Texans face dynamic duo of taxes: sales vs. property
Pick Your Poison
Property taxes vs. the sales tax. It's right up there with flour tortillas vs. corn tortillas and A&M vs. UT. But in this case, nobody really likes either one.
The issue is particularly volatile because of controversy surrounding the way Texans pay for public schools. About 40 percent of the funding for the 2002-03 school year came from the state, mostly from the sales tax, while the rest came largely from local property taxes. The portion paid for by local property taxes has been increasing since 1991, and the state's share is declining, according to the Legislative Budget Board (LBB).
Burning both ends
In 2002, Texans paid $27.3 billion in local property taxes to about 3,600 taxing entities, including counties, school districts, cities and college districts, according to Texas Comptroller Carole Keeton Strayhorn. School districts collected about 60 percent of all property tax revenues, more than $16.4 billion.
But that's not enough to meet the needs of the more than 4.1 million public school students in Texas, so the Legislature uses state sales taxes to help foot the bill, as well as lottery proceeds and other funding sources. An additional $5.4 billion in federal funding also goes to Texas schools, but most of it is earmarked for specific purposes.
The state's share of public education funding continues to shrink. It dropped from 47 percent in 1991 to 39.7 percent in 2003, according to the LBB's 2004-05 Fiscal Size-Up. The LBB projects a state share of about 36.3 percent in 2005, according to the report. The state aid calculation, however, does not include several major education expenditures, such as appropriations for textbooks, the Teacher Retirement System and school employee health insurance.
The state's portion comes largely from the sales tax. In fiscal 1983, the state collected $3.3 billion in sales taxes, about 24.3 percent of the state's total revenues. That figure jumped to $9.1 billion by 1993, and was an estimated $14.3 billion by 2003, according to the Comptroller.
Other taxes, such as the oil production tax, have declined in importance. The state collected $1.2 billion in oil production taxes in 1983, about 8.8 percent of all revenues. That figure dropped to $424 million in 2003, less than 1 percent of all revenues. The state had cigarette tax revenues of $355 million in 1983, which was 2.6 percent of all revenues, while the $583 million it collected in 2003 was only 1 percent of all revenues.
Texas retailers collect the sales tax and send the money to the state.
"Retailers must collect the sales tax for every sale, unless there is a specific exemption in state statute," said Adina Christian, the Comptroller's area manager for Tax Policy. "Food, groceries, water, prescription and over-the-counter drugs are exempt, as are some medical goods, manufacturing equipment and goods that will be resold."
Christian said measures like the Comptroller's annual sales tax holiday, which saved taxpayers $43.8 million in sales taxes in 2003, help alleviate the sales tax sting for consumers. The 2003 holiday saved shoppers $34.6 million in state sales tax and $9.2 million in local sales tax, according to Strayhorn.
"The exemptions also make the tax less regressive," Christian said. "Some other states do collect taxes on those items. We don't."
The propriety of property
Property taxes, assessed in Texas since 1837, are based on property values determined by county appraisal districts. Valuations are assessed based on sales of property in an appraisal district. The districts deduct a number of exemptions, such as that for Texans 65 years of age or older, to arrive at taxable values.
The Comptroller's Property Tax Division provides technical assistance to local jurisdictions, such as appraisal and school districts, that assess and collect local property taxes. The division also determines the taxable value of property in each district, which the Texas Education Agency uses to determine how much state funding a school district gets, said James Archer, area manager for operations of the Property Tax Division. Generally, the less property value a district has, the more state aid it receives.
"Our role is very limited in local property taxes," Archer said. "We also do performance audits of appraisal districts if they don't meet certain criteria."
From fiscal 2001 to 2002, school district, city and county property taxes each increased about 8 percent, according to the Comptroller's 2002 property tax report. Special district taxes increased about 6 percent.
Property taxes made up the largest portion of Texas tax revenue in 2002, about 46 percent. The state sales tax made up about 26 percent. Cities and counties collect sales taxes as well, though they make up only about 7.1 percent of the state's revenue total, or about $4 billion.
Property taxes have attracted a fair amount of outrage due to their rapid escalation since 1995, according to a report by the Joint Select Committee on Public School Finance to the 2003 Legislature.
State funding of public education lagged further behind local revenues from 1995 to 2003, despite billions of dollars in state funding spent on property tax relief, teacher pay raises and school district employee health insurance, the report said.
The total school district taxable property values for the state topped $1 trillion in fiscal 2002, up nearly 6 percent from fiscal 2001, according to the Comptroller. Single-family residences made up the largest percentage of the school district tax base, about 47 percent, or about $548 billion. Taxes on these residences reached $7 billion. That figure was up $818 million in taxes from the fiscal 2001 tax burden.
The method of disbursement of property taxes, and public education funding in general, is under constant attack. As a result of a series of court challenges to state funding systems, Texas requires property-rich districts to share revenue with property-poor districts--a system dubbed "Robin Hood."
Many Texans question the effectiveness of the current system as a slate of court challenges by both rich and poor districts alike attests. In 2002-03, 118 of 1,040 school districts were required to share their wealth with property-poor districts, according to the Texas Education Agency. Those districts include 427,000 of Texas' 4.2 million school children, TEA said.
Each time local property tax revenues increase, the state decreases the amount of funding it gives that jurisdiction. That means per-pupil spending stays the same, much to the chagrin of the homeowner glaring at his or her skyrocketing property tax bill, who can't understand why the schools ask for more money even when property taxes go up.
In 1985, the total levy of property taxes in the state was about $9 billion, according to the Comptroller. That figure reached $16 billion by 1995 and $27 billion by 2002.
Pink house plans
Ultimately, it is up to the Legislature to determine how much of each tax the state collects and where the money goes. The Legislature has attempted to revamp the school funding formula many times, most recently in 2003.
The Senate voted unanimously to approve a plan proposed by Lt. Gov. David Dewhurst that would have reduced school property taxes by about half and would have increased and broadened the sales tax instead. The proposal would have ended the Robin Hood system. The House of Representatives, however, decided not to discuss the plan, effectively killing it.
Archer said that even if school district taxes are lowered, other property taxes will remain.
"You are still looking at city, county and special-district taxes, plus some level of school district taxes," Archer said. "It would take a pretty big jolt to the sales tax to replace the property tax."
The Texas Legislature will almost certainly take up the issue again, and an interim committee, the Joint Select Committee on School Finance, is looking for solutions.