Introduction

This study provides new evidence on tax policy in Texas. Historically Texas has been regarded as a low tax state, a state in which low tax burdens have contributed to high rates of economic growth. However, in recent decades the tax burden has been increasing in Texas, and that higher tax burden has contributed to retardation in economic growth. The main culprit is a sharp increase in property taxes. Higher property taxes have fueled an explosion in local revenue and spending in Texas. As a result, total state and local revenue and spending has increased more rapidly than personal income.

There is now a property tax revolt underway in Texas, not unlike that in California in the 1970’s. Texas citizens are attempting to impose limits on taxes and spending in order to begin to receive some property tax relief. Citizens in Houston, for example, have imposed a new tax and spending limit on their local government. Citizens across the state are demanding more stringent caps on property appraisals and property taxes.

This study explores why existing tax and spending limits have failed to constrain the growth in tax burdens in Texas. It is the unconstrained growth in local property taxes that is the major source of increasing tax burdens. It is not enough for the state to provide temporary property tax relief. Effective limits must be placed on the power of local, as well as state government, to impose taxes. For the first time the Texas legislature will consider legislation that would impose effective tax and spending limits at the local as well as state level. This study explores the impact such legislation would have on tax burdens and economic growth in Texas.

Tax Policy in Texas

The Growing Tax Burden

This study provides new evidence on tax policy in Texas. Texas is often considered a low tax state; however, in recent years that tax burden has increased significantly. This increase is reflected in both average taxes and marginal taxes.

Average and marginal tax rates in Texas are well below the national average over the past three decades.[i] The average tax rate is estimated at 8.98 percent.[ii] This means that state and local governments capture $8.98 out of every $100 in total income produced in the state. The marginal tax rate in Texas is 9.37 percent.[iii] This means that state and local governments capture $9.37 out of every additional dollar produced in the state.

In recent decades both the average and marginal tax rates have increased significantly. The average tax rate has increased about 10 percent, and the marginal tax rate has increased about 9 percent.[iv] This rising tax burden is even more evident in another measure of tax burden, regressivity.

Regressivity measures the percentage change in personal income relative to the percentage change in taxes. Recent research shows that a more regressive tax system has a positive impact on economic growth.[v] This finding is intuitively obvious. A more regressive tax system leaves a greater share of income in the hands of workers as income rises; a more progressive tax system transfers a rising share of income from the private sector to the public sector as income rises. This creates disincentives for work, investment, entrepreneurship, and other productive activity.

While Texas has a regressive tax system, it is less regressive than that for most other states. Regressivity in Texas is measure at about 96 percent, compared to 98 percent for the states as a whole.[vi] This means that Texas is at a disadvantage compared to most other states when comparing the competitiveness of the tax system as a whole. The Texas tax system transfers a higher share of income from the private to the public sector over time as income rises.  

Explosive Growth in Texas Property Taxes

The major culprit in this increasing tax burden in Texas is the property tax. While the state imposes no property taxes, local property taxes have increased rapidly in recent decades, and are now among the highest in the nation. Property taxes are 3.53 per cent of personal income in Texas, ranking the state as the 12^th highest in the nation.[vii] Property taxes are 1.82 percent of home values in Texas, ranking the state as the second highest in the nation.[viii] This means that Texas citizens could reduce their property tax burden by moving to any other state in the nation, except Wisconsin.

Property taxes in Texas are now about fifty percent above that for neighboring states and for the nation as a whole. Property taxes as a share of personal income are almost 90 percent above that for neighboring states.

Table1. Property Tax Burden in Texas Compared to Neighboring States and the U.S. (rank 1 == lowest, 50 highest)

*The nominal residential property tax adjusted for assessment level, per $100 of valuation in 2003. Source: Tax Rates and Tax Burden…A Nationwide Comparison 2003, August 2004, Government of the District of Colombia.

**State and Local Property Taxes per $1000 of personal income, FY 2003. Source: U.S. Census Bureau.

Since 1986 there has been a threefold increase in property tax revenue, from less than $10 billion, to well over $30 billion. Property taxes have emerged as the major source of tax revenue in Texas. This is a relatively recent phenomenon. Until the last few years property taxes have accounted for less than half of total state and local tax revenue. In 2005 property taxes accounted for almost 53 percent of total tax revenue. 

School district property tax revenues have increased more rapidly than other local property tax revenues. From 1986 to 2003 school district levies increased at an average annual rate of 7.5 percent, which is 1.7 percent higher than the 5.8 percent average annual increase in personal income over that period.

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http://americansforprosperity.org/tx/2007/Local_Property_Taxes_and
_Economic_Growth_in_Texas_4_9_2007.pdf