxes. In the short run, voters should have more control by reforming the rollback provision. But let’s not take our eyes off the ultimate prize for Texans to have more opportunity to reach their full potential and finally own property by eliminating property taxes.
Heflin is director of the Center for Fiscal Policy at the Texas Public Policy Foundation. Quintero leads the Think Local Liberty Project at the Texas Public Policy Foundation.
Don't miss this video of a panel I moderated recently on advancing the Texas model with a simple tax system.
The Texas model of low taxes, no individual income tax, moderate regulation, and a good lawsuit climate has generated prosperity for many Texans. Despite these gains, is the state’s tax system with an onerous business franchise tax and burdensome local property taxes the most efficient? Join us as the panel discusses potential improvements to the state’s tax structure so that the budget meets the needs of Texans while providing an environment conducive to the greatest economic opportunity for them to succeed.
Sen. Paul Bettencourt, Chairman, Select Committee on Property Tax Reform and Relief, Texas State Senate | Presentation
Scott Drenkard, Economist and Director of State Projects, Tax Foundation |Presentation
Sen. Craig Estes, Texas State Senate
Rep. Chris Turner, Texas House of Representatives
Moderated by Dr. Vance Ginn, Economist, Center for Fiscal Policy, Texas Public Policy Foundation
This commentary, written by Dr. Vance Ginn and Nozim Ishankulov, originally appeared in print in the Midland Reporter-Telegram on December 27, 2015.
Despite slower economic activity in Midland County, property taxes owed continue to skyrocket. Therefore, lawmakers should consider options to provide permanent relief of these onerous taxes to fund essential local government services.
Contributing to the slower economy is a sustained drop in oil prices that’s led to a 22 percent decline in active rigs to only 32 in the County according to Baker Hughes. Less employment related to oil and gas activity has pushed the unemployment rate up from a cyclical low of 2.2 percent last December to 3.5 percent in October.
Although this mild slowdown suggests a weaker housing market, homeowners noticed that their home appraisal increased, on average, by 12 percent. They would ordinarily cheer the increase as it improves their wealth, but it also means that they face higher property tax bills that may not be associated with an increase in income.
Add to that the 11 percent increase in the County’s property tax rate excluding any other changes and many will risk living paycheck-to-paycheck or losing their home from a mounting property tax burden. This isn’t just in Midland, homeowners statewide face the 14th highest property tax burden in the nation according to the Tax Foundation.
Increases in the average appraisal value and tax rate in Midland will hurt those with low and fixed income the most, particularly the working poor and elderly, as property taxes rise from factors out of their control. A new school nearby may raise their home value forcing them to move to another area with cheaper housing and worse living conditions.
This type of life-changing event determined by the government and not voluntary exchanges in a market has reasonably created unrest among homeowners. For example, there were 701 people in Midland who signed a petition protesting the increase in the County’s property tax rate. Being politically engaged is important to confront higher taxes from excessive spending, but far too often citizens are unaware of their property tax liability.
To alleviate some of this burden, last month voters overwhelmingly approved the constitutional amendment passed by the Texas Legislature known as Prop 1. It increases the homestead exemption for school property taxes by $10,000 to $25,000. The recent Texas Public Policy Foundation’s report The Freedom to Own Property outlines how this will provide only short-term relief while eliminating property taxes and replacing lost revenue with a reformed sales tax advances liberty and prosperity.
The reformed sales tax could be as low as an 11 percent total rate compared with the current 8.25 percent state and local combined rate by broadening the base to include the sale of property and most goods and services taxed in at least one other state.
Unlike property taxes that are many times hidden in homeowners’ escrow account or in renters’ rent, the sales tax is easy to see on every receipt. While property taxes must be paid regardless of affordability, the sales tax is based on an individual’s discretion to purchase something.
By having more disposable income from paying lower mortgage payments and rent, Texans can allocate their income as they see fit whether it be to put food on their table, save for a rainy day, or hire new workers. Research highlighted in the Foundation’s paper finds that this swap could lead to substantial economic gains in the ballpark of $60 billion in new personal income and 340,000 new jobs over five years compared with the current trajectory.
Finally, and most importantly, this swap gives Texans the freedom to own property instead of renting from the government.
For the working poor and all Texans to benefit from owning property, more job opportunities, and more economic prosperity, lawmakers should consider long-term solutions to resolve skyrocketing property taxes with ending them being the best option.
This commentary by Dr. Vance Ginn originally appeared in the Austin American-Statesman on November 30, 2015.
With voter approval of Proposition 1 on Nov. 3, which raises the homestead exemption on property taxes for school districts by $10,000, Texas homeowners will get some reprieve from paying skyrocketing property taxes. Though this is welcome short-term relief, it’s time to stop tinkering around the edges of the nation’s 14th worst property tax system and abolish it so Texans have the freedom to own property.
“The Freedom to Own Property: Reforming Texas’ Local Property Tax,” a recent study released by the Texas Public Policy Foundation, highlights the need to end property taxes and the economic gains of replacing them with a reformed sales tax.
Compared with a 70 percent increase in population growth plus inflation since 2000, local property taxes are up 101 percent, leaving a mounting annual tab of about $1,600 per Texan. Simply, property taxes are outstripping Texans’ ability to afford a home and put food on the table.
What should an Austinite expect from the latest round of property tax relief?
Let’s say you have a home in Austin at the median value of $285,000 that increased 11.3 percent during the last year according to Zillow.com. This substantial price increase in the housing market is from a combination of elevated demand from new arrivals to Austin, netting about 110 people every day, and the restricted supply from onerous regulations. Zillow notes that Austin’s real estate market is overheated as it forecasts only a 3.5 percent increase this year.
With more than 4,000 local taxing jurisdictions statewide, the five in Austin are the Austin Independent School District, City of Austin, Travis County, Central Health and Austin Community College that sum to a 2.38 percent total tax rate. Accounting for exemptions, such as the $15,000 exemption for the Austin school district, your property tax bill would be $6,262.
Proposition 1 raises this school district exemption to $25,000, reducing your annual bill by $122 with no other changes. Though more dollars in your pocket is always better, there’s more to the story.
If your home value went up by only 1.9 percent, you wouldn’t see any change in your tax bill, which is highly unlikely given recent trends. If your home value went up by a projected 3.5 percent, you would owe $104 more.
This also doesn’t account for property tax rate changes determined by local governing jurisdictions. As a hypothetical example, if the Austin school district raised its property tax rate from 1.222 percent to 1.276 percent, this 4.4 percent increase would erase your savings.
What about another likely scenario with both changes in the home value and tax rate?
In that case, the homeowner would owe an additional $110. This clearly shows that Proposition 1 will lead to lower property tax bills for homesteads than without it, leading to relief but very few cuts to a growing burden.
The short-term relief is similar to the reforms in 2006 induced by the Texas Supreme Court ruling that the state essentially had a statewide property tax, which is forbidden by the Texas Constitution. The Legislature bought down property taxes, leading to only a one-year decline in total property tax revenue, and held the school districts harmless by swapping it with a reformed business tax, known as the margin tax, that most agree should be eliminated.
Instead of providing short-term relief in the future or enacting a worse tax, the Texas Public Policy Foundation’s study highlights the benefits of abolishing property taxes and replacing them with a reformed sales tax so Texans can finally own property rather than renting it from the government, forever allowing them to reach their full potential.
This will likely not happen overnight, as Proposition 1 banned a transfer tax on property, which there should never be a property tax and a sales tax on property. However, legislators should make a concerted effort to improve the well-being of struggling homeowners, renters and all Texans by considering an end to costly property taxes and substituting them with a more efficient sales tax.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.