There has been an increased media buzz, both state and national, this week about the elimination of property tax. While voters in North Dakota defeated a proposition to eliminate the property tax in their state on Tuesday, we are pleased to hear, not deterred in reaction to that news, that Rep. Harvey Hilderbran, Chairman of the Ways and Means Committee in the Texas House, has said that he plans to introduce a property tax elimination bill in the upcoming 83rd legislative session which convenes in January 2013. From what can be gathered of the North Dakota defeat, the proposition failed because there was no plan to replace the property tax revenue once the tax was abolished. It can certainly be argued that eliminating the property tax without a plan to fund government in its absence would be short-sighted and grossly irresponsible. That is why we have been working since 2009 on a very comprehensive plan for Texas post-property tax elimination. The level of detail and depth we have offered is unparalleled by any other organization.
We began our study of property tax elimination in Texas by building upon a project published by the Texas Public Policy Foundation in April of 2009, Enhancing Texas’ Economic Growth Through Tax Reform. This study proposed eliminating the property tax and replacing that revenue by broadening the base of the sales/consumption tax (ie – taxing things we don’t currently tax now like haircuts and homes at their time of sale, for example) and then slightly increasing the overall sales tax rate. This study suggested that we could replace the property tax revenue with a revised sales tax rate between 6.5%-14.5% depending on how extensively we broadened the base of taxable goods and services.
While those figures would replace property tax revenue statewide (in other words, be revenue neutral), we found that when you looked at that proposal on a county by county basis, it left a majority of Texas counties in the red. Because there are so many counties in our state that would be at the mercy of state government, we could not support a proposal that would see Austin Robin-Hooding sales tax revenue much like they currently do public school funding. We cling to the principle that tax revenue should be generated and utilized at the source; generate the revenue where the services are provided, or as close thereto as possible.
That led Rick Cunningham, director of the Texas Center for Economics, Law and Policy, to undertake an extensive survey of economic activity across the state. He found that while retail activity varies greatly from county to county, economic business activity is roughly dispersed throughout Texas in proportion to local government services. Mr. Cunningham acknowledged, as do many Texans, that the current Franchise Tax (AKA: business margins tax) that was implemented in 2006, although a relatively new tax, is equally as broken as our current property tax system. Both are inordinately complicated and confusing, wrought with inequities and far beyond repair. (For further reading about the inequities in our current business margins tax please refer to our blog posts: Free Markets or Protectionist Business Policies in Texas and Nothing Free About the Markets in Texas)
With this knowledge in hand, in September of 2010, We Texans published Cunningham’s work in a study entitled: Property Tax Elimination in Texas: A Detailed Fiscal Analysis. As recommended in this study, we propose that we not only eliminate the property tax in Texas but also all current business taxes as well. We then propose that we replace that revenue with a small increase in the retail sales tax (keeping the total sales tax, state + county tax, in the single digits) and a new fair, Texas business tax. This plan is revenue neutral and would allow Texans to finally enjoy true private property ownership and fund their fair share of government through the least burdensome, least bad tax model, a consumption tax. Our plan would also remedy the injustice in the current business tax system and provide businesses in Texas a simple, predictable and, most importantly, fair tax structure. The proposed business tax would cause the least amount of distortion to market driven incentives that serve as the engine of a free market economy.
Our draft legislation (written during the 82nd legislative session in 2011) calls on the comptroller to determine which portion of the new taxes are necessary to provide revenue neutral funding to meet the state’s constitutional obligations to fund public education and then allocates the additional revenue back to local government. It is believed that this state-wide funding mechanism would provide adequate support of the foundation school program and finally put to rest litigation challenging public education funding. It further provides a means for local, independent school districts to fund enrichment programs at the local level as determined by parents and local communities.
The remainder of the tax (that above what is necessary to fund public schools) becomes a local tax much like there is a local component to the sales tax in Texas. That local tax revenue will be available to and appropriated at the local level, not Robin Hooded out of Austin. This tenant of the plan is a huge victory for local control and effectively eliminates the Robin Hooding taking place with tax dollars in Austin today.
We have worked relentlessly on this issue for the past 3 ½ years, talking with key tax experts and legislators to arrive at the appropriate tax rates, and to nail down allocation mechanisms and implementation strategy for this plan. We continue to hear many of the same questions from across the state about our plan, so we have aggregated several frequently asked questions here in anticipation that you may be wondering or hearing the same thing:
Q. Why should we eliminate the property tax?
A. Private property ownership is the foundation of a prosperous society. Man will not work for what he cannot keep. As long as a property tax system is in place, citizens do not enjoy the liberty of true private property ownership nor the prosperity of a society that has capitalized on that ownership. Citizens are all instead simple renting their property from the government. Furthermore, the property tax system in Texas is badly broken as was reported by the testimony of John Kennedy of the Texas Taxpayers and Research Association to the Texas House Ways and Means Committee in March of 2012:
- 41% of appraisal districts fail baseline tests (Methods and Assistance Program Reviews)
- “[I am] absolutely astonished at how bad we are in many places in this state in terms of the actual administration of property tax”
- 91 out of 253 (36%) districts could not document a reliable property value
- It is absolutely essential to equal and uniform taxation that districts do a professional job in assigning market value to everybody’s property. [When districts fail in this category] nobody is paying the share that they should be paying. This is the category in which districts performed the worst, almost half (121 of 253 districts) fail.
- We have significant problems after 30 years in the system… “If this were a report on the performance of public schools, there would be a public outrage and the legislature would be on fire to do something about it.”
The system is broken. It cannot be fixed and it prevents our future prosperity. For further reading on the importance of private property ownership and it’s link to economic prosperity please refer to our blog post: The Case for Private Property
Q. Businesses shouldn’t pay any taxes at all. Why are you advocating taxing the job creators?
A. To answer this question we must look at taxes in their proper perspective. Taxes, while a burden, are not a punishment. Taxes are an individual’s (or business’) share in the cost of government services. Businesses get to use the roads for their vehicles, get to call the police department if they are robbed, the fire department if their business is on fire and get to use the educated work force created by the public school system. Businesses utilize and benefit from government services just like individuals and therefore should share in their cost.
Q. Businesses shouldn’t be taxed because they will pass on the cost of the business tax to their customers. Ultimately, won’t the individual Texan bear the cost of that tax anyway?
A. One very important thing to keep in mind is that Texans are not the only end user of Texas produced goods and services. There are countless Texas companies who sell their products to customers outside of the state and the country. In an environment where businesses are exempted from taxation, local citizens, Texas tax payers, are subsidizing the cost of government services for that business especially when their services (and profits) are exported. Under our model, the business’ customers, whether in state or out, will rightly share in the actual cost of producing those goods and services, instead of leaving that burden solely on the taxpayers of the county where that business is located.
Q. It’s not fair to tax a business on their total sales. Shouldn’t we only tax businesses on their profits?
A. While that argument is heard often, it breaks down easily when you look at it in light of tax as payment for services rendered rather than punishment or economic incentive. Both individuals and businesses must meet their obligations. No one advocates exempting business from telephone or electric bills if they are not profitable. Why should they be exempt from paying for local infrastructure (roads, law enforcement and the like) that benefits their business? Regardless of an individual’s or businesses’ profitability, they are still utilizing government services and must share in their costs.
Q. Won’t a higher sales tax or flat tax on business drive business activity outside the state?
A. There is no evidence to support this concern. In fact, studies by numerous organizations do document just the opposite. Predictable, low and equitable tax policies under-gird prosperous economies. There is certainly anecdotal evidence that indicates businesses will flock to Texas because their tax burden will no longer depend on how good their lobbyist is in Austin. Their tax rate will be based on the most fair, predictable and equitable business tax structure in the nation. Couple that tax system with the absence of the property tax and personal income tax, and we expect economic activity to increase and thrive statewide.
Q. Won’t your proposal open the door for a state income tax?
A. Our proposal is revenue neutral and presents no need for an income tax which has rightly been strongly opposed by Texans for centuries.
Q. Aren’t consumption taxes regressive?
A. Texas has addressed the regressivity of the retail sales tax by exempting items like food and medicine from taxation. We propose that the those current sales tax exemptions for living essentials remain in effect.
Q. Doesn’t this property tax elimination only benefit property owners?
A. Nothing could be further from the truth. The cost of the property tax is spread throughout our economy. The property tax cost is indirectly built into rent prices and the costs of all goods and services produced in this state. Our proposal would enable landlords to reduce rental rates and businesses to either reduce the cost of their goods or take advantage of additional margin in their products. Nineteenth century American economist Henry George said: ”The mode of taxation is, in fact, quite as important as the amount. As a small burden badly placed may distress a horse that could carry with ease a much larger one properly adjusted, so a people may be impoverished and their power of producing wealth destroyed by taxation, which, if levied in any other way, could be borne with ease.” Property tax is a burden badly placed on the whole society.
Q. Won’t this plan hurt rural areas that don’t generate a lot of sales or business tax revenue?
A. Our study has looked at the effects of our plan on the most populous counties in the state. While retail sales are not uniformly spread from county to county, business economic activity is fairly evenly dispersed. The plan works to insure revenue neutrality for all jurisdictions in each county and provides a mechanism for those local citizens to alter the rates as they deem necessary to fund future and additional services.
Q. Aren’t sales taxes more volatile and less reliable revenue streams for government?
A. The state of Texas has utilized the sales tax as a primary source of funding for decades and volatility can be a good thing. Shouldn’t government revenue streams ebb and flow with the income streams of individuals and businesses within the community? With tax revenue tied more directly to economic activity, when businesses and individuals are tightening their belts, local governments must do so also.
Q. Isn’t it preferable to be able to deduct property taxes on one’s federal income tax return?
A. While individuals may miss a deduction on their annual IRS return, they won’t miss the much larger chunk that property tax took from their income in the first place. Additionally, sales taxes also qualify for federal tax deduction. But ultimately, this question misses the heart of the issue. Property tax elimination is not primarily a fiscal issue, it is a freedom issue. Are we willing to give up the wealth of true private property ownership for the pinched pennies of a yearly deduction?
We must recognize that the history of thought is not a long journey of progress but rather one where sound ideas ebb and flow over time. We must rescue the great ideas from the past and compare them with the bad ideas of the new economics, big government and socialist philosophies. We can see in the wealth and productivity levels of countries today that those who protect private property are more productive and thus enjoy a higher standard of living. Our plan is certainly bold, but such is the nature of liberty and Texas citizens.
For further reading on our plan please see our blog posts:
- You Took a Stand. The Nation Took Notice.
- Funding Government Post Property Tax
- Free Markets or Protectionist Business Policies in Texas?
- Texas Needs a Fair Tax for Business
- Nothing Free About the Markets in Texas
- Property Tax Elimination – We Can. We Will. We Texans!
- Demand Property Tax Elimination Today!
- The Freedom Prosperity Link
- Eliminating the Property Tax in Texas – Part One
- Eliminating the Property Tax in Texas – Part Two
- Time to End Property Tax in Texas
- The Case for Private Property
- Aristotle and Rothbard on Private Property
- An Ownership Society Fosters Responsibility, Liberty, Prosperity