Research: Texas economy would benefit by abolishing property tax

AUSTIN – Texas families would see higher personal incomes and the Texas economy would gain hundreds of thousands of new jobs if the Texas Legislature abolished the property tax and replaced it dollar-for-dollar with a revised sales tax, according to a report issued today by the Texas Public Policy Foundation.

“The property tax is an unfair and inefficient way to fund government,” said Dr. Arthur Laffer, internationally renowned economist and lead author on the report. “Texas would gain hundreds of thousands of new jobs and tens of billions of dollars in personal income just by abolishing the property tax and replacing it with a revised sales tax.”

The research found that replacing the property tax with a revised sales tax would, over a five-year period, increase Texans’ personal incomes by between $21.3 billion and $52.1 billion, while creating between 127,700 and 312,700 new jobs.

“Empirically, property taxes impose a larger burden on a state’s productive sector than a sales tax,” Laffer said. “Consequently, property taxes create a greater drag on the economy than a sales tax to raise the same amount of revenues. This larger cost created by property taxes compared to sales taxes creates a tax reform opportunity for Texas.”

The report reviews four options through which the Texas Legislature could achieve a statically revenue-neutral replacement of property taxes with sales taxes.

If the legislature were to maintain the current sales tax base, the sales tax rate would need to increase to around 14.5 percent. Applying the sales tax to all property at the time of purchase would reduce the rate to 12.5 percent. The rate would drop to 9 percent if the sales tax base were expanded to cover all services taxed by at least one other state, and to 6.5 percent if the sales tax base is the total value of goods and services in Texas’ economy, with adjustments to remove non-taxable items (such as government purchases).

“As homeowners begin to receive their 2009 appraisal notices, they are confronted with another sharp increase in their property taxes,” said Talmadge Heflin, Director of the Foundation’s Center for Fiscal Policy. “The most viable option the Texas Legislature has left to provide property tax relief is to repeal the property tax and fund state and local governments through a revised sales tax.”

The report, “Enhancing Texas’ Economic Growth Potential Through Tax Reform,” was produced for the Foundation by Arduin, Laffer & Moore Econometrics, and is available on the Foundation’s website, www.TexasPolicy.com.

Dr. Arthur Laffer is a Senior Fellow of the Texas Public Policy Foundation, and a partner with Arduin, Laffer & Moore Econometrics. Laffer was a member of President Ronald Reagan’s Economic Policy Advisory Board for both of his terms. His economic acumen and influence in triggering a world-wide tax-cutting movement in the 1980s have earned him the distinction in many publications as “The Father of Supply-Side Economics.”

The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation. Heflin served 11 terms in the Texas House of Representatives and chaired the House Appropriations Committee in 2003, leading the Texas Legislature’s successful efforts to close a $10 billion budget deficit without a tax increase.

The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin, Texas.

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