A Tax Proposal That Would Save Typical Texans Over A Billion Dollars
The Problems with Eliminating Texas Property Tax.
<This is part one of two. The second part will examine the proposed Texas Constitutional amendments, with detail attention to the 7 which involve property tax>
The platform of the Republican party of Texas calls for eliminating property tax. Eliminating property tax sounds good, after all who doesn't like a good tax decrease. And property owners all hate property tax because it’s seen as one big sum, written in black, once a year. In poorer communities, it is the evil that drives gentrification. In rich communities it is a, expensive annoyance. It’s no surprise most Texans hate property tax. But Texans focus little of their tax anger at sales tax. We don’t see it because it is hidden in increments on every bill. As a result, most Texans do not realize that they pay more in sales tax than in property tax. If they did, maybe they’d rethink which tax they hated more.
liminating sales tax would save typical Texans a net $5.354 billion dollars, while the top 20% would pay a net $594 million more and businesses $4.7 billion dollars more. This helps a lot of people and give the biggest help the Texans who need it most. But that large a cut isn’t practical. The problem is that leaves a $54.8 billion hole in the Texas budget. A hole that is too big to fill easily. The only tax large enough to do it is property tax, but the property tax limitations buried in the Texas Constitution means the state cannot raise that much money. However, a smaller chunk is possible. Lowering sales tax from 6.25% to 5% would net typical Texans just over $1 billion, while the top 20% would pay $116 million and businesses $954 million more. This is the billion dollar proposal.The platform of the Republican party of Texas calls for eliminating property tax. Eliminating property tax sounds good, after all who doesn't like a good tax decrease. And property owners all hate property tax because it’s seen as one big sum, written in black, once a year. In poorer communities, it is the evil that drives gentrification. In rich communities it is an expensive annoyance. It’s no surprise most Texans hate property tax. But Texans focus little of their tax anger at sales tax. We don’t see it because it is hidden in increments on every bill. As a result, most Texans do not realize that they pay more in sales tax than in property tax. If they did, maybe they’d rethink which tax they hated more.
Eliminating property tax is not the one billion dollar tax change I am advocating. In fact, eliminating property tax would cost typical Texans 4.3 billion dollars1. Be patient, I’ll explain both the $4.4 billion lost in property tax and the billion dollar tax proposal later2. Let’s look precisely at the general problems with eliminating property tax.
1 - Technically $42.95 billion 2- Don’t want to glaze your eyes over with math just yet.
Property tax is the major funding source for the independent school districts in Texas; 48% of property tax goes to schools. The other 52% helps funds Counties, Cities, Municipal Utility Districts (MUDs), Emergency Service Districts (ESDs), Water Districts, Hospital Districts, Library Districts, etc. In Texas, almost all forms of local government rely on property tax to fund their services. What property tax doesn't fund is the state itself. The Texas government is forbidden by its Constitution from funding itself by property tax. So when the Legislature passes a new limitation on property tax, state government is not effected.
Who is impacted are local governments. Their income is lessened and the state doesn't replace most of the money the local governments lose. The state also limits how much local entities can raise in taxes and often makes local governments compete for the same tax dollars. As a result, local governments are in a vice between the forced reductions in property tax and the inability to raise the tax rate to compensate. So local governments bear the load and the state Legislature looks like tax heroes cutting taxes. Their heroism is hollow since the state suffers no real fiscal pain because of the cut.
<Be patient, the billion dollar tax cut is explained just a little farther>
The state does "guarantee" school1 funding lost by property tax collections will be replaced by the state. But the state doesn’t always live up to that promise.. The 2023 tax changes2 were never completely refunded. For the last two years, school districts around the state have gone into debt to fund the lost revenue. When the state does allocate money, it often comes tied to specific grants (like security), or prohibitions (teaching DEI) not necessarily tied to education . When the money is raised locally, the schools have more leeway on spending. When the state reduces local money and replaces it with state money tied to mandates, schools lose local control.
1 – But not cities, counties, MUDs, ESDs, …. 2- including raising homestead exemptions from $40,000 to $100,000
Eliminating property tax would leave a $43 billion dollar hole in local governments budgets. That money has to be raised in other ways. Sales tax is the only tax in the state large enough to offset the loss. While every Texan will save money not paying property tax, they also will be spending more money paying sales tax. And sales tax is highly inequitable. The net effect is that eliminating property taxes and raising sales tax adds $4.295 billion more in taxes to most Texans. It’s the top 20% of Texan earners and businesses that get the tax relief; the top 20% will net $468 million in tax relief and Texas businesses will get a net $3.8 billion. The detailed math will be spelled out later in the post.
<Just wait, The billion dollar tax cut is the next 2 paragraphs down>
I’ve shown my work to several knowledgeable people. They acknowledge the math is sound, but several disagree with the premise the state will replace the lost money dollar for dollar. This is probably true. To compensate for the tax loss of eliminating property tax, the state would have to raise their portion of the sales tax from 5 cents to 11.25%1 and many (Republican) politicians won’t accept that.
The state has three choices if they eliminate property tax: Pay back dollar for dollar, use surplus money, and cut services. I am assuming the payback method simply because it is the easiest to calculate, but the other two eventually become dollar for dollar. Paying out of a surplus is not sustainable, and the $44 billion dollars a year payment would drain any surplus quickly. Surplus spent, the state now has to tax to make up the deficit. So we’re back to taxing to replace the lost revenue. If the state does nothing, local governmental entities would either cut services or close down all together. Most ESDs and hospital districts would cease to exist. MUDs would have to drastically raise rates. Counties and cities, which get more than half their income from property tax would have to cut services, and since public safety takes up more than half of these budgets, people will get hurt. So while this route is not a $44 billion dollar tax bill, it is $44 billion dollars worth of services with dangerous consequences. The resulting outcry would force the state into payments. Again we’re back to taxing to replace the lost revenur. We don’t know how the Republicans plan to pay for eliminating property tax. The most recent property tax elimination bills introduced in Texas don’t deal with replacing the lost tax money, but instead form committee to come up with a replacement plan during the break between sessions. Nothing like having no plan and kicking the can down the road when billions are involved.
1 - with the local tax it will become 13.25%
The math showing eliminating property tax causes the typical Texan to pay more works both ways. Eliminating sales tax would save typical Texans a net $5.354 billion dollars, while the top 20% would pay a net $594 million more and businesses $4.7 billion dollars more. This helps more people and give the biggest help the Texans who need it most. But that large a cut isn’t practical. The problem is that the $54.8 billion hole in the Texas budget is too big to fill. The only tax large enough to do it is property tax, but the property tax limitations buried in the Texas Constitution make that big hole unfillable. However, a smaller chunk is possible. Lowering sales tax from 6.25% to 5% would net typical Texans just over $1 billion, while the top 20% would pay $116 million and businesses $954 million more. This is the billion dollar proposal.
Lowering Sales tax to 5% is an excellent issue for the Texas Democratic Party to take up.
First, it is a practical proposal that helps Texans of all occupations, races,and most incomes. Second it is a good counter the Republican’s plan to eliminate property tax. Without it, fighting against property tax elimination makes the Democrats the party of “NO!”. With a strong counter proposal in hand they become the party of “YES!”. In explaining lowering sales tax, the Democrats indirectly (or even directly) point that the Republican plan is a Trojan Horse that produces tax cuts for the top 20% and businesses, all paid for by the rest of us.
Lowering sales tax to 5% leaves a $11 billion dollar hole in the state’s revenue stream. So how does the State fill this hole with property tax when the Texas Constitution forbids statewide property tax. The answer is easy: the state doesn’t. The State budget for public education is just over $100 billion dollars. The state reduces this budget $11 billion dollars and cuts $11 billion of the money it pays to ISDs. The state then allows the ISDs to raise their property tax to compensate themselves for the loss. Yes, when ISDs raise property tax, we all will pay more tax. The Typical Texans will pay $4.3 billion more. But with sales tax lowered to 5%, they will also get $5.4 billion in sales tax relief to compensate for it. The net is a $1 billion dollar tax cut to the typical
How did I discover this and where did I get my data. All this is from one of my favorite data source-- the Republicans themselves. I learned of this anomaly in 2019 when the Republicans proposed raising sales tax by one cent in order to lower property tax roughly the same amount. As required by law, the Legislative Budget Board did a fiscal analysis (https://tinyurl.com/zyh4whzw) and I stumbled on it. When I found table six showing the top 20% would get a $401 million tax cut and the bottom 60% would pay more taxes, I realized how devastating reduction or elimination of the property tax is and why we need to fight it.
This post arises from being asked to analyze the property tax reductions on the constitutional amendments’ election this November. Much of the data comes from The Texas Comptroller's Tax and Incidence Report. This is a document the Comptroller puts out before every session detailing how much money is involved in each tax and exemption, then breaks those down by economic quintiles and industry. This analysis became a big spreadsheet looking at possible scenarios (no property tax, 5% sales tax, and each proposed exemption in the November election). Let’s look at the sheet for eliminating property tax:
(1) First enter the amount of property tax being removed. For example, proposition 11 would remove $980 million and you would enter it here. But here we’re getting rid of all property taxes, so we enter the full $43 billion. (2) The spreadsheet then figures out what amount of extra sales tax each quintile must pay to make up for that loss (proportioned by the current amounts paid) and the difference between the current and the revised tax. (3) The spreadsheet also calculates the property tax after the deduction is applied (again proportioned by the current amounts paid). (4) net tax paid or saved is simply the difference in revised property tax and sales tax combined. (5) The lower 4 quintiles are summed to be used in examples and (6) finally the tax rate calculated in step 2 is displayed in the summary column. This shows very clearly the bottom 80% pay $4,295,000,000 while the wealthy and businesses get to keep hundreds of millions of dollars in tax relief.
Finally, here are the pages for lowering sales tax to 5% and eliminating sales tax completely
This is fascinating. Could you possibly provide an example of what your proposal means on an individual basis for an average Texan (average economic status)?