Texas has low taxes -- depending on figures
01/12/2003
URL:http://www.dallasnews.com/sharedcontent/dallas/business/stories/011203dnbustaxburden.cbf65.html
By ANGELA SHAH / The Dallas Morning News
Conventional wisdom has long held that Texas is a low-tax state.
That idea has lured business to the state through decades of the booms and busts of an economic cycle. For many taxpayers staring at higher-creeping tax bills, the oft-touted maxim can seem a little hard to believe.
It's no wonder. Texas is, generally, a "low-tax" state, ranking 49th per capita in state tax burden. That number starts to inch up, however, once other taxes are factored in.
Add local taxes, such as sales and property taxes, into the equation, and the state ranking moves up to 40. That's because Texas' local taxes – which provide much of the shock to homeowners and businesses – rank as the 15th most expensive compared with the 49 other states.
So, yes, Texas ranks below the average state in per capita taxation. But underneath, the state has an unbalanced tax system that relies heavily on sales taxes and property taxes, experts say.
"I don't think Texas does [taxes] very well because of the heavy reliance on sales and property taxes," said Mike Davis, an economist at Southern Methodist University.
Large-state peers such as California, New York and Florida rank higher on the per capita burden scale – seventh, second and 35th, respectively.
"We've pushed those two taxes about as far as we can go," said Dick Lavine, senior fiscal analyst at the Center for Public Policy Priorities in Austin. "State spending is extremely low. Part of the slack is taken up by local governments."
Today, Texas faces a gaping budget deficit. Some estimate it to be as high as $12 billion. So how and whom Texas taxes will be front and center when the Texas Legislature reconvenes for its biennial session Tuesday.
Although state leaders from Gov. Rick Perry on down have said the session will produce no new taxes, longtime Legislature watchers say tax bills of various stripes will be introduced as surely as odd-numbered years mean lawmakers descend on Austin.
Just over half of Texas' state-level revenue comes from state sales taxes. The other revenue comes from various taxes, including motor vehicle sales, fuels and corporate franchise taxes. To fully fund all of Texas' obligations – most notably, the public school system – Texas "pushes down" to the local level for funding.
Those sources include a local sales tax and the property tax, and leave the state with a high local tax burden, says the Center for Public Policy Priorities.
"Some sort of income tax is the obvious solution," Mr. Davis said. "It's deductible and less distortionary. But there's no way to introduce something like an income tax politically. So we're sort of stuck."
State income tax
A majority of states have adopted a state personal income tax in recent decades. But Texans have long had an aversion to doing so – even during the depths of the state's oil and gas crisis in the late 1980s.
And being known as a low-tax state certainly helps bring economic development prospects through the front door, said Bill Sproull, vice president of economic development for the Greater Dallas Chamber.
"But a low-tax policy by itself isn't sufficient for economic development success," he added. "Business is always willing to pay reasonable taxes for good public services."
For example, he said, the Dallas chamber supports increased funding for higher education and favors reinstituting an unemployment insurance tax to fund an employer-driven training program. Such a tax expired in 2001.
Although Texas is one of a handful of states that doesn't have an income tax, many states use both income and sales taxes because they can balance each other, says the National Conference of State Legislatures. Income taxes are considered to be "progressive" in that the rate increases as the amount subject to the tax increases.
Sales taxes, on the other hand, tend to be regressive. They take a bigger bite out of the poor's income rather than the rich's. Because of the state's dependence on sales taxes, Texans earning just under $17,900 must use 6.7 percent of their income to pay state and local taxes. Those earning more than $82,900 pay 1.6 percent of their income, says the policy group in Austin.
Solving that imbalance is part of the benefit of having a state income tax, some experts said.
California example
Still, there is a downside to such a tax, others note, and it is best illustrated by the fiscal crisis under way in California.
While the equities markets ran red-hot, income from the exercising of capital gains taxes generated as much as 25 percent of California's revenue. About a tenth of that came from employees at just six corporations.
Today, the state faces an ever-growing multibillion-dollar shortfall for fiscal 2003 and fiscal 2004, largely because that revenue vanished almost overnight. That's not an isolated case. New York, Washington state and others face similar difficulty.
"The volatility of the income tax has been exposed," said Mark McMullen, a senior economist at Economy.com in West Chester, Pa. "The income tax is out of style."
Indeed, the absence of an income tax helped Texas as the technology boom busted into recession, he added.
"Until the second half of 2002, Texas was one of a handful of states keeping their heads above water," Mr. McMullen said. "And the dependence on the sales tax was very good. Unlike other periods of economic weakness, consumers have kept spending through discount auto sales and all the stuff when you buy a house."
And certainly, so far, Texas has easily attracted investment and a skilled workforce that has boosted its economic vitality. Over the long term, however, he cautioned that Texas may have difficulty in keeping such a tax structure in place.
There are limits to how high property taxes can be raised, he said. Given the importance of property taxes to school funding in Texas, any threat to the state's educational attainment would be cause for concern. State lawmakers are well aware of those pressures, but Legislature watchers don't expect leaders to tackle the issue this year.
"I'm doubtful any real action will occur," said John Kennedy, senior policy analyst at the Texas Taxpayers and Research Association in Austin. "A more apt scenario is something along the lines of ... do what [leaders] have to do to get by. But between this and '05, once again do a complete review and study of the tax system, coupled with school finance reform. And attack that issue head on in the '05 session."
In the meantime, Mr. Davis said, "there will be all sorts of backdoor fee increases, tuition hikes."
In recent weeks, state leaders have said they will seek to make state government and its programs more efficient and that there will be cuts. But Mr. Lavine cautioned against cutting too deep.
"The whole purpose of taxes is to provide services," he said. "You have to look at what you need to create the future that you want. If you want a vibrant state 20 years from now, you've got to do it today. It's going to cost money, but it's worth it." |
