Abbott, Patrick, Bonnen Shock with Late-Session Tax Swap Proposal

posted on 4.15.2019

- 16% Hike in Sales Tax for “Lasting” Property Tax Relief

With about 45 days left in the legislative session, the state’s top elected officials – all Republicans – last week dropped a bombshell of a proposal on lawmakers that would hike the state sales and use tax rate by 16 percent in order deliver “lasting” property tax relief. The move was a concession that their proposed revenue caps on local governments will only slow the rate of property tax growth, not actually cut property taxes.

Gov. Greg Abbott, Lt. Gov. Dan Patrick and Speaker of the House Dennis Bonnen said their plan would “buy down property tax rates for all Texas homeowners and businesses” by convincing voters to hike the state’s portion of the sales tax from 6.25% to 7.25% - a 16% increase and a state tax rate that would match California’s as the highest in the nation.

Adding the 2% sales tax levied by cities and counties, the total Texas sales and use tax would total 9.25%, a 12% overall increase and a total tax rate that would be the third highest in the country.

The hike would generate an estimated $5 billion per year, and lawmakers are expected to propose that 80% be directed to property tax relief with the remainder funneled into educational programs.

The Process
First, however, they need two-thirds approval from the House and Senate which appears unlikely at this point.  The Republicans would need to convince 17 House Democrats and 2 Senate Democrats to go along, but because the sales tax hits lower-income Texans much harder than middle- and upper-income Texans, peeling off that many Democratic votes appears unlikely.

Then, a majority of Texas voters would have to approve the hike in a constitutional amendment election this November.  A recent University of Texas/Texas Tribune poll showed 74% of Texas voters oppose hiking the sales tax to boost school funding, but would they see an exchange for lower property taxes differently?

Criticisms and Alternatives
Democrats, instead, prefer hiking the homestead property tax exemption as a way of cutting school property taxes which have soared as GOP legislative leaders have slashed the state’s share of public school funding over the past decade.  Such a move would not require a constitutional amendment. 

Some legislative proposals would hike the current $25,000 homestead exemption to $50,000 or even $100,000.  One would go as high as $300,000 under certain circumstances.  All would require an infusion of new state dollars into public schools.  Yet another proposal would expand the sales tax base by eliminating exemptions for several personal and professional services currently exempt, such as automotive repair.

The business lobby generally opposes hiking the homestead exemption because it wouldn’t benefit their businesses.  Business interests also assert that renters would benefit from a property tax rate cut, but not a homestead exemption increase.

Critics, however, point out that the GOP-dominated Legislature itself has created the current property tax and school funding crisis by diluting the state’s main business tax it established in 2006 in order to lower the school property tax burden on homeowners. It originally was projected to generate $7 billion per biennium, but now produces just half that amount.

In that 2006 special session, lawmakers reduced school property taxes by one-third, but most property owners say they never saw the cut because valuations increased.  The Abbott-Patrick-Bonnen sales tax scheme would buy down property taxes by 16 percent. Even combined with the separate but related effort to impose property tax revenue caps on school districts, property owners will see their tax savings evaporate in about two years, tax experts say. Few Texans will consider that a “lasting” impact.

Still others note that a homeowner-centric property tax cut is justifiable because businesses are still reaping the benefit of federal tax cuts which dropped the marginal corporate tax rate from 35% to 21%.

And as for renters, advocates for a homestead exemption hike argue that landlords will pocket the savings and blame further rent hikes on increasing demand as cities throughout much of the state continue to grow in population.

Finally, the state’s sales tax revenue has declined about eight times in the past 20 years.  What lawmakers do for school funding when the next downturn hits is anybody’s guess, but most people figure their target will be reducing funding. That, in turn, will force property taxes higher as voters will likely choose to keep their schools open.

What Happened to the $9 Billion Revenue Boost?
None of these tax proposals imperils the Legislature’s bicameral effort to pour most, if not all, of the $9 billion in additional state revenue generated by the booming state economy into public schools and revamping the state’s school finance system to lessen the property tax burden.

But they do reflect the reality that revenue cap plans will shave less than $100 a year off the tax bill for a home worth $200,000, a small savings that will disappear as home values continue to rise.

Moreover, they reflect the fact that the state’s tax system, reliant primarily on sales taxes and property taxes, may well be due for a third leg to balance the stool: an income tax. That, too, would require a vote of the people and more political risk than any lawmakers appear willing to take.

With an income tax off the table, lawmakers at this point see only two paths to delivering some measure of property tax relief that is significant enough for property owners to appreciate, even for just a couple years. Whichever path they ultimately select will undoubtedly figure heavily in the 2020 general election races that will kick off just when the tax cut sheen evaporates.

Questions? Contact TAB’s Oscar Rodriguez or call (512) 322-9944.

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