Sales taxes vs. property taxes

From Todd Hill at Burnt Orange Report:

Yesterday at a fundraiser in Weatherford, Republican Phil King let it be known that the Texas House has formed a committee to figure out how to abolish the use of personal property taxes to support public education and instead transition to a regressive sales tax.   

. . .

King had this to say to the Weatherford Democrat:

"I am absolutely convinced that my constituents, and frankly, the voters across Texas would rather pay a sales tax when they purchase something than a property tax for the rest of their life," King said speaking by phone Wednesday.

I agree that this is a horrible idea, but not necessarily with Todd's reasons:

A sales tax is a tax on the poor and middle class, plain and simple.  The majority of middle class and poor Texans spend the majority of their taxable income on goods and services.  Considering the heavy tax burdens, and current economic burdens already on this class of Texans, a sales tax would certainly crush what remains of this core block of constituents.  You can't lay the future of Texas public education on the unpredictable peaks and valley's of an economy.  This move would cripple the foundation of Texas public education, which the majority of Texas children attend. 

Is a sales tax necessarily more regressive than a property tax?  Depending on the homeowner's equity and interest rate, property taxes may account for 25% or more of annual housing costs.  Someone who pays 30% of gross income on housing thus may pay 7.5% of his gross income in property tax.  Lower-income households, who often spend much more than 30% of their gross income on housing, are hit even harder.  (Renters pay the property tax, too -- it's just folded into their rent.)

Someone spending 30% of gross income on housing would be lucky to have 50% of gross income left to spend on taxable goods.  Even if the sales tax were jacked up to 10%, such a person would pay just 5% of gross income in sales tax.  Also, sales taxes are more easily avoided than property taxes.

On the other hands, cutting property taxes probably would cause property values to rise.  Current homeowners would benefit at the expense of renters/future homeowners. 

Still, It's not clear to me that sales taxes are more regressive than property taxes.   

This is still a horrible idea for two other reasons.

First, sales taxes mean state funding.  State funding means state control.  Schools have an incentive to be more responsive to students and parents when they are subject to local control.  (They're already subject to too much state and federal control.)

Second, slashing property taxes and raising sales taxes creates perverse incentives for cities and towns.  New residential development becomes a financial burden because it does not pay its own way through property taxes.  Cities become overly dependent on retail, causing them to fight each other for shopping centers while shutting out new homes.  That's arguably what Proposition 13 did to California.  In fact, there's a good argument that Proposition 13 accounts for much of the anti-growth sentiment in that state, which in turn has caused the crippling home prices out there.  I doubt those spending 40% of their gross income on interest-only mortgages are reveling in their low property taxes.   

Comments

[M1EK]

"Renters pay the property tax, too -- it's just folded into their rent"

That's a gross oversimplification. Renters pay what the market demands - landlords charge what the market will bear. Property taxes, inasmuch as they affect profit, do _eventually_ have _some_ effect on supply, and hence, price, but the relationship is very indirect and incomplete.

In other words, I'm a landlord; and there has never been a year when my rent went up about the same amount as my property taxes did. In fact, I just recently re-acquired the rent we were charging back in 2004 - when property taxes on that condo were about 40% less than today.

[M1EK]

By the way, as far as equity goes, there's one very obvious solution - but one we're still stuck without - the income tax. High earners _should_ be paying more for the education of today's children. The property tax and especially the sales tax are relatively poor proxies for wealth and income.

[DSK]

I don't have an ideal solution, but I submit that property taxes in Texas are out of control.
Forget what those taxes are as a percentage of housing costs, what are they as a percentage of gross income?
I'd actually be interested to see what the ratio of median owner-occupied residential property tax to median gross income. The best I can find, from data on city-data.com for Travis County, is 2005 median income and median property tax for houses with mortgages. That comes out to just under 8% (7.9). I don't miss having to pay Travis County taxes this year.
Even in Bastrop County we've seen taxes go up plenty (although the "Perry cut" did actually have a slight effect there).
I think Tennessee's limited income tax is reasonable: only on interest income, with the first $1500-$2500 of interest exempt. Texas should consider something similar rather than increasing business taxes.

[DSK]

I should add that there are interesting rules in Tennessee for types of interest income that are NOT taxable. One notable case is interest from credit unions. Presumably because in that case the money is going directly back into the community (rather than to some guy in NYC who's buddies with the banker next door).

[AC]

"That's a gross oversimplification. Renters pay what the market demands - landlords charge what the market will bear."

Fair enough. Who bears the burden of prop tax, particularly fluctuations, will depend on the market and whether renters or landlords are more sensitive to price changes.

But in the long term, property tax is a cost for landlords, and if landlords can't recoup it, they don't get into or get out of the landlord business. My (oversimplified) point was that some people think that because renters don't make out checks to the tax collector, they don't pay property taxes.

I don't know what to do about the regressiveness of property taxes either. The downside to a state-administered income tax is that the state will inevitably get a lot of control over local expenditures. I don't want the state deciding how much money Austin will have to spend on parks or libraries or roads or anything else.

[M1EK]

The state already does decide most of that - through their power to regulate local property taxes - and an income tax for schools wouldn't affect that kind of spending anyways (school districts being so 'independent' from city/county governments).

I think local control is overrated anyways. The countries with the purportedly best schools are highly controlled at the national level.

[M1EK]

I should clarify:

Localities taxing for truly local needs = fine.

Schooling = non-local need, in my opinion.

There are plenty of ways to make local taxation/spending less regressive - more user fee contributions for suburban infrastructure; more taxation based on size of lot rather than value of home/lot; etc.

But even with the current system, wipe school taxes off the property tax slate and it's probably not big enough to worry about after that.

[AC]

I haven't heard about taxation based on lot size. How would that work?

I could see it creating incentives to subdivide (a good thing), but how would it not be more regressive? Someone on a 1/5 acre lot in Windsor park being taxed like someone on a 1/5 lot in Hyde Park?

[AC]

The more I think about it, I do agree that there's little "local" control over schools left because of TAKS, No Child Left Behind, etc. AISD has sometimes seemd surprisingly immune to citizen pressure. I'm not sure what insulates it . . .

I disagree with funding schools with income taxes, as long as there is a little room for cities to supplement with (small) property tax contributions. If a city wants to buy better schools than average, it ought to have the leeway to do so. I also think it's important to keep them from viewing residential growth as their enemy.

[M1EK]

AC,

I view the income tax as the state's minimum contribution - i.e. if it costs $5000 to educate a kid to the bare minimum in district Y, then make sure that money arrives in district Y from the income tax. If after that, a small amount of extra property tax is levied locally, fine by me.

As for "tax by lot size" - what I mean there is for construction/maintenance of infrastructure which is dependent ONLY on lot size - i.e. maintenance of sewer/water pipes (rather than the flow); maintenance of arterial roadways; etc. On balance, this would result in LOWER taxes in urban areas and higher ones in suburban areas. I'd even argue that some proportion of police/fire/EMS costs needs to be allocated this way (some fraction is due to population, but another fraction is due to area of coverage).

On balance, if you taxed that way, the average poor person would be a lot better off.

Realistically, it would be foolish to call this a tax - because it would piss off people who hear the word and think "bad". Better instead to have the utility's fixed costs be allocated in two parts rather than one - "customer charge" and "lot charge" where "lot charge" starts out as a fixed rate per acre (possibly more for difficult conditions). And, by the way, we'd need to more accurately account for fixed versus variable costs here - I have the suspicion that use charges are subsidizing maintenance which has nothing to do with the number of watts used, for instance.

As it stands, utility customers in small-lot easy-construction East Austin are subsidizing those in the hilly rocky big-lot terrain of West Austin. (This type of thing was one of the first studies on the 'who subsidizes who' question re: suburban sprawl, btw).

(roadways is just until we can enter the utopia where tolling on roads smaller than highways is feasible, or we jack up the gas tax sky-high and redistribute a chunk down to cities for maintenance).

[M1EK]

BTW, I've felt this way about the income tax for schools on both sides of the divide - when I lived in the condo, my property taxes were lower than an equivalent school tax would probably have taken from my income; and now it's reversed. Education of children is a shared responsibility - and taxing based on property value is an asinine way of demonstrating that, since people can have property appreciate underneath them on a very low income - are we to believe their obligation to educate has somehow increased? At least with a rise in income, one could make a much more ethical case that the obligation to educate has risen.

[AC]

Crap. I'm having a bad day. I meant to say "I _don't_ disagree with funding schools with income taxes . . . "

[Chop Chop]

I've always had fantasies about taxing people in proportion to the benefits they receive. For example if police protection costs $1,000 dollars a year and is split between to neighborhoods of equal population, if area A has 10 times the murder rate of area B, then those in area A should pay 10/11 of the taxes. This would create a natural incentive for people to either vote for increased police protection in area B, or move to area B.

We could do the same thing for education, environment, etc. Even defense spending could be charged like an insurance premium: the more you have to defend, the more you have to pay.

I realize that measurements government service would become entwined in politics. Quickly the rich and powerful would have ways of measuring benefits that ensured lower taxes, but its still a dream of mine.

But before RFID and image recognition people thought that user fees for toll roads were pie in the sky.

[Marcus]

I've been here in Austin for 2 years, and I've seen a dozen neighbors who have been in the neighborhood for years get taxed out of their own homes! I come from states with state income tax... why doesn't Texas get it? If everyone paid a 1-2% income tax, it would encourage more property ownership because we wouldn't be unfairly burdening homeowners.