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No, we can’t eliminate the property tax

The latest wingnut economic fantasy is that we can completely eliminate the property tax and replace it with an increased sales tax. Debra Medina was a champion of this during the 2010 GOP gubernatorial primary, which should give you some idea of where this lies on the spectrum of mainstream policies. Former Deputy Comptroller Billy Hamilton pens an op-ed explaining just how dumb this concept is.

The property tax produces more than $40 billion a year. All of that revenue goes to fund the state’s 4,000 local governments, including cities, counties and school districts. Because Texas doesn’t provide local governments with many other tax options, the property tax is their most important tax source, providing 80 percent of all of local taxes.

It would take a whale of a sales tax to replace that much revenue. Based on state estimates, a sales tax on the current tax base of 25 percent would be needed to replace the property tax and still provide revenue for the state, which relies on the tax for more than half of its total tax revenue.

That means a $100 purchase would cost an extra $25 in tax, rather than the $8.25 charged now in most places. It also means that the Texas sales tax rate would be more than double the current highest sales tax nationally and far higher than states like New York, which typically are viewed as high-tax states. You can see the problem.

Supporters of this idea suggest that this problem could be overcome by expanding the sales tax base. The question is to what? Many of the big-ticket items that aren’t taxed now aren’t taxed because they don’t make sense in a sales tax – items like raw materials used in manufacturing. Or they would put a heavy burden on families – like taxing groceries, water, medicine or home sales. There’s certainly room to expand the sales tax base, but what we are talking about here is replacing twice as much revenue as the state sales tax brings in now.

Even if it could be pulled off, this tax swap would have other undesirable effects. It likely would undermine local control of funding for cities, counties and schools. The decisions about who gets how much of the tax would likely have to be made in Austin, and there would be losers – particularly rural Texas, which doesn’t have the population to generate much sales tax.

The swap might be revenue neutral, in the sense that the same amount of money would be raised, but it wouldn’t be tax neutral for taxpayers. Depending on whether you pay a lot of sales tax or own land, you could see a large swing in your tax bill. The plan also would give an immense tax break to out-of-state property owners who would get a massive property tax cut but wouldn’t necessarily pay anything in sales tax.

Supporters sometimes promise that the change would produce an economic boom in Texas, but it’s hard to see how that could be true. What business would locate here and face the prospect of a 25 percent tax on the goods and services it buys? Tax avoidance such as shopping on the Internet or in surrounding states would increase dramatically. The one economic boom that is likely from this swap is in the construction of large shopping malls just over the Texas border in Louisiana, Arkansas, Oklahoma and New Mexico.

One thing Hamilton fails to note is that the Lege has considered the idea of swapping property taxes for sales taxes before, in 2005. This was a much smaller swap, which would have raised the state sales tax rate from 6.25% to 7.25%, with some other bells and whistles in there. The Legislative Budget Board studied this proposal, and concluded that it would benefit the rich at the expense of everybody else. One can only imagine what a huge boon a complete swap would be for the one percent crowd.

There are other issues – Hamilton correctly notes the effect of border-crossing and online shopping, but doesn’t mention the black market that would quickly burgeon in this scenario – but this is a pretty long list already. But let’s be clear about something: The purported reason for wanting to find an alternative to the property tax is that one’s property taxes can rise faster than one’s ability to pay them, and through no fault of one’s own one can find oneself unable to afford one’s house. If only there were some other kind of tax that could be substituted for the property tax. You know, a tax that was proportionate to the amount of money one made in a given year, so that one’s annual tax bill rose or fell in direct relation to one’s ability to pay it. I don’t know what you’d call this kind of tax – maybe the “Annual Earnings Tax”, or the “Tax On How Much I Made This Year”; I’m sure there’s a snappier, pithier name for it if only I could think of it – but I’m sure if we thought about it we’d realize that it could well achieve the aim of substituting for most of the property tax without suffering from all the problems that a 25% or higher sales tax would have. Maybe that’s the tax we should talk about implementing instead.

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One Comment

  1. Linkmeister says:

    maybe the “Annual Earnings Tax”, or the “Tax On How Much I Made This Year”; I’m sure there’s a snappier, pithier name for it if only I could think of it “

    Ooh! Pick me! I know! Pick me!

    One of the better examples of sarcasm I’ve seen this Sunday, Kuff.