Note: This article originally appeared in the Austin American-Statesman on September 30, 2012.
What if I told you that with only some modest changes to the tax code, the next Legislature could radically improve the Texas economy, possibly spurring the creation of hundreds of thousands of new jobs and tens of billions of additional wealth over the next five years.
Sound too good to be true? Well it’s not.
New research suggests that if Texas eliminates its local property tax system, ranked as the 14th most oppressive in the nation, and instead replaces those lost revenues with an adjusted sales tax, then the ensuing flood of capital investment and business activity could ignite the Texas economy for years to come.
That’s right, just by changing how Texas governments collect public dollars-but not how much they spend-the Legislature can give the economy and people’s wallets a major boost.
By how much, you ask? Our estimates suggest quite a bit.
In the Texas Public Policy Foundation’s August 2012 tax swap report, Enhancing Texas’ Economic Growth Through Tax Reform, written with the help of renowned economist Dr. Arthur Laffer, estimates of the new jobs and wealth resulting from the tax swap range from:
– A one-year increase in personal income of between $3.6 billion to $3.68 billion;
– A cumulative five-year increase in personal income of between $22.85 billion to $63 billion; and
– A five-year net gain of new jobs of between 124,900 to 337,400.
For those curious to know the reason behind all of this extra economic activity, the secret lies in the shifting of the tax burden from property and investment to consumption. In essence, by eliminating the property tax and going to a consumption tax, we stop penalizing people for investing in their properties and remove the fear of paying higher taxes. Without this barrier, it’s only reasonable to expect that Texans will begin expanding and beautifying their homes and businesses, thereby injecting money into the private economy that would not have been there otherwise.
Now, in order to make the plan revenue neutral, meaning that Texas governments would see no change to their current funding levels, lawmakers could adjust the sales tax in a number of ways, all of which are outlined in the report. But the most preferable, and realistic, way is to take the rate to 11 percent and expand the base to include all goods and services-less food and medicine-that are taxed in at least one other state, including the sale of property.
Under this scenario, state-local government funding would remain the same, homeowners and businesses would see the property tax eliminated entirely while suffering only a modest sales tax rate increase, and Texans would benefit from all of the added jobs and wealth outlined above.
For anyone who’s made it this far through the article thinking that this plan is too radical , I’d encourage you not to abandon it entirely but rather consider a smaller, scaled-down version of the plan: eliminate just the school district maintenance and operations (M&O) tax and replace the revenues with an adjusted sales tax.
While the magnitude of this reform would not be the same as the first, it would nonetheless help to relieve homeowners of a major part of the burden, as maintenance and operation taxes currently compose over half the total local property tax burden.
Whether the Legislature tackles the reform in part or in toto, the time is right for meaningful tax reform in Texas. And, if it’s done in the right way, lawmakers can help light a fire under the Texas economy that will ensure that the Lone Star State stays America’s jobs and economic engine.