Texas Gov. Greg Abbott (R) wants the largest tax relief in state history as the state has a record $33 billion surplus. And he has even gone as far as to say that he wants to “eliminate your property taxes.”
The state is blessed to not have a personal income tax but has the sixth most burdensome property tax system in the country from mostly progressive cities overspending across the state. So substantial property tax relief is welcome.
While the Texas Legislature wasted that tax relief opportunity during this year’s regular session as they increased spending by the most in the state’s history, Abbott immediately called a special session after sine die to address it.
But the process has stalled.
Abbott’s approach uses compression. This allocates state surplus dollars to buy down school district maintenance and operations property taxes that are nearly half of the property taxes collected by local governments across the state. And this process would continue each session until those taxes are zero. This is mostly what has been passed by the House, but Lieutenant Governor Dan Patrick (R) disagrees as he is also pushing raising the homestead exemption.
It’s great to see that the discussion is how to provide the most property tax relief in the best way, but the economics and past efforts prove that compression of school district M&O property taxes is the best path being discussed to provide all families with relief and end these taxes quickly.
Based on historical revenue growth and keeping spending in check to less than the rate of population growth and inflation, these school taxes could be eliminated within a decade resulting in the state paying 100% of public education.
Those taxes funding public schools would be replaced mostly by state sales taxes based on the current state-determined school finance formula while relieving families who are homeowners, renters, and employers across the state of burdensome property taxes. These benefits support increased economic growth, more jobs, and lower prices.
Patrick has pushed back against Abbott’s plan with a concern that sales taxes couldn’t adequately fund schools, especially in the event of an economic downturn. He believes that homestead exemptions are a more suitable form of relief even as they would need a constitutional amendment.
Here’s the problem with that.
A Texan’s primary residence called a homestead can have its appraisal go up by at most 10% each year, and without tax rate changes, any homestead exemption relief is temporary when that fixed amount is exceeded, which can be within a year or two. And with Abbott’s goal of eliminating property taxes, a dollar amount for a homestead exemption can never end school property taxes. But compression is a permanent solution as it continues to buy down rates until they are zero.
The Texas House has already passed a bill this special session that matches the call by Abbott for compression of $12.4 billion for 16.2 cents per $100 value of property in rate reduction. It wouldn’t be the largest tax cut in Texas history as that would need to be about $21 billion in inflation-adjusted dollars to provide a 25-cent compression, but it’s a good start.
Considering Dallas’ independent school district (ISD), the House’s bill would bring the rate closer to zero faster than the Senate’s $12.1 billion effort of hiking the homestead exemption by $60,000 to $100,000 and providing a 10-cent compression.
And while the Senate’s version would provide more relief to homesteaders, it would pick them as winners and everyone else as losers as the burden of government spending on public schools funded by the remaining property taxes would be shifted to everyone else. Families who rent or own a business wouldn’t benefit from raising the homestead exemption, thereby hurting many families in the process.
The fear of shifting more to sales taxes through surplus funding is overblown.
Sales taxes aren’t much more volatile than property taxes, better match one’s ability to pay based on economic conditions, and typically rise faster during expansions. Even when there’s a downturn, better prioritizing spending should be the top priority, and the state will likely have nearly $27 billion in the rainy day fund.
At the end of the day, property taxes are immoral as it means that homeowners can never have their right to truly own their home as they are forced to rent forever from the government. And their use of funding schools through the Robin Hood system has been under legal scrutiny many times.
Texas can’t expect to rest on its laurels and remain competitive when other states are spending and taxing less. The Lone Star State shouldn’t waste any more time in spending less and providing maximum compression to put the state on the fast path to no school M&O property taxes. This would provide substantial benefits to all families whether they are homeowners, renters, or employers. And ultimately, Texans should be able to stop renting and start owning with elimination of property taxes.
Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC, host of the Let People Prosper podcast, senior fellow at Americans for Tax Reform, and chief economist or senior fellow at multiple think tanks across the country. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. He resides with his family in Round Rock, Texas. Join the thousands who follow him on Twitter for daily, insightful commentary @VanceGinn.
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