Scrapping the Texas Property Tax?

Post Image for Texas tax law blog | Legislative ActionThis morning, three public policy experts asked the Ways & Means Committee of the Texas House of Representatives to consider a full repeal of the Texas property tax. The speakers included Peggy Venable from the Texas Chapter of American for Prosperity, Talmadge Heflin from the Texas Public Policy Foundation, and Debra Medina, former GOP Texas gubernatorial candidate (Ms. Medina packed the room with supporters of her proposal). Testimony was by invitation only, so the Committee members apparently welcomed the experts’ suggestions.

Each of the speakers provided eloquent and logical reasons of why the property tax system is seriously flawed. However, as always, the more difficult question is–how should the state replace the tax revenue? Each of the speakers provided suggestions, but it was unsurprising that the proposals for new tax sources were more vague than the reasons why an existing tax source wasn’t any good.

The attending members of the Committee and the speakers appeared to be most interested in tweaking the sales tax, either by increasing the rate or by expanding the base. Mr. Heflin made the most concrete suggestion: he asked the Committee to consider expanding the sales tax to include not only more services, but also to tax the sale of real property. (His organization provides a summary of his testimony here.) Replacing the Texas property tax–a tax on the value of real property–with a tax on the transfer of real property makes conceptual sense. But a real-property transfer tax may be difficult for the state to efficiently collect. It could also create further disparity between Texas school districts.

State & local tax is often described as a “three-legged stool”: one leg is an income tax, the next is a property tax, and the last is a sales tax.  Many states balance on these three legs. (The Minnesota Revenue Commissioner has been known to attend meetings with actual stools with uneven legs, to demonstrate the instability of his state’s revenue structure.) Texas has had some success balancing on a stool with only two legs:  property tax and sales tax.  Texas has no personal income tax, and the corporate income tax (the franchise tax) brings in a relatively low amount of revenue.

The proposals that the Committee invited today would remove one of the remaining legs, leaving the state precariously balanced on only the sales-tax leg. That would be a gutsy move. The Committee wisely asked Comptroller representative John Heleman to determine whether replacing the Texas property tax, which many view to be a relatively stable tax, with a sales tax would harm the state’s bond rating.

Obviously, it’s way too early to predict whether the Legislature is even seriously considering such a radical shift in the tax base. Still, I found it curious that the Ways & Means Committee appears fairly interested in the idea. It’s certainly something to keep an eye on.

I was also somewhat surprised about how little the Committee discussed the Texas Franchise Tax during the meeting. The agenda stated that the Committee would “examine alternatives to the current system of taxation.” I therefore expected at least a brief discussion of a possible revamp or repeal of the highly unpopular margin tax, particularly after the Supreme Court’s Allcat Claims Service decision cleared the way for the Legislature to simplify the tax. Instead, the Committee appears focused, at least for the moment, on the Texas property tax. Perhaps this is because many Texas voters pay property tax, and very few pay the margin tax. Perhaps priorities will shift after election season ends, and the next legislative session begins.

Stay tuned to this site for updates.


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