This morning, I presented to Texas’ Commission on Public School Finance. The commission is considering changes to the Texas education system, including how the system is funded.
Currently, a large share of education spending is funded by local property taxes, with an increasing share coming from state revenues. One important question for the commission is how Texas can reduce its reliance on the property tax.
In my testimony, which is below, I reviewed Texas’ 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. climate and its respective strengths and weaknesses. The state is competitive, largely due to its lack of an individual and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. . But the state is held back by its Margin tax, a complicated gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. . Repealing the Margin tax would move Texas from 13th best among the 50 states on our State Business Tax Climate Index to third best.
My testimony also discussed various ways that Texas could expand its sales tax base to include more goods and more services. This could generate additional revenue to reduce a reliance on the 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. ; however, I cautioned the Commission not to completely eliminate property taxes. Diversity in revenue streams is important, especially to control revenue volatility.