The 84th Texas Legislature will convene at noon on January 13, 2015. Legislators will then have another opportunity to determine the appropriate level of taxation to fund basic public necessities.
The two primary types of taxes used to fund the bulk of state budgets nationwide are consumption (i.e. sales tax) and personal income taxes. Compared with a personal income tax, a sales tax wastes fewer resources to collect, it is clearly visible on purchase receipts, and it doesn’t penalize taxpayers for working.
This is just three of a multitude of reasons why Texas should never have an income tax.
A recent study shows that states without a personal income tax (e.g. Texas) perform substantially better economically, on average, than those with high income tax rates (e.g. California), generating more tax revenue in the process.
While these are reasons for states to adopt a sales tax, the rate chosen depends on the services and infrastructure states decide to fund. In determining the sales tax rate, legislators should also account for the competitiveness of the sales tax rate relative to other states.
The Tax Foundation’s recent report ranks states based on their combined state and average local sales tax rates.
Nationwide, 45 states collect a statewide sales tax and local communities in 38 states have their own sales tax. The three states with the highest combined sales tax rate are Tennessee (9.45 percent), Arkansas (9.24 percent), and Louisiana (8.91 percent).
California, which is most similar to Texas regarding its economic size, population, and availability of natural resources, has the highest state-level tax rate at 7.5 percent and ranks 8th highest nationwide for a combined state and local tax rate of 8.44 percent.
Texas, on the other hand, has a 20 percent lower state-level tax rate of 6.25 percent than California and the Lone Star State’s combined tax rate of 8.16 percent ranks better at 11th.
Texas’ economy has performed remarkably well despite having a relatively high combined sales tax rate. Contributing to this is the fact that while California not only has one of the highest combined sales tax rates in the nation, it also has the highest income tax rate at 13.3 percent. On the other hand, Texas does not have an income tax and has a substantially lower cost of living, which makes entrepreneurial decisions to relocate here easy.
Though there is more that the Texas Legislature should do to lower the bottom line of the budget and provide tax relief for all Texans, there is currently no mechanism available to accomplish this.
This void in the budgeting process could be filled next session if the Texas Legislature created the Sales Tax Relief (STaR) Fund. It could work by simply allowing legislators to commit surplus funds or funds from ineffective programs to the STaR Fund starting in the 2017 Legislative Session. The Texas Comptroller would then temporarily reduce the state’s sales tax rate for a specified period based on the amount in the Fund.
This could reduce the bottom line of the budget and subsequently give a boost to the economy. And, according to the rankings in the Tax Foundation’s report, make the state more competitive. For example, if there were enough money in the STaR Fund to lower the state’s sales tax rate by half-a-cent to 5.75 percent for two years, the combined tax rate would drop to 7.65 percent improving its ranking to 14th. Other options might improve the state’s ranking even more.
By continuing to provide an economic environment that is conducive to individual liberty, more Texans will prosper beyond their wildest dreams. The solution to help those who may be left behind is not more government; it is more opportunity.