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Texas Is On The Cusp Of Trouble


The Texas Miracle—a state now with 30 million inhabitants, putting the heat on California as the greatest place people have ever flocked to in pursuit of the American Dream. For years, Texas has been the picture of mass prosperity. Homeownership within everyone’s grasp (and a stellar housing stock). Jobs galore. Entrepreneurial opportunities everywhere. Zillions of children.

A secret to Texas’s success has been, without question, its lack of an income tax. A zero-rate income tax—ask Florida, Washington, Nevada—is a business magnet. States with no income taxes can have other forms of taxes that are on the large side. The property tax is the big tax in Texas. It has gotten large enough to become a clear problem. If Texas does not address itself to this problem and, crucially, solve it correctly, the Texas miracle will be in jeopardy.

Property taxes in Texas, for households for example, generally run near 2 percent of market value. A $300,000 house means a $6,000-plus yearly tax bill in that scenario. In tax disaster areas like New Jersey, such a bill is not exceptional. But in most places across the nation, property taxes are comfortably below this level.

Texas, therefore, has felt popular pressure to “do something” about property taxes over the years. The main something has been a bad thing—coming up with more exemptions that clear out portions of the property value from tax. There is a homestead exemption, a senior citizens’ exemption, and a veteran’s exemption. In the currently meeting Texas biennium, one legislator wants to tack on a further exemption for large families.

The major legislation pending has it that the exemptions will increase big time and rates will be cut slightly, and the state will send additional money to localities and school districts. Big increase in exemptions, minor decrease in rates, with state money inflated by the Texas boom covering up any shortfalls—this is the current plan.

The finances go in the wrong direction. Texas has high property tax rates. Adding on exemptions all but guarantees that the rates, which are the problem, will not come down. Exemptions mean less revenue with no change in the rate. The state gets high rates with less revenue because of the narrower base.

The straight way to do it is to have low rates with no exemptions. If rates were, say around 1 percent (as is perfectly common including in zero income tax states), the clamor for exemptions, from the homesteaders, the seniors, the veterans, the big families, would vanish. It is also likely that revenue from each increment of the tax base would increase.

But the legislature has not opted for this solution. Over the years, as now, it has dealt with the problem of high rates by expanding exemptions and adding new ones. Therefore, the state should realize that it has to do two things, both close loopholes and lower rates. Lower rates would generate lower revenues in the short term for sure, and the curtailing of the exemptions would enflame classes of owners that have counted on and in many cases lobbied for their benefit.

That’s a political mess. Instead of getting serious about property tax reform, over the years, and at present, Texas has let rates hang high while it loaded up on exemptions. Rates, whatever superficial cuts in current legislation, remain sticky high—because of all the exemptions—and this has served to render yet more valuable still further expansions in exemptions. Everything is moving along the wrong path.

If you’re Illinois faced with such a predicament, you flake out. You ignore the problem, vote your unions a pay raise, and call it a day. But as Texas you are not a modern flop. You are the chosen destination of the latter-day American Dream, in a certain sense the very hope of the world. The seriousness of the matter is profound. If you solve the problem, Texas will continue to captain America. If you don’t, or do something lame, you will permit a problem that is becoming nasty to become embedded even more.

The legislature is currently playing ball with exemptions and is backing off from really touching rates. Let’s say property prices balloon as they have been in this country, and that the exemption expansions take the rate up from near to 3 percent. Pay $15,000 per year on a $500,000 home in Texas?

It’s OK—just be part of a favored constituency and you can tamp that amount down—is a terrible counsel. Try saying that to business. Investors will see the high rate, as well as the games one has to play to get it less applicable in particular circumstances, and say this is no place to invest broadly. A state can go the Ohio/Intel
route—look at all the businesses we got through tax abatements!—or a state can do it for real. Texas has boomed because, more than just about anywhere else, it has had low (zero on the income tax side) and simple taxes and let business come in and make decisions irrespective of government breaks, hiring tons of people in the offing. The flood of business investment, real and uninvited, has been epic.

How hard is it to lower a rate while easing out exemptions? Easier than in the future when there will be more exemptions on current trends. Property values are up—this is the perfect time for a lower rate and cuts in exemptions. The opportunity to reduce a rate with a negligible revenue loss happens to be right now. If the legislature has the wisdom to dismiss the exemption lobbying and cut statutory property tax rates baldly, the Texas miracle has an outstanding chance of continuing apace. If not, the pathetic kind of braggadocio Ohio is prone to could be its fate (to say nothing of Illinois/New Jersey), as its population and all the other metrics stagnate. The further matter is that at this juncture, the nation, the world is running out of exemplars, places where anyone can pursue the dream. Many many millions, one might dare say globally, are counting on Texas. It should have low tax rates with no exemptions.

See our recent book on the history of the income tax—with chapters on how state property taxes have risen because of the federal income tax, Taxes Have Consequences: An Income Tax History of the United States.

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