By Kolten Morris
This week the Texas Senate Finance Committee will take a close look at tax relief during what’s been called “tax week."
Although no one likes to pay taxes, they are an inevitable part of funding core government functions. As such, the Texas Legislature’s challenge is to develop an efficient tax system that provides necessary revenue while doing the least economic harm.
Lawmakers should take care, however, as not all methods of raising revenue are created equal, and “tax week” is an excellent opportunity to highlight the damaging effects of some taxes and the desirable characteristics of others.
The three main taxes imposed within Texas are the sales tax, local property taxes, and the business franchise tax—commonly known as the margin tax.
Texas, unlike a majority of the other states, does not levy a personal income tax; a wise decision that has benefited the Texas economy as it tends to negatively influence productivity, wage gains, consumer spending, and savings.
A sound tax system consists of four principles: adequacy, simplicity, efficiency, and accountability
- The adequacy of a tax involves its reliability in providing a stable source of revenue from a broad base.
- A tax’s simplicity is critical in ensuring the compliance of the taxpayers, effectiveness and consistency of the administration of the tax.
- Efficiency of a tax mainly encompasses its ability to remain economically neutral by not picking winners and losers who pay different rates.
- A tax’s accountability represents its ability to remain transparent and free of loopholes.
The state’s sales tax fits all four metrics for a sound tax. It provides an adequate, stable source of revenue from all Texans who consume goods or services at any time. It has a simple structure based on a set percentage (6.25 percent for the state portion and up to 2 percent more by local governments for a maximum of 8.25 percent) so it can be easily levied.
On the other hand, local property taxes in Texas do not meet the criteria to be considered a sound tax. Property taxes may be adequate by providing a stable source of revenue, but they are not simple with over 4,000 taxing entities statewide.
Property tax rates frequently change and appraisal values are based on the opinion of the chief appraiser’s estimate of market value—a number often difficult to accurately predict. The tax is not levied efficiently because it discriminates against those who own property, effectively disincentivizing home ownership. However, renters pay property taxes through the form of higher rent. Property taxes cause a larger economic distortion than a sales tax, and they discourage capital-intensive investments in real property that leads to business growth and job creation.
The onerous business margin tax definitely doesn’t meet the sound tax criteria. The tax is far from adequate as it has failed to meet revenue estimates by about $4 billion since 2008. It’s highly complex nature often leads to higher compliance costs than the tax liability—burdening opportunities to hire new workers.
The margin tax isn’t efficient either as a result of its exemptions and two rates. Collectively, these costs contribute to substantially less personal income and job creation than otherwise.
Looking at the three major taxes imposed in Texas, property taxes and the margin tax are no doubt the most nefarious.
This legislative session, lawmakers should look to use excess revenue to immediately eliminate the margin tax, while also requiring local voter approval when property tax revenue increases more than 5 percent or population growth plus inflation, whichever is less.
The Senate’s “tax week” is a great place to start moving toward these policies.