The Least-Worst Way to Under-Invest

Dick Lavine, Senior Fiscal Analyst at the Center for Public Policy Priorities

Tax cuts are the wrong priority – Texans would be better served if lawmakers increased investments in public services. However, as I told members of the House Ways & Means Committee late Tuesday night, if lawmakers feel they have to cut taxes, then increasing the school homestead exemption (SB 1/SJR 1 by Sen. Jane Nelson) is the way to go. Yes, that’s right. I just said that one tax cut plan is preferable to another. But as my colleague Eva DeLuna Castro says, I’m really saying which is the least worst way to under-invest in schools, college access and health care systems

The House has voted to cut the sales tax rate, while the Senate has voted to increase the homestead exemption from school property taxes. Proponents of the sales tax cut argue that it would reduce a tax paid by all Texans, while the benefit of a homestead exemption would be enjoyed only by homeowners.

However, the savings of a sales-tax cut would not be evenly distributed.

First, 40 percent of the savings from the sales tax cut would go to businesses – not to individual consumers. For households, the benefit would tend to differ according to household income, which determines consumption. The tax equity note prepared by the Legislative Budget Board for HB 31 shows that households in the top income group would receive about four times the savings of the lowest-income households, and twice as much as households in the middle of the pack:

  • $48 for a household with income below $34,000
  • $97 for a household making between $62,000 – $94,000
  • $209 for a household making over $147,000

The flat-dollar homestead exemption offered by school districts spreads the benefits more evenly among homeowners of all income levels by giving every homeowner in a school district the same reduction in tax liability. Increasing the homestead exemption would also increase the state’s share of education funding by swapping state General Revenue for local property taxes, even though it doesn’t increase net revenue to schools.

You can watch my testimony below:

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