FAQ: Texas Taxes and Tax Cut Proposals
The House and Senate have different tax cut proposals, generating many questions about what these tax cuts could mean for the future of Texas. Here are some answers to frequently asked questions.
What are the tax cut proposals?
The Senate proposes a $4.5 billion tax-cut package, made up of:
- SB 1, which would cut property taxes through an increased homestead exemption;
- SB 7, which would cut the franchise tax by 15 percent; and
- SB 8, which would exempt businesses that have less than $4 million in gross receipts from the franchise tax.
The House, on Tuesday, April 28, will consider a $4.9 billion tax-cut package, made up of HB 31, which would lower the state sales tax rate from 6.25 percent to 5.95 percent, and HB 32, which would cut the state franchise tax by 25 percent.
Do Texans pay too much in taxes?
The taxes we pay help fund schools, universities, health care, roads, and other public services that benefit all Texans. Texas taxes on average are lower than in much of the U.S. In Texas, state and local taxes paid per capita in 2012 were $3,750, compared to the U.S. figure of $4,423. This ranks Texas 32nd among the states and the District of Columbia. Looking just at state taxes, the Texas per capita ranking drops to 43rd: $1,865 in 2012, compared to the U.S. average of $2,552.
Although Texas is a low-tax state, the regressivity of our tax system means that Texas is not a low-tax state for everyone. A regressive tax system is one in which households with lower incomes pay a greater share of that income in taxes than do households with more income. Texas has the third most regressive state and local tax system of the 50 states.
Which taxes cause the Texas tax system to be regressive?
The Suits Index is one measure of how regressive, or unfair, a tax is. All major Texas taxes are regressive according to the Suits Index.
If the sales tax is regressive, will cutting it make our tax system fairer? If the homestead exemption is a progressive way to reduce property taxes, would increasing the exemption be a good choice?
Although it might be tempting to reduce the sales tax or to increase the homestead exemption, it is far more important to maintain the state’s ability to fund education, health care, college access, and other public services that help Texans move up the economic ladder.
To create a more equitable tax system, the Legislature should establish a systematic review of all tax exemptions and special treatments, such as the high-cost natural gas exemption and Chapter 313 school property tax abatements. Each one of these costs the state hundreds of millions of dollars every year. Two bills to require such a review are HB 1003 and SB 80. In addition, the House should list for consideration HB 35, which would reduce the wasteful $130-million-per-year “prepayment discount” given to retailers who send their sales tax payments to the state comptroller ahead of schedule.
Will tax cuts help the economy?
Tax cuts weaken our ability to make the investments that support the foundations of economic prosperity. The sustainability of our economy depends on a well-educated workforce, healthy and safe communities, well-maintained roads, and other public services. Tax cuts are unlikely to provide Texas with a robust economy, but they will eventually cause harmful cuts to the very services that allow families and businesses to compete and succeed.
 State & Local Government Finance Data Query System. http://slfdqs.taxpolicycenter.org/pages.cfm . The Urban Institute-Brookings Institution Tax Policy Center. Data from U.S. Census Bureau, Annual Survey of State and Local Government Finances, 2012. Date of Access: April 23, 2015.