When Texans step into the voting booth on November 5, they’ll have the option to prohibit an individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. through a constitutional amendment.
The state constitution already includes measures to prevent an income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. , but Proposition 4 creates a more robust barrier by outlawing it altogether. The proposed amendment would read, “The legislature may not impose a tax on the net incomes of individuals, including an individual’s share of partnership and unincorporated associated income.”
Under current constitutional provisions, dating to 1993, the state can adopt income tax legislation after gaining a simple majority in both the House and the Senate and putting the choice before the voters. If voters pass the measure, the legislature is free to amend or repeal the legislation without putting it in front of the people again. If the legislature repeals the bill, but then changes and decides to put it into effect within a year of voter approval, the bill doesn’t need to go back to the voters. The current amendment also requires that any revenue from such a tax would go toward education.
Proposition 4 goes further, strictly prohibiting the creation of an individual income tax for any reason. This means the legislature would need to repeal the amendment with two-thirds supermajorities in both houses before the state could move forward with any income tax legislation.
Texas is one of seven states—along with Alaska, Florida, Nevada, South Dakota, Washington, and Wyoming—which does not have any form of individual income tax. New Hampshire and Tennessee do not tax wage income but do impose taxes on dividend and interest income. Tennessee’s tax, known as the Hall Tax, is scheduled to phase out by 2022.
Income taxes are less competitive than consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es (like the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. ) because they tax both current consumption and savings (for future consumption), reducing both investment and labor (and the return on labor). When combined with a sales tax, consumption is effectively taxed twice: once when the income is earned, and again when it is spent.
Forgoing an individual income tax is one of Texas’s key competitive advantages in the tax code, and contributes to the state’s 13th-best overall ranking on the Tax Foundation’s 2020 State Business Tax Climate Index. Because the Lone Star State doesn’t have an income tax, it leans more heavily on sales and property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es for revenue. Sales taxes account for 35.4 percent of state and local tax collections, and property taxes account for 43.8 percent, compared to national averages of 23.6 and 31.5 percent, respectively. Even with this increased weight on non-income taxes, state and local tax collections are only 8.7 percent of personal income in Texas—the 11th lowest level of the 50 states.
If approved by voters, Proposition 4 would put more robust barriers in the way of a personal income tax, ensuring that Texas retains this signature feature of its tax code far into the future.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.Subscribe