Testimony: Texas Policy Options for Tax Reform

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’ tax climate and its respective strengths and weaknesses. The state is competitive, largely due to its lack of an individual and corporate income tax. But the state is held back by its Margin tax, a complicated gross receipts tax. 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 tax; however, I cautioned the Commission not to completely eliminate property taxes. Diversity in revenue streams is important, especially to control revenue volatility.