Debates on school finance in recent years have been driven as much by tax relief as by education reform. Indeed, from the top of the panhandle to the southernmost tip of Brownsville, it seems legislators have been talking property tax cuts forever.
Don’t get me wrong. I am all for tax cuts. Letting people keep more of the money they earn benefits everyone. Tax reductions frees up more money for culturally productive purposes – job creation, thrift, charity – and the things we want individually – leisure, retirement, and the like.
For the last two years, lawmakers have been suggesting forcing as much as a 50-cent reduction in ad valorem school taxes. Such a reduction in Texans’ tax burden would be a boon to our economy; benefiting all of us. However, this is true if, and only if, such a reduction were really a reduction, achieved through fiscal restraint and greater operating efficiencies.
But the current debate is decidedly not about a tax cut, rather a tax shift. What we must understand is that while property tax cuts sound great, they mean nothing if being replaced by, at best, something neutral. They can be devastating if replaced by something worse.
Here’s why. Given the current debate – adding new monies, holding harmless all school districts, and the like – we cannot find both new funds and buy down the locally-levied ad valorem rate by 50 cents. Such an effort would require a shift not to existing taxes, but a whole new tax.
Only available to lawmakers are taxes which are proven job-killers and income-depressors: the income tax, the payroll tax and the business activity tax.
Whether it is a tax on productivity (like the income tax), job creation (like the payroll tax), or on economic development (like the business activity tax) the fact is that all three of these options will have long-term, detrimental effects on Texans individually and as a whole.
Politically, such an effort is waste. What we know historically is that when politicians perform a tax shift, no one is happy. The group receiving the “cut” won’t believe it is real, since the tax doesn’t go away. Meanwhile, the people paying the bill for the new tax have a whole new reason to despise the lawmakers who imposed it.
But there are winning solutions. It is possible to reduce ad valorem tax rates by a significant amount without doing harm to our economy. By broadening existing consumption taxes, it is entirely possible to buy down the property tax rate by 25 cents. That is a significant property tax cut, and no new people are made mad. Add to that the ability of the legislature to statutorily dedicate future surpluses buy-down the tax rate to that vaunted 50-cent level, and everyone wins.
The underlying problem with property taxes is that they have risen so rapidly in recent years. For most Texans, property taxes are 50 percent higher than in just 1990, but there have not been corresponding improvements in academic results. If the education bureaucracy continues their spending frenzy unabated and with nothing to show for it, true tax reductions will never take place. A key element of tax reform must include strong fiscal discipline.
Texas’ economy is far more important than political rhetoric. We must not let misguided, if well intentioned, political promises do irrevocable harm to the state economy. It just isn’t worth it.
Byron Schlomach, Ph.D., is the chief economist at the Texas Public Policy Foundation.