Texas’ tax system is upside-down. When it comes to funding our public services, schools, and state and local governments, Texans with lower incomes are expected to pay more than their fair share. The latest edition of the Comptroller’s Tax Exemptions and Tax Incidence report from January confirms this yet again.
Sources of State and Local Revenue
About 80% of our state and local tax revenue ($141 billion in 2023) comes from sales taxes and property taxes. The Comptroller’s Exemptions and Incidence report provides data on those taxes plus a few of the other significant taxes paid by Texans – the franchise tax (our business tax), motor vehicle sales and use tax, and the oil extraction tax.
Of state taxes, the general sales tax is the largest contributor to our state revenue at 57%. The state sales tax is 6.25% on most purchases, and cities and counties have the option to add up to an extra 2%.
In Texas, all property taxes are local; we do not have a state property tax. About half of property tax revenue is collected by school districts, while the rest is collected by cities, counties, and other local taxing authorities such as hospital districts, community college districts, and municipal utility districts.
Tax Incidence
Taxes are not paid equally by everyone. The incidence of a tax – a measure that can be used to gauge the impact of a tax on different groups – indicates the fairness of a tax. To analyze incidence, the Comptroller’s report divides all Texas households into five equal groups (quintiles) with 2.3 million households in each. It then explores how much each group pays in taxes. Their analysis finds that virtually all the taxes highlighted in the comptroller’s report are regressive: lower-income Texans pay a bigger share of their income. Overall, the bottom fifth of Texans pay over 14% of their income in state and local taxes, while the top fifth pay less than 4%.
The general regressivity of our state and local tax system revealed in the Comptroller’s report is confirmed by the Institute on Taxation and Economic Policy (ITEP). ITEP’s Who Pays? report, last updated in 2024, provides an overview of all 50 states’ taxation; it finds that Texas has the seventh-most regressive tax system in the United States.
While property taxes are regressive, sales taxes are much more so since lower-income people tend to spend more of their money on taxable goods and necessities. Wealthier families spend more of their money on services, which are largely tax exempt.
We can also use the data in the Exemptions and Incidence report to compare each quintile’s proportion of income to its proportion of taxes paid. 80% of Texans pay a larger share in taxes than they receive in income. On the other hand, the top 20% earn over half the income in the state, but they pay considerably less than their share in taxes.
Equity and Fairness of Property Tax Cuts
Just as in previous sessions, property taxes are a big topic of conversation for the 89th Legislature. As our state economy and population continue to grow, home values and property tax bills grow with them. This crunch is felt in housing costs by both renters and homeowners. Even after $23 billion in tax cuts last session, lawmakers are again contemplating more big cuts by “compressing” (or reducing) school property tax rates and replacing those dollars with state revenue.
Preserving our stable property tax revenue is vital for properly funding our schools and public services. Every Texan believes that the Legislature should not cut property taxes again, but if lawmakers choose to do so, there are ways to cut taxes more equitably.
“Equity” does not mean that people get back the same amount they pay. As much as possible, the benefits of tax cuts should be focused on the Texans who need help the most. As discussed, the sales tax provides the majority of state revenue and is much more regressive than the property tax. So, when the Legislature replaces local property tax revenue with state sales tax revenue, it is shifting taxation from wealthier Texans onto those with lower incomes – the exact opposite of what’s equitable.
The chart below analyzes the incidence of four different methods of property tax cuts. The percentage of benefit received by each income quintile is shown by the height of each bar, and the difference is stark.
Increasing the flat-dollar homestead exemption is the most equitable way to cut property taxes. Under current law, homeowners receive a tax exemption of $100,000 from the taxable value of their homes. With all homeowners receiving the same sized exemption, the benefits are more equitable. Lower-income homeowners, for whom that $100,000 represents a larger portion of the value of their homes, will feel that benefit more substantially. For this reason, Every Texan supports providing cities and counties with the option to provide similar flat-dollar homestead exemptions, which they cannot currently do.
Tax cuts based on a percentage of property value will always disproportionately benefit the wealthy. The higher the home value, the bigger the tax cut. Appraisal caps and percentage exemptions (such as the local-option homestead exemption that may be provided by cities and counties) provide more than half their benefits to families making more than $195,000 per year. While across-the-board rate compression is somewhat more fair, 44% of the benefit still goes to the top 20% of households.
We understand why property tax cuts are popular – many Texas households are struggling with housing costs. Often excluded from the conversation around tax cuts are renters, who comprise 37% of Texas households. Every Texan has suggested a variety of ideas to reduce housing costs that benefit renters as well, including renter’s rebates or circuit breakers.
Through Every Texan’s People’s Budget advocacy campaign, we’ve been introduced to communities throughout Texas who say the same thing – meaningful investments in education, health care, jobs and higher wages are urgent and necessary. We believe that after multiple rounds of tax cuts, it’s time for the 89th Legislature to listen.