Texans appreciate living in a state that values liberty, sensible business policy, and, perhaps most importantly, a strong dislike for taxes, which inevitably infringe on the first two values.
But, in comparison with other states, Texas is beginning to lose its competitive edge in business climate as noted in the Tax Foundation’s recently released 2019 State Business Tax Climate Index.
The report ranks all fifty states based on the burdens of each state’s corporate income tax, individual income tax, sales tax, unemployment insurance, and property tax.
Figure 1 presents the ranking of each state whereby the top-ranked states include either states without at least one major tax, such as the individual income tax, or states that have all major taxes with low rates and broad bases.
Meanwhile, poorly ranked states share similar shortcomings such as complex non-neutral taxes and comparatively high tax rates, such as in the three worst ranked states: California (48th), New York (49th), and New Jersey (50th).
In this year’s report, Texas’ overall rank took a hit, sliding from 13th best nationwide in 2018 to 15th best for 2019. Yet, the drop is not due to new policy as the state’s individual category scores remained unchanged and actually improved by 8 ranks for Unemployment Insurance. Rather, the new lower overall rank highlights Texas’ stagnation in decreasing its tax burden as other states jump on the opportunity to increase their prosperity from lower burdens.
While Texas excels in the category of individual income tax because as it doesn’t have one, the state is consistently held back by its corporate income tax portion of the index, which remains unchanged at 49th, or second worst!
This is because Texas’ business tax is a gross receipts-style tax that is costly to comply with and pay. If Texas eliminated this onerous tax, the Tax Foundation has found the state’s business tax climate overall rank could improve to 3rd best. And the Texas Public Policy Foundation and the Legislative Budget Board (LBB) have estimated large economic gains.
Texans have been hurt by burdensome local property taxes for too long, with that ranking in the report being 14th worst in the last three years. We know all too well about complexity, high rates, and lack of voter oversight of Texas’ local property tax system.
To overcome this over-burdensome system, the Foundation has recently released a report detailing a strategy to slow the growth of state and local government spending in order to use surplus state funds to permanently reduce the school maintenance and operations (M&O) property tax until its eliminated. This would end nearly half of the property tax burden in Texas within about a decade while increasing funding for school districts over time with state taxes that would eventually fund 100 percent of schools M&O.
Moving forward, Texas’ elected officials should consider these rankings by the Tax Foundation and other reports when looking for ways to improve the state’s business tax climate so Texans have the best chance to start a new business or gain employment.
The Texas model of limited government has contributed to human flourishing, where 24 percent of new civilian jobs created nationwide have been since December 2007, but there’s always room for improvement.
In this Let People Prosper episode, I provide today's press conference of the 18-member Conservative Texas Budget Coalition, with special thanks to Senator Donna Campbell for standing with us on these key legislative priorities, along with my explanation of the details of each of these priorities and how they work together to let people prosper.
The Coalition outlined its legislative priorities for Texas' upcoming 2019 session. This includes the Conservative Texas Budget that sets limits for the 2020-21 budget of $156.5 billion in state (non-federal) funds and $234.1 billion in all funds to effectively limit spending so tax relief can be realized by all Texans. Read today's press release with quotes by each of the members of the Coalition.
This is important because spending trends since 2004 outlined in the Real Texas Budget show that Texas families of four are paying $1,000 more, on average, in state taxes than if the budget had just matched population growth and inflation.
Moreover, if the Texas Legislature can hold spending within a 4 percent growth limit this session and thereafter, Texas can eliminate the school maintenance and operations property tax--nearly half of the property tax burden statewide--within about 11 years. Read this for details of this simple property tax relief plan.
As noted on the Coalition's website, other legislative priorities includes strengthening government spending limits, eliminating the business margins tax, creating a tax relief fund, and increasing budget transparency to let people prosper.
Texas’ property tax system has turned property holders into renters, where government is their landlord and Texans who struggle to pay annual tax bills face confiscation of their properties. Additionally, the growth of government is harming taxpayers and the economy through higher taxes and more regulation.
For example, Eddie Wilson owns the landmark Austin restaurant Threadgill’sbut recently announced he must close a location soon noting that he is “Flummoxed and bludgeoned by property tax increases, the grim truth is that we can’t afford it on the slim margins you make on meatloaf and chicken-fried steak.”
Substantial, permanent property tax relief is needed.
The Foundation’s recent report provides a plan of limiting government spending to eventually abolish property taxes in Texas by starting with eliminating the school maintenance and operations (M&O) property tax—nearly half of the property tax burden in Texas.
The school M&O property tax is a good place to start because the level of student funding is determined by state funding formulas that are first funded by local property taxes and then by state dollars. Although there’s a lot of noise about whether local governments or the state legislature is at fault for a skyrocketing local property tax burden, the truth is excessive spending is the problem and taxpayers foot the bill regardless (see figure below). The relative ease of this process is lost with other local tax jurisdictions.
Our plan is simple: State and local governments would limit spending such that state revenue permanently replaces the school M&O property tax within about 11 years. In other words, every dollar not spent by the state or school districts will produce a 90-cent property tax cut for Texans until half of the property tax in Texas is eliminated.
Here are the plan’s details:
Table 3 shows how the plan could work mathematically given the above criteria:
Under this plan, Texans will experience substantially lower property tax bills immediately and slower growth in them over time along with the broader economic benefits of slower government spending and a lower tax burden. Other options, such as sufficiently broadening the sales tax base, that begin with spending restraint to replace the school M&O property tax may be considered to deal with this problem.
Limiting government spending and using state dollars to replace nearly half of the property tax burden that funds education would shift Texas toward a more efficient sales tax system to let people prosper.
In this Let People Prosper episode, I discuss my latest published research on how institutions matter for prosperity in Texas and beyond. I compare multiple measures of economic freedom and economic results between the largest four states in terms of population and economic output of California, Texas, New York, and Florida along with U.S. averages. These data indicate that Texas has greater economic freedom and prosperity, which should be emulated by other states and D.C., but there's more to do to improve the Texas Model.
VIDEO of event "#NAFTA and #FreeTrade: Gain or Loss to Texans?" hosted by @TPPF & @Heritage here: https://t.co/U5cwxTjrXV. Panelists include @Glenn_Hegar, @dwkreutzer, and me, with @DrewWhiteTX moderating. I hope you'll watch and share it with others.
Here are other publications of mine on NAFTA and international trade:
1) Texans Support, Prosper from Free Trade
2) Renegotiating NAFTA Without Favoritism Supports Prosperity
3) NAFTA Contributes to Texas Model's Success (Overview of my academic research)
4) Trade Deficits Can Be a Good Sign
5) Fast Track to Free Trade Prosperity
Vance Ginn, Ph.D.