Local governments and schools in Texas rely heavily on property taxes to fund their operations. A bill filed in the Texas House does away with the property tax and replaces it with a Value Added Tax (VAT). Critics believe this major change could cause more problems than it would solve.
Texas has some of the most expensive property taxes in the nation. Tax-Rates.org ranks Texas as number 3 on the list of high property tax states.
House Bill 3770 would abolish property taxes and institute a VAT on “each person in this state who supplies any service or property in the ordinary course of a trade or business in which the person engages for profit.” The rate of the VAT would be 6.72% of the taxable receipts from the supply of services or property.
The VAT is different from a sales tax in that it is collected in every stage of a product’s journey. However, in the end, the consumer pays the full tax embedded in the purchase price without knowing how much tax was paid along the way.
Localities may levy their own VAT under the bill, but it may not exceed 2% and school districts may not levy a VAT above 0.5%.
Supporters of consumption taxes like the VAT believe they inject taxpayer choice into the taxation equation. They are, however, much more vulnerable to economic factors. The best example is what happened with the COVID-19 pandemic. People chose to scale back their spending due to job losses and general insecurities about what the future might bring, and it created a huge impact on the state’s tax collections.
While property taxes are generally unpopular, they are a constant source of tax revenue. They are also the only tax that can be contested through an appeals process.
Doing away with property taxes would create a windfall for out-of-state owners, business, and industry. As an example, a major manufacturer may pay over $100 million in property taxes annually. That same major manufacturer would have to spend that amount locally to offset the property tax they would escape. Otherwise, other local taxpayers would have to pick up the difference.
Also, while Texas is a high property state, since there is no state income tax, it is in effect a low tax state per capita, ranking about 42nd. These are facts that advocates of abolishing the property tax seem to overlook.
If HB 3770 becomes law, property taxes will not automatically go away. The bill provides that after 2022, the legislature may explicitly permit the establishment of an ad valorem tax by a political subdivision. There is then a five-year transition period for a constitutional amendment to be passed by 2026 to abolish property taxes.