Research & Commentary: Property Tax Swap Is Bad Deal for Texans

Published May 3, 2019

Texas lawmakers are considering a major tax reform proposal that would raise the state sales tax by 1 percent to 9.25 percent in most of Texas while reducing property taxes—a tax swap that would place a major burden on Lone Star State consumers. The proposal would also shift a portion of the new revenue to education spending.

It is important to note all sales taxes are regressive because they place an increased burden on lower-income families. On average, low-income families pay 7.1 percent of their incomes in sales taxes, middle-income families pay 4.8 percent, and high-income families pay 0.9 percent, according to the Institute on Taxation and Economic Policy.

Although proponents of the sales tax increase claim it is necessary to improve the quality of Texas’ public education system, evidence demonstrates more education funding often does not improve educational outcomes. For example, real spending per student nationwide has increased by 23.5 percent over the past decade, but education outcomes have not improved. Scores on the National Assessment of Educational Progress test have remained stagnant despite record spending.

Even if Texas were to increase the sales tax to propel property tax relief, there is no guarantee local taxing bodies would lower tax levies to decrease their property taxes. Decreasing levies is the only way to reduce property taxes. To decrease levies, local taxing bodies must reduce spending.

The Senate proposal aims to address education spending growth by placing a cap on property taxes each year. This is a positive reform, assuming the cap is kept as low as possible.

The Senate bill would give teachers and librarians a $5,000 across-the-board pay raise and increase the basic per-pupil allotment from $5,140 to $5,880. The bill would bring property tax relief by lowering school district property taxes by 15 cents per $100 valuation and raising the homestead exemption.

Unfortunately, history and common sense reveals raising sales taxes to reduce property taxes over the long term does not work. Virtually every time this has been tried the result has been even higher property taxes within a few short years. Texas lawmakers should abandon this ill-advised tax swap. Instead, they should consider school spending reforms and other policies to relieve government intrusion into the education sphere.

The following documents examine property and sales tax reform in greater detail.

Broadening the Sales Tax Base: Dos and Don’ts
In this presentation, Fred Nicely of the Council of State Taxation and Liz Malm of the Tax Foundation examine various approaches to sales tax reform and discuss which reforms are best suited to achieve positive results.

Abolishing the “Robin Hood” School Property Tax
In this paper from the Texas Public Policy Foundation, Kara Belew, Bill Peacock, Emily Sass, and Vance Ginn argue that by reducing state and local government spending growth, Texans can eliminate the Robin Hood school property tax and cut overall property taxes almost in half.

Regressive Effects: Causes and Consequences of Selective Consumption Taxation
In this study authored for the Mercatus Center at George Mason University, Adam Hoffer, Rejeana Gvillo, William F. Shughart II, and Michael D. Thomas examine selective consumption taxes. The authors argue they do little to change individual behavior and are extremely regressive, placing an unnecessary burden on the poor.

Does Spending More on Education Improve Academic Achievement?
Dan Lips and Shanea Watkins of The Heritage Foundation discuss the rising cost of education and whether increasing education spending has improved education outcomes.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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