Eliminating the Local Property Tax is a Bad Idea for Texas
by DICK LAVINE
Sep 22, 2012 | 833 views | 0 0 comments | 6 6 recommendations | email to a friend | print

 



Let’s say you and your neighbors want to improve your local school, or want to request cleaner parks, or more books at your local library. Because those basic and essential services are funded directly by your local property tax dollars, all you and your neighbors would have to do is take your requests and concerns to your city council, who would then vote on the measures. But, if the local property tax were replaced by a statewide sales tax – an idea swirling among Texas officials – you and your neighbors would have to take up local funding issues with the state legislature, which only meets every two years and is in some cases hundreds of miles from your hometown. The relationship between you, your community, your schools, and your local services would look wildly different.



 



Eliminating the local property tax- the primary source of funding for our schools, police, fire, and emergency services – and replacing it with a statewide sales tax is a bad idea for Texas for several reasons. First, it would sever an important link between your community and your schools. Next, it might also require us to pay a sales tax on many daily necessities that are currently not taxed, like household gas, electricity and groceries.  And finally, this tax swap would ultimately increase your family’s tax bill if you earn less than $125,000 a year.



 



Texas cities, counties, school districts, and special districts (community colleges, hospital districts,  etc.) are funded by some $42 billion a year in local property taxes.  To support these same services with a sales tax would require a statewide rate of close to 18 percent, nearly triple the current 6.25 percent sales tax.  Add the current 2 percent local sales supporting cities, counties, and transit authorities, and consumers and businesses would face a 20 percent tax on most purchases.



 



As an alternative to this punishing rate, proponents of the tax swap suggest expanding the sales tax to items and services not currently taxed.  Taxing business and professional services, such as legal, accounting, and brokerage services, could be a positive step toward modernizing the sales tax to better reflect the service economy of the 21st century.  But even taxing all business and professional services, except health care, would bring in only enough extra revenue to reduce the tax rate by 3/4 percent. 



 



Taxing even more items to lower the rate, as proponents of this scheme suggest, would force taxation of such items family purchases as residential utilities such as gas, electric and water, and business expenditures such as manufacturing machinery and materials.



 



We need to ask exactly what problem we are trying to solve.  Texas property taxes are high compared to other states, but that’s largely because we have no state personal income tax to help finance public services.  And with the homestead exemption for all homeowners and school tax freeze for seniors, we protect those who can least afford to pay. 



 



On top of which, the sales tax takes a much larger percentage of the income of low- or moderate income families than of higher-income families.  For 80 percent of Texans, replacing local property taxes with a higher statewide sales tax would mean a much larger overall tax bill.  Only families earning more than $125,000 would benefit.



 



When it comes to something as important as our schoolchildren and our local police, fire and EMS protection, we should not place all our bets on one horse.  Using both property and sales taxes buffers our schools and local emergency services from economic downturns.  While the sales tax is the major source of state tax revenue, collections can be quite volatile.  In fact, sales tax revenue fell in 2002 and 2003 and again in 2009 and 2010.  In contrast, property tax values are much more stable and can provide a better base of support of public education and city and county services.



 



Forcing local communities to become totally dependent on the state’s distribution of revenue from an expanded sales tax would sever an important link between a community and its public schools.  Under the current system, if a community wishes to raise its own property taxes to improve its local schools, public safety, or recreation, it can vote to do so.  If city, county, and school funding were centralized into a state sales tax, this opportunity would largely disappear.  For instance, schools would have only the amount of money per student assigned by the state to all school districts, without regard for any local commitment to improve funding.  In addition, cities or counties looking to combat urban blight by foreclosing property-tax liens on abandoned property would lose a valuable tool.



 



Texas moves along with two major tax supports for public services – the property tax and the sales tax --- like a bicycle that occasionally wobbles, but keeps going straight.  Relying on solely a high-rate sales tax would be more like riding a unicycle, going sometimes forward and sometimes backward, with the real chance for a crash at any moment.



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Dick Lavine is a senior fiscal policy analyst at the Center for Public Policy Priorities.



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© Texas Lone Star Forum. 9/12



 

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