The One Reform Texas Needs More Than Anything

The One Reform Texas Needs More Than Anything
Source: AP
Source: AP

Fairness, like beauty, is in the eye of the beholder. This popular sentiment holds true in the free market, where prices are determined by buyers and sellers instead of by a third party picking winners and losers. Unfortunately, the real estate market in Texas has become overly politicized, leading to questions about the fairness of its property taxes.

Commercial property owners have been appealing the appraised value of their property, attempting to have it lowered. In some cases, the final value of the property has even been placed below their eventual sales price, to lower tax liability. Thus, the property tax burden in Texas has shifted from commercial property owners to homeowners. Although increasing transparency in the property tax system by mandating the sales price of a commercial property be reported is an option, there is a better alternative to avoid this issue entirely: abolish property taxes.

Appraisals of commercial property are nothing more than educated guesses, formulated before a final sale assigns a market value. Abolishing property taxes would eliminate an inefficient tax system that distorts property-related decisions and hinders the proper functioning of the economy.

A Texas Public Policy Foundation study found that property taxes are "less stable than consumption taxes; create larger economic distortions; are less related to taxpayers’ ability to pay; are more expensive and more complicated to administer; and discourage capital intensive industries from moving to Texas." Property taxes place undue burdens on all property owners, primarily discouraging investment in private property — a key building block of economic prosperity. To raise lost property tax revenue, the legislature should consider broadening the base and increasing the rate of the state’s sale tax from its current rate of 6.25%.

The report continues to say that, "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% if the current sales tax base is used; and 11.0% if all services that are taxed in at least one state are taxed in Texas." 

The study also finds that switching from a property tax to a consumption-based 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 to use the additional dollars to purchase goods, hire employees, make property improvements, and take on other more productive ventures.

The Tax Foundation’s 2014 State Business Tax Climate Index lowered Texas’ business climate ranking to number 11 (in the nation,) which was largely due to the state’s property tax ranking falling three spots to number 35. Abolishing this tax will not only increase financial resources for consumers, but it will also increase the state's competitive edge on a national level.

By shifting the state’s property tax system to one based on consumption, the Texas Legislature could eliminate distortionary effects and increase economic prosperity. Instead of trying to make a tax system more "fair," property taxes should be abolished and Texans should be given the opportunity to reach their full potential.