Which state most strongly supports freedom and prosperity? Texas, of course. That’s why people are flocking to the Lone Star State – which has gained better than 1,000 new residents per day, according to the U.S. Census Bureau.
We gladly welcome these refugees from high-tax states like New York and Illinois, but we need to be sure that Texas remains Texas – and that starts with ensuring we never have an income tax.
Texas is one of only nine states without a personal income tax. Rep. Jeff Leach, R-Plano, supported by Governor Greg Abbott, R – recently took a bold step by filing a constitutional amendment to permanently ban a state income tax.
Rep. Leach noted that his proposal would help keep the Texas Model of limited government strong by “ensuring that Texans can keep and control more of their hard-earned tax dollars in their own pockets.”
Governor Abbott carried that on by noting that “Texans know far better than government how to spend their own money.”
Although no one likes to pay taxes, they are an inevitable part of funding government. The challenge is to develop an efficient tax system that provides necessary revenue while doing the least economic harm. Not all methods of collecting taxes are created equal.
While each tax affects behavior differently, a personal income tax is among the most pernicious because of the negative effects it has on earnings, productivity, and wage gains. Because of these adverse effects, people generally save and consume less. And a personal income tax requires a large bureaucratic apparatus to collect taxes, as we see at the federal level, which results in even higher taxes.
There are much better ways to collect taxes, without incurring such harmful economic effects or enlarging bureaucracy. So how has Texas’ economy performed without a personal income tax?
Texas’ state and local tax burden ranks 5th lowest nationally, according to the Tax Foundation’s latest report, placing it among the best states for taxpayers. Because of the state’s comparatively friendly tax environment, Texas’ private sector economy has surged forward.
For example, Texas’ employers created about one out of every four civilian jobs added nationwide since the Great Recession. Texas has an annual average job creation rate that’s almost twice that of California – the best comparison – and an unemployment rate that’s been at or below five percent (considered full employment) for more than four years – California only achieved this last year. Clearly, Texas is doing something right.
There are major differences among the nine states without a personal income tax compared to the nine with the highest marginal personal income tax rates in the last decade. Regarding the growth rates of population, personal income, and employment, the nine states without an income tax lead the way, and even lead in tax collections growth as more dynamic economies support more taxes – for better or worse.
Texas does, however, have a relatively high (and growing) property tax burden – ranked sixth highest nationwide by the Tax Foundation. This could be from not having a personal income tax in what’s known as the “three-legged stool” of taxation: income, property, and sales taxes. But this high property tax burden overlooks the fact that high taxes are always and everywhere a spending problem.
Economically, property taxes result in less property and wealth. In other words, property taxes are a poor form of taxation and are highly regressive over time because they hit lower income people hard year after year, and those hits compound over time, so a property holder can ultimately never own the property.
Texans need and deserve real property tax relief. While Governor Abbott’s reform plan to slow the growth rate of property taxes is a step in the right direction, the Texas Public Policy Foundation’s relief plan would actually lower property taxes. In fact, for many homeowners, our relief plan would cut property tax bills in half within a decade by eliminating the school maintenance and operations property tax while still responsibly funding education and other budget priorities.
Our plan would support more economic growth and job creation as Texas would move towards a strong “single-legged stool” with a broad-based sales tax. This type of tax system would be the most economically efficient, better match the average taxpayer’s ability to pay, and give people more opportunity to enjoy the fruits of their labor.
The Texas Model is strong, but there’s more that must be done. Other states and D.C. should take notice of what happens in the upcoming legislative session.