A lack of state income tax does not a low-tax state make
There are two things I love writing about: Tax policy and counterintuitive results.
The main criteria for evaluating tax policies are to answer whether they are: 1. effective at raising revenue 2. sized appropriately 3. economically efficient 4. fair. On the fairness question, a recent report from the Institute on Taxation and Policy points out some deep flaws with the system of Texas taxes. (“Texas taxes” — go ahead and say that out loud ten times fast!)
The ITAP authors address the issue of whether Texas is really a “low-tax state,” a source of state pride that ranks alongside the Alamo, King Ranch Ford 150s and the culinary superiority of Frito pies. The big idea from the ITAP report is that where you stand on Texas as a “low-tax state” depends on where you sit on the spectrum between wealth and poverty.
Specifically, for the very wealthy, taxes are indeed low. For families in poverty, by contrast, taxes in Texas are quite high. Let’s start there. Considered narrowly, Texas ranks 43rd among states for the amount of taxes collected as a share of personal income. An important explanation is the lack of state income tax as well as a lack of state inheritance tax. Texans pay taxes instead on real estate and retail purchases, and pony up for other state fees. That’s the basis for the “low-tax state” argument.
But we have to go a step further, as the ITAP authors point out.
For individuals in the bottom 20 percent of income, earning an average of $13,000, they spend 13 percent of their income on taxes. That makes Texas the state with the sixth-highest tax rate in the nation. The next 20 percent up the income ladder, with an average income of $28,400, pays an average of 10.9 percent of their income on state and local taxes.
Those are pretty high percentages of income for a supposedly low-tax state.
On the other end of the spectrum, the wealthy find Texas to be a very low-tax paradise. The top 1 percent of Texans, earning an average of $1.6 million per year, pay just 3.1 percent of their income to state and local coffers.
A system in which the wealthy pay less as a percentage in taxes than the poor is known as a regressive tax system. A system like this will tend, over time, to increase inequality. So, that’s the fairness problem of the current state and local tax system. On that basis alone, we can say that Texas tax policy fails the key test of fairness.
In the state’s quest to keep taxes low, will Texas’ state tax regime get more progressive or more regressive during the coming legislative session? It’s unclear. Houston Public Media recently reported that state lawmakers are looking to save money by closing certain tax breaks, some of which are designed to alleviate taxes for the state’s poorest.
Jennifer Rabb, director of the McNair Center for Entrepreneurship and Economic Growth at Rice University’s Baker Institute in Houston, notes that eliminating those tax breaks — for food, medicine, doctor visits and home electricity — would hit the state’s most vulnerable the hardest.
Now, it’s obvious why Texas taxes are regressive: Texans pay no state income tax. States with relatively high income taxes, like California, New York and New Jersey, by contrast, have progressive state and local tax systems overall.
We all know the reason Texas has no income tax. The theory is that investment — and therefore job growth — favors low-tax states.
That’s a neat theory. But also a bit simplistic.
I know this will come as a shock to Texas readers, but high incometax states are also booming economically. Lots of people build lots of wealth in states with progressive state income tax regimes.
California, with a high income tax and progressive tax policy, has the most billionaires of any state. New York, no slouch when it comes to income taxes and progressive taxation, is next on the list of billionaires, despite having a smaller population than Texas. Texas and Florida follow on the list of billionaires per state, in that order.
The three top states with the most millionaires per capita are Maryland, New Jersey and Connecticut, in that order. I know it’s counter-intuitive, but all three states have progressive state income taxes.
I’m not saying high and progressive state income taxes lead to lots of wealth concentration — causality is more complex than that — but I am saying the theory that state income taxes inhibit wealth creation is a bit, well, unproven.
And here’s another thing. Without a state income tax, Texas has to depend — too much I’d say — on real estate taxes at the local level and sales taxes at the state level.
Now, I am not in poverty yet (*quickly knocking on wood) but my state and local taxes feel high to me.
I paid my half-year property taxes last week, and — while I generally find complaints about taxes distasteful — I was left feeling queasy from the increasingly nosebleed cost of home ownership in the Lone Star State.
The basic reason my property taxes are so extraordinarily high is because there’s no state income tax.
When I am appointed benevolent dictator of Texas, I will institute a modest state income tax, both because it will increase tax fairness and because it will relieve the distortions caused by superhigh real estate taxes.
And yes, I purposefully said “appointed,” because I understand I’ve lost all of your votes with my pro-state income tax political platform — so being appointed benevolent dictator is my only shot at state leadership.