When We Texans asked for commentary about finding the right balance between taxes on business and taxes on individuals, we should have expected it to stimulate a good debate. But it has been especially gratifying to see how insightful, varied and enthusiastic the responses have been.
Several common themes seem to have emerged from supporters. First, they don’t like big government. They don’t like the way it wastes the hard-earned money they pay in taxes, and they don’t like the way it uses that money to fund its seemingly endless quest for greater and more intrusive power. Second, they see it as being more than just a good idea for citizens to be able to start and run businesses free of undue governmental interference; they see it as a fundamental right. And third, they see adherence to the U.S. Constitution as the ultimate assurance that our federal government will be kept under control and that our liberties will be preserved. Of course, it is not surprising to hear this from We Texans.
As far as Texas’ state and local governments (counties, cities, MUDs etc.) are concerned, however, there seems to be some difference of opinion about just how great the roles of these governments should be. Some have suggested that Texas state and local government could be scaled back so dramatically that revenues available from the retail sales and use tax would be all that is needed to fund them. In thinking about this idea, let’s look at the actual budgets for a moment.
In the year ending August 31, 2010, the State of Texas brought in just over $19.5 billion in Texas sales and use taxes as currently configured, but its total net expenditures were just over $38 billion. Adding revenues from taxes on sales of motor vehicles and manufactured housing, motor fuels and cigarettes and tobacco adds an additional $7 billion of revenue, for a total of $26.5 billion. But in order for the state to rely entirely on those $26.5 billion, the state’s 2010 net outlays would have to have been cut by 30%, or $11.5 billion. That’s a lot of cutting in a budget comprised mainly of Education ($17 billion), Health and Human Services ($9 billion) and Public Safety and Corrections ($5 billion). But these figures don’t begin to address local government budgets, which rely overwhelmingly on local ad valorem property taxes to fund their programs and operations.
To put these in perspective, look at the following table from the Texas Comptroller’s Annual Property Tax Report – Tax Year 2009, p. 1 (January 2011):
Tax Revenue in Texas by Source, 2009
| Type of Tax | Tax Amount | Percent of Total Tax |
| Property Tax | $40,034,355,798 | 47.80% |
| State Sales Tax | $21,014,065,089 | 25.09% |
| Local Sales Taxes | $5,903,570,177 | 7.05% |
| Other State Taxes | $16,808,387,924 | 20.07% |
| Total Taxes | $83,760,378,988 | 100% |
Of the $45.938 billion in taxes collected and presumably spent by local jurisdictions in 2009 (not counting incidental revenues such as service or user charges, fines, etc.), only 12.8% consisted of sales and use taxes – the remainder consisted of ad valorem property taxes. More than half of these property taxes went to the state’s 1025 local school districts; the remaining $18.21 billion was divided among counties, cities and special purpose districts. Compare this to the $5.9 billion collected by those same jurisdictions in sales and use taxes during the same period. If Texas’ local jurisdictions were to be financed exclusively by the sales and use taxes they collect, their budgets would have to be slashed by more than 87% on average, including closure of virtually every public school district in the state. Or, if no change were made on the spending side, current local sales and use tax collections would have to be increased almost eight times over in order to fully fund local expenditures. We know from previous studies that it would be very difficult to effectively increase local retail sales and use taxes to this degree.
Undoubtedly there is wasteful and/or excessive spending at all levels of our state and local governments. But, unless Texans are prepared to undertake truly wrenching reductions in the size and scope of their governments, we need to look for solutions on the revenue side. This is where the question of burdens and benefits comes in.
Texas leads the nation in the attraction of business and the generation of jobs and economic growth. For this distinction we can be justly proud of our state’s abundant natural resources and its generally favorable business climate. But let us not forget to credit in particular those aspects of this climate that are made possible by our state and local government expenditures. Our talented and highly educated workforce owes much to our publicly funded secondary and post-secondary education systems. Our roadway, rail, aviation and public safety systems reduce the cost and increase the reliability of shipping, travel and transportation. Our law enforcement agencies and courts promote the rule of law and the orderly settlement of business disputes; these critical elements of the business climate are so taken for granted that we often forget how difficult commerce would be without them. And our public health system promotes the health and well-being of our residents, which, combined with our education, recreation and housing opportunities, makes Texas a place in which employees and their families can readily be persuaded to live.
Business in Texas benefits directly and tangibly from all of these resources, and business owners profit from them as a result, even if those owners happen to live elsewhere. In seeking a level of fairness and equity in the distribution of Texas’ state and local tax burden, it is reasonable to suggest that a significant portion of that burden should fairly be borne by Texas business. An across-the-board tax on business sales, at percentage rates low enough to minimize resulting marginal economic distortions, represents one very practical way of allocating that burden.
Richard D. Cunningham
Rick Cunningham authored the 2010 study entitled “Eliminating the Property Tax in Texas: A Detailed Fiscal Analysis” (available through Amazon.com), demonstrating how most Texas state and local taxes – including the property tax — could be replaced with a small business sales tax and a somewhat larger retail consumption sales tax. Rick serves as Director of the Texas Center for Economics, Law & Policy, where he continues to conduct analysis of and advocacy for public policies promoting liberty, constitutional government, and fiscal and monetary responsibility.
