Tax Fairness
Taxes are not paid equally by everyone. The incidence of a tax – a measure that shows the impact of a tax on different groups – indicates the fairness of the tax. In a state with a fair tax system, the share of taxes paid by each income group would resemble that group’s share of income. But in Texas, the wealthy pay very little in taxes compared to their incomes, and lower-income families pay much more. This is why we say Texas has an “upside-down” tax system.
Texas struggles to fund essential services because our unfair tax system overly burdens lower-income residents while letting wealthier individuals and corporations off the hook. This harms all of us by reducing the state’s capacity to invest in public and higher education, good jobs, and affordable healthcare.
What's Happening in Texas
- Inequality is high in Texas, and our tax system makes it worse. We are often touted as a “low-tax state” because of our lack of an income tax. But it’s not low-tax for everyone. Lower-income Texans – disproportionately people of color – pay more for their basic necessities and are robbed of the opportunity to save and build wealth. The entire system represents a redistribution of wealth upward, widening income and wealth inequality.
- Texas has a highly regressive tax system. 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%. Looking at it another way, the top-earning Texans rake in 56% of the income but pay only 41% of total taxes collected. According to the Institute on Taxation and Economic Policy, Texas has the 7th most regressive tax system in the country.
- Our tax system is inherently unfair because it relies mostly on the sales tax. Sales tax revenue accounts for about 60% of all state tax dollars. Most goods are taxed at 6.25% by the state and up to another 2% by local governments. The sales tax overly burdens low-income families because it is based on how much each family spends – and on what. In general, lower-income people pay more of their incomes on necessities and taxable goods, while wealthier people tend to spend more on investments, savings, and untaxed services.
- Sales taxes are also more volatile. Sales tax collections go down when the economy suffers a downturn and Texans buy less, drying up state and local revenue at precisely the wrong time.
- Certain tax cut policies are especially beneficial for wealthy Texans. Tax cuts based on a percentage of property value can confer over half of the benefits on households making over $195,000 a year. And any time the Legislature cuts property taxes and replaces them with sales tax revenue, it is simply shifting taxation from wealthier, property-owning Texans onto those with less – the exact opposite of what’s equitable.
What We’re Doing
- We support more equitable and progressive revenue options for fairer taxation and to properly fund our schools, healthcare, infrastructure, and other state and local services. A progressive state income tax or wealth tax could balance out our tax system and lower overall tax bills for most households.
- Tax cuts or tax credits should focus on low-income Texans. A renter’s rebate or state EITC or CTC could return money to some households, or a circuit breaker policy could be used to lower a household’s property tax payment based on their income.
- The tax base should be updated for our modern Texas economy. For example, taxing business and professional services primarily used by higher-income families could make the sales tax far less regressive.
- We support “equity notes” for local tax bills that tell us how fair the bills are. The Legislature should ask the Legislative Budget Board to produce them.