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Texas Taxes Executive Summary The Texas tax system needs to change. But the current debate is not focused on what is really wrong with taxes in Texas:
Any proposed change in Texas’ tax system needs to be judged by whether it would solve these two major problems in the current structure of state and local taxes. What taxes do we pay? More than three quarters of our state and local tax load is due to just two taxes: the property tax and the sales tax. The largest tax paid by most Texans is the local property tax, which accounts for more than 40 percent of our total state and local tax load. State and local sales taxes account for another one-third of taxes paid by Texans. Where do our taxes go? About half of all our taxes goes to the state government; the other half goes to local governments, primarily to school districts. The bulk of state taxes goes to pay for public and higher education, and health and human services, which together account for three quarters of the state budget. Local taxes are divided about evenly between supporting public education and funding services of cities, counties and special districts. Schools receive about equal amounts of funding from state and local taxes. The federal government has played an increasingly important role in supporting state services, but future federal funding is very uncertain, placing great pressure on state revenue sources. Are our taxes too high? Texans’ total tax load is light compared to other states, although our property tax burden is heavier than in the average state. Our property and sales tax rates are among the highest in the country, since most Texas government revenue comes from just these two taxes. Other states avoid high property and sales tax rates by spreading the tax burden onto a third major tax, the personal income tax, which is not levied in Texas. Another reason for high property tax rates is the shrinkage in the value of taxable property. Taxable property values have only recently surpassed their 1985 peak, in part because of the growth in residential, commercial, and industrial exemptions. Who really pays taxes? The initial impact of state and local taxes falls mainly on business, which pays almost 60 percent of the taxes collected in Texas. Property taxes constitute nearly half the taxes initially paid by business, and the sales tax accounts for another quarter. The state’s major business tax, the corporate franchise tax, accounts for only 18 percent of taxes paid by businesses. It is important to remember that taxes levied on businesses are not ultimately paid by business. The cost of business taxation may be passed on to consumers through price increases, to workers through lower wages, or to owners and shareholders through lower returns on investment. Property taxes imposed on owner-occupied homes fall entirely on the homeowner, who cannot shift the tax onto someone else. Taxes on residential rental property may be borne by landlords or passed onto tenants through higher rents, depending on the local rental market. The sales tax is initially paid about equally by individuals and businesses. However, businesses shift sales taxes onto their consumers through higher prices. How much sales tax individuals pay depends on how much of their income they spend and what they buy. Because lower- and middle-income individuals generally have to spend more of their income and can save less than persons with higher income, the sales tax takes a bigger share of their income than it does of a higher-income person. Who doesn’t pay taxes? All taxes offer exemptions — provisions that allow certain taxpayers to pay lower taxes or permit certain transactions to occur untaxed. The major school property tax exemptions are received by homeowners, owners of agricultural land, and businesses. If property receiving special tax treatment were fully taxed, the statewide average school tax rate could be reduced. The sales tax exempts groceries and other necessities, which aids lower-income Texans. Many of the services that are exempt from the sales tax, such as legal, accounting and stock brokerage fees, are used disproportionately by upper-income households and by business. The exemptions ease the relative burden on these groups. How should we judge tax reform proposals? The current Texas state and local tax system fails to provide a stable source of adequate revenue from a balance of sources. Equally as important, the system does not distribute tax burdens equitably. Any change in the system should provide enough revenue to meet the current needs of all Texans for adequate public services, and should grow along with the growth of the state. Any tax reform also should improve the equity of Texas taxes, which now fall disproportionately on low- and middle-income families, who are least able to bear the burden. |
