This commentary originally appeared in Forbes on October 31, 2014.
Americans hate property taxes.
Given a choice of all major tax systems in the U.S., a comprehensive 2012 study of polling data on taxes by the American Enterprise Institute found that the public harbored the greatest disdain for property taxes.
And it’s easy to see why.
State and local governments that impose property taxes do more than just levy a tax. They distort the housing market by placing a wedge between buyers and sellers. They force housing prices up, pushing many low- and fixed-income residents out of the market. They create barriers to entry for large capital-intensive industries, reducing the number of high-paying jobs those companies employ. And they negatively alter the economy by affecting business and personal-investment decisions.
Perhaps worst of all, the imposition of property taxes means that people will never truly own their home or business even after it’s paid in full. Property-tax payers live under a system that mandates regular “rent” payments to the government in perpetuity. If you think that statement is in error, try not paying your next property tax bill and see how the government responds.
A Major Revenue Source
In spite of the unpopularity and all the negative social and economic implications associated with property taxes, many state and local governments still rely on the property tax as a major revenue source. However, according to the Tax Foundation, its share of revenues nationwide has declined from 82 percent in 1902 to 60 percent in 1940 to 35 percent in 2010. Meanwhile, many Americans are tired of the status quo and question whether there is a better way to fund government services.
With Texans knowing all too well what it’s like to live under a punishing property tax system, Texas may be poised to give Americans just the answer they’re looking for.
The state’s property tax is administered exclusively at the local level, with more than 4,000 overlapping local property-taxing jurisdictions across Texas, consisting of cities, counties, school districts, and special purpose districts. Collectively, these taxing entities collect more than $40 billion in revenue annually, amounting to a property tax burden of nearly $1,600 for every man, woman, and child in the state.
Two Decades of Soaring Tax Bills
Texans have seen their tax bills soar over the past two decades. According to the Texas Comptroller, property tax revenue exploded by 188 percent from 1992 to 2010, partially as a result of the proliferation of special purpose districts, increasing by 57 percent more than population growth and inflation over this period.
Texas’ crushing property tax problem has become so pervasive that tax reform has become a central campaign issue for most candidates on both sides of the aisle, including most prominently in the race for Lieutenant Governor. Texans, like Americans, are fed up with property taxes and hunger for relief.
Enter the property tax-sales tax swap.
Not long ago, the Texas Public Policy Foundation released an innovative tax modernization study, Enhancing Texas’ Economic Growth Through Tax Reform, authored by President Ronald Reagan’s chief economic advisor Dr. Arthur Laffer and his associates, that offers a sensible path forward.
A Reformed Sales Tax
According to the study, local property taxes could be eliminated entirely and the lost revenue replaced with a reformed sales tax that would feature an expanded sales tax base and a slightly higher rate.
To achieve revenue neutrality, the study estimates that that the current 8.25 percent total sales tax rate, which includes the sum of state (6.25 percent) and local (max 2 percent) portions, could be modestly adjusted upwards to 11 percent and the base broadened to include property and all goods and services taxed in at least one other state. In this way, Texans could eliminate its local property tax system.
This reform would finally let Texans own their home or business, marking a major win for all those who cherish property rights and liberty. What’s more, the reform would incentivize the purchase, upgrade, and expansion of business and personal property leading to impressive economic gains.
The Foundation’s research suggests that, if the tax swap were implemented in full, total personal income could increase by some $23 billion over a five-year period. In addition, the increased economic activity could lead to the creation of at least 200,000 jobs above what the status quo promises.
These benefits would arise despite the higher sales tax rate because the system as a whole would be more transparent, efficient and simple than the currently complex, multi-tax system that includes burdensome property taxes.
The Critics’ Red Herring
Of course, critics will contend that a tax swap of this nature might disproportionately hurt those on the lower end of the socioeconomic spectrum because sales taxes are regressive. But this claim is little more than a red herring. As noted by the Texas Comptroller’s 2013 report Tax Exemptions and Tax Incidence, alltaxes in Texas are regressive.
Because these taxes disproportionately affect the poor creating harsh economic conditions that disincentivize wage increases and hamper job creation, it seems obvious that those across the political spectrum would demand fewer regressive taxes. From the overwhelming evidence, the choice seems clear that funding essential state and local government services with only a sales tax would be the most efficient.
People, Not Government, Would Hold the Power
Since property taxes are based on subjective property valuations determined by a county tax appraiser, there may be an incentive for the appraiser to raise the value to increase local revenues. Too often, these valuations are out of step with the true market value forcing people to lose their homes, struggle to pay bills, or keep people from purchasing their first house. Property taxes reduce money in the pockets of Texans before they have an opportunity to choose how to allocate it. This puts power in the hands of government.
To be fair, a sales tax is not perfect. It distorts your decision to purchase goods and services. But it distorts the economy the least of any tax and, to a large extent, is a voluntary tax. You only pay a sales tax when you decide to purchase goods and services. That’s a far cry from the current property-tax system that requires “rent” payments be made irrespective of circumstance or ability to pay.
To put it simply, property taxes inherently put more power in the hands of government while sales taxes let people have more control over their own destiny.
No American ought to suffer the slings and arrows of a punishing property tax system to pay for our government. Not only is a break from the status quo possible, but it’s also potentially prosperous for all Texans in a big way. All that’s needed is a little political will and a continued push by the public.
Mr. Ginn, Ph.D. is an economist in the Center for Fiscal Policy at the Texas Public Policy Foundation. Mr. Quintero is director of the Center for Local Governance, also at TPPF.