Skyrocketing local property tax rates pose an escalating threat to the health of the Texas economy. Many in the Texas Legislature believe that by substituting a broader-based sales tax and limiting government spending growth, much needed property tax relief can be delivered.
Over the last 20 years, data reveals that local property tax burdens across Texas have grown faster than the average taxpayer’s ability to pay for them. Despite the impact of several reforms and buydowns over the years, property tax bills for Texas homeowners rank 7th highest in the nation. And though the state boasts an otherwise friendly business climate, Texas localities levy the 15th worst property tax burden on corporations. In fact, property taxes account for around half of all tax revenue in the state, reaching $70 billion in 2020.
Polling shows Texas families are fed up with the status quo. More than three quarters of Texans say property taxes are a “major burden for them and their family,” according to a recent Texas Public Policy Foundation poll. Onerous property tax burdens hurt low-income earners more than any other group. Since the tax is paid annually and the costs compound over time, property taxes are often an obstacle preventing low-income Texas residents from purchasing their first home. It’s also worth noting that property tax burdens are also borne by renters, as the costs are passed along and factored into monthly rent payments.
Americans for Tax Reform is adjuring Texas legislators to pass tax reform aimed at reducing property tax burdens during this summer’s special session. One option, last proposed in HB 958, would limit government spending over the next decade to buy down school district Maintenance and Operations (M&O) taxes using the surplus dollars. Constituting a whopping 43% of the state’s property tax revenue, an elimination of the M&O tax would mean tens of billions in relief for Texans. If growth in state spending were limited to 4% per biennium, with most of the surplus directed toward school district property taxes, M&O costs would be totally expunged in about a decade, putting those dollars back into the pockets of Texas families.
Another proposal, though recently defeated in the legislature, would substitute M&O property taxes with an expanded sales tax. Vance Ginn, chief economist at the Texas Public Policy Foundation, points out that Texas sales taxes have grown at far lower rates than property taxes. While personal income increased by 157% from 2001 to 2020, property taxes went up by 181%. Sales tax collections, meanwhile, rose by just 133%.
Every year, Texas provides more than $43 billion in exemptions, exclusions, and discounts to the sales tax base. By getting rid of many of those special exceptions written into the tax code, Ginn argues, the state would significantly raise its sales tax revenue and provide a more level playing field.
In fact, significantly reducing property taxes through the elimination of sales tax exemptions would actually lead to an overall reduction in the total state and local sales tax rate, thanks to the tens of billions in additional revenue. “We can eliminate nearly half the tax burden in Texas, that’s the key part,” Ginn points out. “You’re cutting the property tax dramatically, and actually lowering the rate from 8.25 percent today for state and local taxes down to 8.21%.”
These two property tax reform options recently proposed in the Texas Legislature would stimulate economic growth and job creation, according to economists at Rice University’s Baker Institute. Just the first year of gradually replacing property taxes with sales taxes could contribute to a $14.3 billion increase in economic output and 217,000 new jobs. Meanwhile, Texas could see a $12.5 billion increase in economic output and 183,000 new jobs after the first year of buying down M&O property taxes using the dollars saved from limits on government spending.
Reduced property taxes in Texas would lead to greater household after tax income, lower rent payments, and other economic benefits for Texas residents. By rectifying onerous property tax burdens, Texas lawmakers can fix one of the two greatest flaws – the other being the imposition of the margins tax – in what is otherwise one of the most competitive business tax climates in the U.S.