Tax Breaks & Incentives
Policymakers should set our tax and budget priorities with all Texans in mind.
Instead, our tax system unfairly advantages the wealthiest individuals and corporations as elected officials have often used tax exemptions or tax incentives to favor certain businesses, industries, or certain groups of taxpayers.
These tools can help boost the state or local economy, but we must be clear about the tradeoffs. Quality-of-life is just as important as pumping up Texas’s Gross State Product. Every handout or tax break given to a corporation or homeowner represents less funding for education, food access, health care, or infrastructure. Our tax dollars should be used carefully for public investments that benefit many Texans, not just the wealthy few.
What's Happening in Texas
- Over the years, the Legislature has raised exemptions to cut property taxes for homeowners. For school taxes, homeowners receive a $140,000 exemption on their homesteads, and seniors and disabled homeowners receive an extra $60,000 exemption. Local governments and school districts can offer additional homestead exemptions based on a percentage of home value up to 20% (called a local-option homestead exemption, or LOHE). A homeowner does not pay tax on the exempt portionof the home’s value. One tradeoff: school property tax exemptions reduce the property taxes received by school districts statewide by $27 billion a year, or 40% of school tax revenue.
- Some goods and many services are exempt from sales tax. Some sales tax exemptions make sense because they help make necessities like groceries and medicine more affordable. And some state sales-tax exemptions are for items taxed under a different law, such as motor vehicle sales, gasoline/diesel, and insurance premiums. But other sales tax exemptions have outlived their usefulness and are now simply handouts to robust industries that should be contributing more revenue. Most professional services remain untaxed, and some exemptions have grown obsolete as markets have evolved, such as the “high-cost” natural gas exemption.
- The state allows cities, counties, and school districts to reduce property taxes in order to encourage business investment. Tax Code chapters 311, 312, 380, 381 and the JETI program offer localities a variety of tools to lower property taxes for a business, limit property values for a period of time, or otherwise reduce tax liability. Business may grow, but there’s a catch: less money for local services like police, parks, libraries, and roads.
- The costs and benefits of economic development incentives can be unclear if agreements lack transparency. We are highly skeptical of tax giveaway programs such as JETI or CAPCO, as well as handouts of tax dollars to established, viable industries such as TV/film. Evidence suggests that such incentives mostly benefit the wealthy. If there’s a compelling public interest in bringing an industry to the state or a community, tax incentives can be useful to get that industry off the ground; in theory, a company lured by a tax incentive may bring jobs, investments, and higher property tax revenue. But the benefits are sometimes not worth the cost in revenue – particularly if not many jobs are created. Or, an incentive may be simply unnecessary if the business would likely locate in the community anyway. This is called the “but for” test: To get a tax break, a business must show it would not be located here “but for” the incentive.
- Within reason, tax breaks can be useful tools to attain certain policy goals. Reasonable, inexpensive exemptions or incentives designed to help small groups of disadvantaged Texans or to achieve certain policy goals may be well worth the cost.
What We’re Doing
- The Legislature should regularly review tax rates and tax exemptions to make adjustments and eliminate those that are wasteful, inefficient, or outdated. The Legislature and local appraisal districts could also promote more outreach to ensure more eligible Texans are receiving the benefits.
- Expand the sales tax to include some business and professional services, such as legal, accounting, and financial services, used primarily by higher-income households. This could reclaim up to $12 billion in the budget and make the sales tax more fair.
- Repeal the $1+ billion-per-year data center sales tax exemption or use it as a tool to reduce data centers’ negative impacts on local communities by requiring more permanent jobs, less water use, or greater energy efficiency.
- Repeal the local-option percentage homestead exemption (LOHE), used by some school districts and local governments. Generally adopted by wealthier taxing districts and benefiting primarily wealthier homeowners, this exemption is obsolete because of the 10 percent cap on appraisal values.
- We oppose wasteful economic development incentive programs and demand more oversight from policymakers. Such programs are often unnecessary, don’t create many new jobs, and mostly benefit the wealthy. Greater transparency would help policymakers better assess the costs and benefits.
