The income groups paying the highest tax rates in Texas are disproportionately Hispanic and Black, whereas the lowest-taxed group (the wealthiest 5%) is predominantly white.
Sustainable tax revenue provides the foundation for public education, healthcare, and other essential public services. A fair tax system can support those investments, foster shared prosperity, reduce racial disparities, while helping low-income people build wealth and economic security.
Yet Texas’ tax system is upside-down, meaning the Texans with the lowest incomes pay the highest share of their earnings in state and local taxes. Our regressive tax code unfairly burdens low-income familiesand disproportionately impacts Texans who are least able to afford it. According to the Institute on Taxation and Economic Policy (ITEP), Texas has the seventh most regressive tax system in the country.
ITEP provides unique data on Texans’ overall tax liability by income group. The organization also determines the racial and ethnic makeup of each group, which is not provided in the Texas Comptroller’s biennial Tax Exemptions and Tax Incidence report (analyzed in a previous Every Texan blog).i The Comptroller’s report and ITEP’s report use different methodologies to calculate the income groups, leading to slightly different results. Their analyses, however, broadly align on the overall regressivity of Texas’ tax system.
Because Texans with lower incomes are disproportionately people of color, this means that Hispanic and Black Texans pay higher effective tax rates than everyone else. Our upside-down system particularly reduces their opportunities for upward mobility and worsens racial inequity overall.
Texas’ Two-Legged Stool
A three-legged stool is a metaphor often used to describe a reliable tax system to include an income tax, property tax, and sales tax.Since Texas does not have an income tax, our state sits on an unstable two-legged stool. Recent property tax cuts, particularly to those that support our schools, place greater reliance on the sales tax, which is the most regressive of the “three legs. In FY 2025, about 57% of the $87 billionraised in state taxes came from sales taxes. Texas’ sales and local sales taxes rank 14th highest in the United States.
Property taxes, which supply most revenue for local government entities and public schools, are less regressive but still pose a burden to lower-income households.
In many states, a progressive state income tax serves as the vital third leg to balance regressive sales and property taxes. If the state were to institute an income tax, it is likely that most Texans would end up paying less in taxes overall, and the burden would be more fairly distributed.
Lower-Income Texans Pay Higher Effective Tax Rates. They Are Mostly People of Color.
According to ITEP, Texas households in the lowest income quintile, with an average income of only $12,600, pay an effective tax rate of 12.8%, higher than any other income group. In contrast, the wealthiest 5% of households, with an average income of $879,300, pay only 5.2% of their income in taxes.
The regressivity of sales taxes is most dramatic, with rates ranging from 8.1% for the lowest-income households to 1.9% for the top earners. Low- and middle-income families pay more in sales taxes because they spend more of their income on necessities and other taxable goods. Higher-income households tend to spend more on untaxed services and investments.
The income groups paying the highest tax rates in Texas are disproportionately Hispanic and Black, whereas the lowest-taxed group (the wealthiest 5%) is predominantly white. Hispanic households make up 36% of Texas’ population, yet they make up almost half of taxpayers in each of the bottom two quintiles.
About half of Hispanic and Black Texans are in the bottom 40% of incomes, while Asian and white Texans are overrepresented in the top 5%.
Because Texans of color are overrepresented in lower income groups, and our tax system is regressive, this means that Hispanic and Black Texans pay higher tax rates overall. This limits their ability to save and build wealth, perpetuating the racial wealth gap. Higher-income, predominantly white and Asian Texans pay lower effective rates and can retain more of their money to save or invest.
Tax Policy Recommendations to Advance Racial Equity and Economic Justice
Our state and local tax system is not race-neutral. It clearly places a heavier tax burden on low-income people of color, even as the wealthy fail to pay their fair share despite Texas’ strong economy. A more progressive tax system would address this disparity by equalizing the tax burden for low-income households and requiring wealthier households to contribute more to support our public services and the shared prosperity of all Texans.
The Legislature should focus on:
- Collecting more incidence data on our regressive tax system. Texas Government Code § 403.0141 lays out the requirements for the Comptroller’s biennial Tax Exemptions and Tax Incidence report. This is a vital report that must be continued. Furthermore, the Legislature could amend that statute to require the Comptroller to include an analysis of racial and ethnic disparities in tax incidence.
- Providing targeted tax refunds. Support low-income households with targeted, refundable tax credits, such as state versions of the federal Earned Income Tax Credit or the Child Tax Credit, to boost wages and improve families’ well-being.
- Easing housing costs. Alleviate the housing burden by offering property tax “circuit breaker” credits to help families whose property taxes or rent are high relative to their income. Additionally, extend similar tax breaks to renters through refunds akin to the property tax cuts already provided to homeowners.
- Fairly raising revenue. Ensure the wealthy pay their share by raising revenue sustainably through income and wealth taxes, rather than relying solely on property and sales taxes. Despite the state constitutional amendments prohibiting the taxation of income and wealth, these taxes could help balance our revenue system and make it fairer and more progressive.
Thanks to former Every Texan staffer Sammy Cervantes for his contributions to this blog.