Conservative Rs Seek to Zero Out School Property Taxes
Fri December 7, 2007 9:36 am

Yikes! I worked all night on a post about the Phil King proposal to eliminate school property taxes and replace them with an expanded sales tax, and the blogger software, which is supposed to save automatically, didn't save any of it except the headline. Trying again:

King made this case in his press release:

"I believe it is time to admit that the school property tax system just cannot be fixed. The courts have tried, the legislature has tried, school districts and appraisal districts have tried. The problem is that we are trying to correct a fundamentally flawed means of financing public schools. Texans are tired of dealing with this broken model, and it’s frankly time to start over."

"A plan to fully fund public education can be structured in a way that protects our low income citizens, benefits our schools and strengthens our economy. Consumption taxes are fair, predictable and will spread the cost of education over the economy at large. Abolishing school property taxes would dramatically reduce mortgage payments, put real money in all property owners’ pockets, and provide a needed boost to the building and real estate industries. Lease rates would go down. Some foreclosures could be averted. Even the underground economy, as well as those here illegally, would be forced to help finance our schools."

I agree with King that the school property tax system "just cannot be fixed." The repeating cycles of tax cuts that become eaten up by rising property values is not tenable. Sooner or later, the state will be back in the courthouse over the lack of local discretion. But I emphatically disagree with King that, "A plan to fully fund public education can be structured in a way that protects our low income citizens, benefits our schools and strengthens our economy." Protects our low income citizens? It's going to be hard to get to the $15.4 billion in new revenue necessary to replace the property tax without eliminating the current exemptions for taxing food and food stamps, prescription and over-the-counter drugs, and residential electricity. Fully fund education? Hah. Not while Tom Craddick sits as speaker. Strengthen the economy? This is the biggest worry. If the Legislature starts tampering with longstanding exemptions and exclusions from the sales tax, they could do real harm to the state's economy.

There are only two possible solutions to finding the revenue to fund the elimination of property taxes: a personal income tax, which would make the most sense but is politically unpalatable, or an increase in sales tax revenue. (Some have suggested a state property tax at a low rate, but the rate will not stay low.) Similarly, there are only two ways to find the necessary revenue from the sales tax: raise the rate or broaden the base. Whichever way the Legislature chooses, Texas will be far out of step with other states. As best I can tell, the sales tax brings in around 3 cents per penny per year, so a 5-cent increase would be necessary to replace property taxes. Texas would have by far the state's highest sales tax. This could discourage companies from moving to or expanding in Texas. It could make the state less attractive for conventions. Broadening the base, by eliminating the exemptions and exclusions, could put Texas businesses at a competitive disadvantage with those in other state, particularly in the manufacturing and professional services sectors. Anyone who was around ten years ago, when Paul Sadler's select committee went through all the exemptions and exclusions in an effort to fund Governor Bush's proposed property tax cut, will remember that there is a reason for every exemption and exclusion.

It has been said that taxation consists of the art of so plucking the goose as to obtain the most feathers with the least hissing. As I go through the list of possible sales that are not taxed now but could be fair game for Phil King and his allies, consider how much hissing the various possibilities could produce.

The total amount of existing exemptions and exclusions is $28.7 billion. Exemptions account for $24.3 billion of this total, exclusions the rest. These are not loopholes. They are policy decisions that were made for a reason. In some cases, the reason was political (such as not taxing food), but more often the reason had to do with advancing economic development.

Of the exemptions, $8.8 billion is for sales that are already taxed outside the sales tax. They include crude oil and oilfield services, natural gas, aviation fuel, motor vehicles, motor fuels, cement, sulphur, and insurance premiums. These are off-limits; it is hard to imagine the Legislature repealing the exemptions and engaging in double taxation.

Another $11.2 billion of exemptions is for manufacturing: raw materials, industrial machinery, industrial utilities, and packaging. These exemptions exist in almost all states. Repeal them in Texas and we will lose coveted manufacturing jobs. Old refineries are particularly vulnerable; the Sadler committee heard testimony that industrial electricity represented 50% of their costs.

The remaining exemptions are mostly for necessities: food and food stamps, prescription and over-the-counter drugs, residential utilities. Agriculture, which gets more tax breaks than anybody, doesn't have to pay taxes on ag supplies and equipment (including seed). Water has an exemption worth $250 million. I think bottled water should be taxed and tap water should not be -- but it's easy to demagogue taxing water.

Let's move on to the exclusions, which are worth $5.4 billion. Sales taxes apply only to tangible property, so the biggest exclusions are definitional, for property that is not tangible. These include stocks and bonds and real estate. This is a plump old goose, tax the rich and all that, but watch out for the hissing. It isn't just the rich who have stocks and bonds; most working folks have 401K plans, and they aren't going to like it when they convert investments to cash and discover that they owe the state 6.25% of their life savings. The same goes for real estate. The tax on the sale of a $250,000 house is $15,625. This takes a bunch of money out of the housing market.

I should acknowledge here that the negative effect of the broadening of the sales tax on taxpayers must be measured against the benefits from the elimination of school property tax. The net effect on businesses and families can only be calculated on a case-by-case basis. Still, it is clear that finding $15.4 billion in new revenue is not going to be easy and will extract a substantial political cost. Even worse is the danger of an economic detriment to the Texas economy.

Many services are also excluded from the sales tax, including all professional services. Doctors, dentists, lawyers, accountants, architects, advertising firms, consultants of all kinds, counselors, computer programmers, and financial and real estate brokers all pay no sales tax on their fees. The undesirable result is that the fastest-growing sector of the economy, which is making money hand over fist, provides no revenue for the state. This makes services another fat goose. Lawmakers (most recently David Dewhurst) have looked at taxing professional services from time to time, but they haven't done it. One reason is that Florida attempted to do so in the late eighties, and the tax was repealed before its first birthday. Affected groups canceled their conventions in the state. The trouble with taxing services, as the Sadler committee heard, is that clients in urban areas can contract for the services out of state and save 8.25%. Texas firms would lose business to firms in other states. Witnesses from profession after profession told the committee that an income tax would be preferable to a tax on services.

Other services that are excluded from taxation are residential construction and health care. If you tax residential construction, you raise the price of a home by the amount of the tax. If you tax health care, you get to hear opponents call it a sick tax. If you tax funerals, you get to hear opponents call it a death tax. Child care won't be well received either.

The bottom line: Even though Texas exempts and excludes sales that amount to almost $30 billion, these activities are not easy targets. The arguments against repealing the exemptions and exclusions are very strong, resting on economic growth, and the interests aligned against them are formidable. If Phil King wants to tax services, he is going to be taxing Republicans.

The final problem with the Phil King plan is that its ultimate purpose is not to help state government but to hurt it. Conservatives want high sales taxes because they reveal the true cost of government. Every time you buy a product and have to pay a big sales tax, the chances are you will get mad. Government has been skillful about taxing income; you only notice the tax once a year. The same is true of property taxes. You only notice them on the day the assessment arrives in the mail. But sales taxes are omnipresent. The ultimate object of high consumption taxes is to inspire a tax revolt. This is all about conservative ideology.

Thanks to the Texas Taxpayers and Research Association for helping me get through the numbers and directing me to the information on the comptroller's Web site.

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