Big Three’s Sales Tax/Property Tax Swap Scheme Tanks

posted on 5.06.2019

-Lawmakers on Right & Left Balk at 16% Hike in Sales Tax

The grand plan to deliver “lasting” property tax relief to Texans by hiking the sales tax rate 16% tanked this week after taking fire from every corner of the political landscape, despite being advanced prominently by Governor Greg Abbott, Lt. Governor Dan Patrick and House Speaker Dennis Bonnen.

The plan’s death was as stunning as its birth which came with no warning more than half-way through the session and was championed by state’s top elected officials – all Republicans – much to the surprise of rank and file lawmakers in both parties.

Structured as a proposed constitutional amendment requiring two-thirds of the House and Senate to advance to voters this November, the Big Three couldn’t muster the votes in either chamber. Polls showed strong opposition from likely voters.

The highly regressive nature of the sales tax – meaning that lower-income people are harder hit by the tax than are upper-income people – is generally anathema to Democrats.

Many Republicans, meanwhile, opposed the idea of raising one tax that hits everyone to some degree with a mere promise of lowering another tax that would benefit just some Texans.

Renters couldn’t be assured of lower rental costs because landlords wouldn’t be forced to pass through their tax savings. Plus, rental rates are driven more by supply and demand, not tax policy. Senior citizens – reliable voters – see their school property taxes frozen when they reach 65, so they would have no incentive to raise their own sales tax when they wouldn’t see a property tax reduction.

The Legislative Budget Board reported last week that the swap wouldn’t benefit Texans earning less than about $150,000 per year. Further, some data runs circulating among Republicans demonstrated that Texans with homes valued at $700,000 or more wouldn’t even start to benefit from the swap.

Senate Says “No” to Tax Swap, House Tables
The Senate weighed in this week with a firm “no” on the tax swap question when they advanced the school finance reform bill minus any linkage to new revenue that would be generated by a sales tax hike.

Instead, Senators opted to recommend establishing a new “Tax Reduction and Excellence in Education” Fund to pay for future property tax relief. The TREE Fund would divert $2.3 billion in oil and gas severance taxes from the Rainy Day Fund, $300 million from the new sales tax on online purchases authorized by a recent U.S. Supreme Court decision, and $300 million from the Available School Fund operated by the General Land Office which leases state-owned lands for the benefit of public education.

With the tax swap dead in the Senate, the House chose to table the legislation advancing a tax swap until the 2021 legislative session.

Not the Last Word
While the plan may not resurface again for a couple years, if then, this won’t be the last Texans will hear of it. The tax swap proposal will figure largely in 2020 political campaigns, and lawmakers will likely begin exploring other ways to address the growing burden of sky-high property taxes on homeowners.

Those ideas could include the Senate’s TREE Fund, a straightforward hike in the homestead exemption, a wholesale review of existing sales tax exemptions for potential repeal, or something else entirely. The only certainty is that cutting property taxes significantly and permanently is expensive and someone has to pay that price.

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

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