Educating 5.4 million Texas public school students is a critically important responsibility. All of us benefit directly or indirectly from public education, and it’s our responsibility to make sure current and future generations have access to a high-quality public education.
Texans share the responsibility for helping to fund the Foundation School Program, the primary way of paying for school operating costs. But the state’s share of school funding has fallen from almost 50 percent in 2008 to below 40 percent in 2019, putting more and more pressure on school property taxes.
In the 2019 legislative session, some lawmakers are once again advancing an extremely dangerous way (HJR 3) to replace school property taxes with higher sales taxes. The proposal is linked to an otherwise promising school finance plan (HB 3) working its way through the Legislature. A penny increase in the state sales tax (per pending committee sub) from 6.25 to 7.25 percent would replace 14 percent of the local share of the school finance formulas. This could take some pressure off property tax growth, but raising the sales tax is the wrong approach.
CPPP applauds efforts to increase funding for our 5.4 million Texas public school students, but House Joint Resolution 3 as it stands now does not increase funding for schools; it merely swaps one tax for another. It is the wrong solution for our schools, our economy, and for hard-working Texas families.
Taking the Most From Those With the Least
Our state’s tax system is already upside down, asking the most from low-income families. In Texas, the wealthiest residents pay an average of 4.3 percent of their income in state and local taxes, compared to 16.7 percent for residents with the lowest incomes.
Our sales tax in particular falls more heavily on low and moderate-income families because these households usually spend most of their income providing for their families. Wealthier families can afford to set aside savings or spend money on non-taxable services like lawyers or accountants. As a result, lower-income Texas families pay 7.3 percent of their income directly or indirectly in state sales taxes, while wealthier income families pay only 1.6 percent.
Increasing the sales tax rate would hold down families struggling to work their way into the middle class. Using all of the increased sales tax revenue to reduce school property taxes would increase taxes paid by most Texas families. Taxes would increase for 80 percent of households, while only the 20 percent of Texans with annual incomes over $150,000 would benefit, since they are the only group whose property taxes would drop more than their sales taxes would increase.
The school property tax takes a more equitable percentage of income from families at every income level. This may be because families at different income levels spend similar percentages of their income on housing. In addition, business owners who generally make more income are frequently more responsible for business property taxes. The homestead exemption, which is currently $25,000, and the 65-and-over tax ceiling reduce school property taxes, particularly for lower-income homeowners.
Gambling With School Funding
A good revenue source should be able to deliver consistent support for public services. The sales tax fails this test, since sales are very sensitive to changes in the economy. State tax collections have dropped in five of the past 20 years. When the economy slows down (like during a recession), people and businesses tend to buy fewer things, which means lower sales tax collections. This volatility has already caused difficulties in the state budget, which is highly dependent on sales taxes, forcing cutbacks in school funding and making long-term commitments difficult.
In contrast, property taxes provide a more stable base of support. Property values do not fluctuate as much as taxable sales. In addition, property tax rates can change from year to year in response to changes in the value of property being taxed to maintain necessary revenue. It is far more disruptive to change sales tax rates annually, since every retailer in the state would have to reprogram their checkout systems to reflect the new rate.
Hurting the Texas Economy
The current state sales tax in Texas is 13th highest in the country. Adding another one percent would push Texas to the highest state sales tax rate in the U.S.- tied with California. This would put Texas businesses at a competitive disadvantage, discouraging consumers from neighboring states who currently travel to Texas to shop.
The Solution Is Simple
Texas is wealthy and fast-growing, but our public investments don’t always keep up with the needs of our state. With the right tax policies, we can invest in schools, roads and other things we all want while ensuring that everyone is paying their fair share. Let’s continue the legacy of our parents and grandparents, who made the investments we benefit from today and plant the seeds now for a healthy and vibrant Texas.
If lawmakers truly want to increase funding for schools while lowering property taxes, they should make sure that all property owners – especially commercial and industrial property owners – are paying their fair share in taxes by eliminating wasteful or outdated tax exemptions and special giveaways. Or, rather than raise the sales tax rate, the Legislature should bring the sales tax up to date to reflect the modern service economy by taxing business and professional services, such as those provided by lawyers, accountants, stock brokers, real estate agents, and management consultants.
Contact your member of the Texas House of Representatives, and urge them to oppose HJR 3.