Texas Tax Reform
April 19, 2018

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.

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A 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.

The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.

A 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.