Slowing Texas economy underscores need for property tax reform

Photo by John Jordan

Weighed down by Obamacare, global economic uncertainty and falling oil prices, the Texas economy is beginning to show signs of a slowdown.

Over the past six months or so, the state’s labor force, which consists of both the employed and the unemployed, has experienced something of a decline. According to the Bureau of Labor Statistics, more than 170,000 people exited the labor force from February to August, reversing what’s been an otherwise impressive trend that had held for almost a decade.

More people exiting the labor force has also meant a drop in Texas’ labor force participation rate, which measures the percentage of people working or actively seeking work. As of August 2015, that measure had fallen to 63.4 percent, still better than the U.S. average but worse than its peak of 69.4 percent in 1995.

The Lone Star State’s labor market woes are a good reminder that, especially in today’s topsy-turvy world, Texas needs the right policy prescriptions in place to have the best chance at economic success. And while Texas has done well in the past to enact pro-growth policies, there is still room for improvement — especially when it comes to reforming the state’s onerous property tax.

Property taxes in Texas, which are levied exclusively at the local level, are notoriously tough on homeowners and businesses alike. The Tax Foundation’s latest national rankings suggest that the Lone Star State has the 14th worst property tax system in the nation, costing every Texan about $1,600 annually. That’s money that could otherwise be used by Texas businesses to hire workers, and by consumers to employ Texas services. In other words, that’s money that could be improving the state’s labor force participation rate. And it’s a burden that’s growing quickly.

The Texas Comptroller’s 2012 report Your Money and the Taxing Facts shows that from 1992 to 2010, local property taxes outgrew population by a factor of almost 5 to 1. Against the backdrop of this sort of frenzied growth, it’s easy to see how property taxes have become the single largest tax in the land, bringing in almost twice as much revenue as the next biggest tax (the state sales tax).

Real reform is an absolute must if Texas is to remain as America’s economic engine. The status quo—which has come to be as a result of runaway local government spending and debt—simply won’t do.

To fix a broken system, the next Texas Legislature should focus on two key goals: providing immediate relief and pursuing lasting reform.

In the short term, the goal ought to be to contain fast-growing property tax bills by capping how fast property tax revenues can grow from year-to-year. Enacting a property tax revenue limitation will go a long way toward protecting taxpayers and bringing stability to Texans’ already weighty tax bills.

Over the long haul, the goal should be to eliminate Texas’ property tax system entirely and replace it with revenues from an expanded sales tax. This approach, laid out in detail in a 2012 study commissioned by the Texas Public Policy Foundation, offers a multitude of advantages, including massive job creation and a boom in personal income. Additionally, private property rights would be greatly enhanced under this kind of tax swap as Texans are finally freed of government coercion and are able to own their homes and businesses instead of “renting” from the state.

To their credit, the 84th Texas Legislature did make property tax reform a priority in the last legislative session, passing bills to increase the homestead exemption for school districts, which will go before voters in November, and creating a supermajority requirement for local governments wanting more tax money.

Still, stronger and more lasting reforms are needed to halt the unsustainable growth of Texas’ property tax and to give the economy its best chance to grow and create jobs. It’s critical that the next Legislature make such reforms an absolute priority.

Disclosure: The Texas Public Policy Foundation is a corporate sponsor of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.

James Quintero

Director, Center for Local Governance, Texas Public Policy Foundation

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