by Vance Ginn
Fairness, like beauty, is in the eye of the beholder. This popular sentiment is certainly true in a free market where prices are determined by buyers and sellers instead of a third party picking winners and losers. Unfortunately, the real estate market in Texas is overly politicized with questions over fairness from property taxes.
By commercial property owners appealing the appraised value of their property and having it reduced substantially to lower their tax liability, the property tax burden in Texas has shifted from commercial property owners to homeowners and has become far too politicized in the process. Although increasing transparency in the property tax system with mandated reporting of the sales price of a commercial property is an option, there is a better alternative to avoid this issue entirely: Abolish property taxes.
Abolishing property taxes would eliminate an inefficient tax system that distorts property-related decisions, which impedes the life-blood of a well-functioning economy.
The authors of a Texas Public Policy Foundation study titled “Enhancing Texas’ Economic Growth Through Tax Reform” find that property taxes are “less stable than consumption taxes; create larger economic distortions; are less related to taxpayers’ ability to pay; are costlier and more complicated to administer; and discourage capital intensive industries from moving to Texas.” Property taxes place undue burdens on property owners, primarily discouraging investment in private property — a key to economic prosperity.
To raise lost property tax revenue, the Legislature should consider broadening the base and increasing the rate of the state’s sales tax from its current 6.25 percent.
The foundation’s report stated, “Keeping the sale of property in the sales tax permits the total sales tax rate to be lower (due to the broader sales tax base) while still removing many of the adverse impacts from the property tax. Alternative tax rates and tax bases that include property sales in the sales tax base are: 15.7 percent if the current sales tax base is used; and 11 percent if all services that are taxed in at least one state are taxed in Texas.”
This study also finds that switching from a property tax to a consumption tax system could increase personal income in Texas by as much as $3.7 billion in the first year and by at least $23 billion over five years compared with the current tax structure. In addition, faster economic growth would lead to an average net gain of 231,000 jobs over a five-year horizon.
Increasing property owners’ incomes by eliminating their property tax liability allows them the choice to use these dollars to purchase goods, hire employees, make property improvements and take on other ventures that are more productive than paying a coercive property tax.
The Tax Foundation’s 2014 State Business Tax Climate Index lowered Texas’ ranking to 11th in the nation for its overall business climate, which was largely from the state’s property tax ranking falling three spots to number 35. Abolishing this tax will not only free up dollars in consumers’ pockets, but it will also allow the state to increase its competitive edge over other states.
By shifting the state’s property tax system toward one based on consumption, the Legislature would eliminate distortionary effects and increase economic prosperity. Instead of trying to make a tax system more “fair”— and more politicized — property taxes should be abolished to allow Texans the opportunity to reach their full potential.
Vance Ginn, Ph.D., is a policy analyst for the Center for Fiscal Policy with the Texas Public Policy Foundation, a nonprofit, free-market research institute based in Austin. He may be reached at firstname.lastname@example.org.