Texas, we have a problem. Our school finance system is unconstitutional. And the state’s supreme court is requiring a solution by June 1st of 2006.
Although the court warned against “pouring money” into the school system, the court ruled we have a statewide property tax because districts are near the rate cap. The easiest way to solve that problem is to throw a billion or two dollars at the schools just to increase the gap between rates and the cap.
But rarely are facts and legal opinions impediments to spending more money. Indeed, the school districts who brought the lawsuit were, immediately after the decision was announced, repeating the “more money” mantra. And, as one would suspect, they have already determined which pockets to pick in that quest.
We have heard it before and no doubt we’ll hear it again: business must pony up more cash. They say business must “pay its fair share” of the tax burden. Business, we hear again and again, needs to step up even more to fund schools.
Surely, some claim, Texas business can afford the bill.
It is a fact that Texas’ individual tax burden is one of the lowest in the country. The U.S. Census Bureau ranks Texas as having the lowest per capita state tax burden in the country. Another measure ranks Texas as having the third lowest tax burden among the states.
But wait – Texas depends more heavily on local governments, like school districts, than other states. When local taxes are thrown into the mix, Texas’ low-tax ranking drops from first or third to eighth among the states.
The bad news does not stop there. It turns out Texas businesses pay just over 60 percent of all state and local taxes, the fourth highest business tax burden in the nation by this measure. The U.S. average is 43 percent. Even California depends less on business taxation for its state and local revenues – 41.4 percent.
Well, one might reason, maybe a lot of Texas’ tax revenue comes from business but Texas is still a low tax state, so that does not necessarily mean Texas businesses face that high of a burden. But Texas’ business tax burden is 5.8 percent of the state’s yearly gross income – the seventh highest rate among the states. Once again, Texas comes in higher even than California’s 4.5 percent; the U.S. average is 4.7 percent.
During the first meeting of the Governor’s Commission on Tax Reform, it was repeatedly – and correctly – asserted that only people pay taxes. Businesses do not. Businesses are only tax collectors. It could be reasoned that it makes no difference if we impose business taxes or some other kind of taxes, people will pay them regardless.
But that misses the point. When businesses directly pay taxes, those taxes – every dollar of those taxes – appear directly as business expenses. They do not appear on the check stubs of employees whose pay falls due to taxes. They do not appear on the price tag of the product whose price has risen due to taxes. They do not appear as an expense on a smaller dividend check. And when some business goes under due to the extra burden of taxes, the culprit is rarely publicly named.
Business taxes make this state less competitive with other states and nations. Business taxes do not impact all businesses in the same way, distorting the way business is done and which businesses survive.
Texans have a right to know how much their government costs them. The best way for Texans to know that cost is with transparent taxes like those on consumption. Business taxes, which hide the cost of government, are not good business. They are not good policy. They are bad for Texas.
The easiest way to avoid worrying about the school finance problem is with more money, and the easiest way to hide spending is with a business tax. But neither should be confused with a solution. Indeed, new spending and taxes only create whole new problems for everyone who lives, works, and seeks to prosper in Texas.
Byron Schlomach is the chief economist for the Texas Public Policy Foundation, a non-profit, non-partisan research institute based in Austin.