Greenfield: Breaking down the numbers on the property tax sales tax swap
Economist Dr. Stuart Greenfield notes that “this policy would increase taxes for 80 percent of Texas households, reducing taxes only for those with income above $146,000”
For the last decade, conservative groups have actively campaigned to replace the state’s property tax with an increased sales tax.
On April 10, the state’s troika announced that legislation would be introduced to ask voters to approve increasing the state’s sales tax by one percentage point to 7.25 percent.
The increase in sales tax receipts would be used to reduce local school district property taxes by a comparable amount.
What was not mentioned by the state’s leadership is that this policy would increase taxes for 80 percent of Texas households, reducing taxes only for those with income above $146,000. For those of us who enjoy a Whatameal, we’ll now find it costing us 6.4¢ more.
In 2017 a one percentage point increase in the sales tax rate would have provided the state with about $4.6 billion in additional sales tax. This $4.6 billion in additional state revenue would have reduced the $32.1 billion in school property taxes by 14.4 percent.
The initial reaction is great; my school property tax will decline by almost 15 percent. With these additional funds, I can take my family out to eat. When you receive the check after your meal at the restaurant you will find what you pay for the meal has increased by one percent.
In 2017, state sales tax receipts were $28.9 billion, while total local property taxes were $59.4 billion. Of the $59.4 billion in property taxes, $32.1 billion is paid to school districts.
In 1979 the Comptroller’s office published a study of the incidence of state tax on both households and business. The latest study was released in November 2018 and is the basis for determining the distributional impact of replacing property taxes with an increased state sales tax. In 2017, state sales tax receipts were $28.9 billion, while total local property taxes were $59.4 billion. Of the $59.4 billion in property taxes, $32.1 billion is paid to school districts.
Table 1 shows how these taxes were distributed among Texas income levels (quintiles) and the proportion of each tax that was paid by out-of-state taxpayers. The table also shows the final incidence or tax burden of each tax by household income. Also presented is the percent of total tax paid and the percentage of income used to pay the tax (incidence) for both the state sales tax and local school property taxes. This last number is used to compute the Suits Index, which measures the progressivity of a tax.
This last number is used to compute the Suits Index, which measures the progressivity of a tax. The Suits Index for the sales tax is -0.226, while the Index for local property taxes is -0.099. An Index of zero means the tax is proportional, while a negative Index indicates a regressive tax. One would consider the property tax to be proportional, while the sales tax is regressive.
Several groups/individuals, e.g., Texas Public Policy Foundation and many business groups have voiced support for this proposal. Business groups should be dancing in the street as the tax swap will reduce their taxes by $500 million. As total taxes remain the same this tax swap will result in businesses paying less in taxes with households paying more.
While all of the advocates for reducing/replacing the property tax with an increase in the sales tax, none of the advocates have shown what the impact would be on Texans by income, i.e., the change in tax burden that would be experienced. While the total amount of taxes paid would be the same, which income quintile bears the burden is quite different. As shown in Table 2, replacing the property tax would increase taxes for all but the highest income group. Those with income greater than $146,000 would see a reduction in taxes; all other income groups would find total taxes increasing.
In fact, 14.5 percent of the decline in taxes for the highest income group would come from those in the lowest group (income below $37,630), while almost 50 percent of this decrease would be from those with incomes less than $66,112.
While it was not possible to determine the Suit Index value, this chart shows that the “new” tax swap will result in a more regressive tax system. A regressive tax is one that the tax as a percent of income declines as income increases. The Texas tax swap will solidify the regressive nature of the Texas tax system by replacing the less regressive property tax with the more regressive sales tax.
I would suggest that those advocating such a policy have not done their homework. Replacing local property taxes with a comparable increase in the state sales tax would increase state taxes for 80 percent of Texas households and providing an overall decrease in taxes only to the top 20 percent of Texas households. For those hypothesizing that replacing the local property tax with an increase in the state sales tax, I would urge one to stroll over to 111 E. 17th Street and ask Comptroller Hegar for an autographed copy of the Tax Exemptions& Tax Incidence report.