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March 04, 2005

Republican Tax Plan Would Raise Taxes on Majority of Texans

By Andrew Dobbs

So I've been at work today crunching numbers. I've been doing the math to figure out the impact of the various tax plans on Texas families. Since the Democratic plan doesn't have all the details on how they'll make up for their cuts and new expenditures, its like comparing apples to oranges, but just the impact of the property tax cut is pretty dramatic. I'll start there.

The GOP plan will simply cut the M&O Property Tax Rate from $1.50 per $100 valuation to $1.00 per $100 valuation. Local governments could add another $0.10 per $100 valuation "enrichment tax," and with their finance plan pretty much everyone will have to pass one of those. The Democratic plan, however, would triple the homestead exemption- from $15,000 to $45,000- and lower the rate only to $1.25. This would only apply to homeowners, businesses would see no cut in the rate. The primary advantage to the Democratic plan is that most rural Texans, inner-city residents and South Texas residents live in homes valued not much more than $50,000. Suburbanites live in the big fancy houses, so the homestead exemption wouldn't effect them much. But most Texans would see a significant benefit.

The average Texan lives in a house valued at $109,639. Right now they pay $1419.59 a year in property taxes. Under the GOP plan, their taxes will drop to $1041.03- a 27% decrease with the enrichment tax included. Under the Democratic plan however, their taxes would drop to $807.99, a 43% drop. Half of Texas would see a bigger decrease than even that 43%. Furthermore, every single Texan- no matter how poor- would only get that 27% decrease under the Republican plan. Under the Democratic plan, the lower the value of your house (and by extension, the poorer you are) the more you keep.

Just for some examples, let's look at some selected districts. In Delwin Jones' (a West Texas Republican) rural district homeowners would see an average drop of 50%. Terri Hodge's inner city Dallas district would see a decrease of 65% and Aaron Pena's South Texas district would see a drop of 81%! A majority of Texans would see a decrease greater than 43%, while under the GOP plan everyone would get only 27%. For years whenever Democrats voted for a smaller tax cut than Republicans, Republicans have called that a vote for a "tax increase." So is it far for us to say that Republicans want to raise property taxes on a majority of Texans?

But that's not all. The Democratic plan doesn't have all the details as I've said, but they are unlikely to have much of a sales tax increase and would probably shy away from the payroll tax proposed by the GOP. That's beside the point. What is important is that under the GOP plan the average Texas family would see a tax increase. That's right- their taxes would INCREASE. Let's do the math.

For our purposes we're going to use the Texas average home value ($109,639), the state's median household income ($45,861), the state's average family structure (two parents and one child) and have $300 of repairs on at least one car (not an unlikely scenario).

First, the average family will get a $473.20 property tax cut. This will be followed by absorbing the 1.1% payroll tax. Don't like me using this there? The Republicans are selling it by saying that businesses can simply "shift" their payroll costs- cut salaries, benefits or jobs. Furthermore, for years Republicans have decried the federal payroll tax by saying (as economists back them up) that the 6.2% employer share of the tax comes out of wages. The most pernicious thing is that Texans won't even see this tax being taken from them necessarily, but they will be paying it. This tax will cost them $504.47 a year. That leaves them with a $31.27 tax increase. Next comes the sales tax. The IRS says that the average Texan in this salary bracket paid $714 in sales taxes last year. The GOP increase is 11%, meaning they'll pay $792.54 in sales taxes without accounting for the expansion of the tax base. $31.27 plus $78.54 equals a $109.81 tax increase now. But what about those $300 in repairs? While that was once tax exempt, it now gets taxed with a bill of $27.60. Add it all up and you have a $137.41 tax increase for the average Texas family. Realize that for people who don't own their home (36.2%) the increase will be even greater, and about half of all homeowners will have a higher tax increase than even this.

So how is this revenue neutral? Because the very wealthy get a big tax cut. Let's take a typicaly Highland Park family. On their $500,000 house they'll be saving $1940 a year in property taxes. But on the payroll taxes they are only taxed on their first $80,000 of income, not every penny of it like the average Texas family. So they only pay $880, leaving them with a $1060 tax cut. With the sales tax increase they'll lose $182.16, leaving them with a tax cut of $877.84. Finally, they pay the same amount in car repairs ($27.60 on their $300 of repairs), giving them a $850.24 tax cut.

So a family that makes $150,000 a year and lives in a rich suburb gets $850 in their pockets, chump change for them in the end (0.5% of their income), while the middle class family gets a $137.41 tax increase. This bill benefits the rich more than the poor, but it doesn't even benefit them that much in the end. We need more details on the Democratic plan, but as it stands now this plan should be killed no matter what- even the status quo is better it seems.

Posted by Andrew Dobbs at March 4, 2005 02:49 PM | TrackBack


A point mentioned briefly in the article deserves emphasis. Texans who rent rather than own won't get any benefit from the property tax reduction, but they will pay higher sales taxes (regressive) and indirectly will pay the payroll tax (regressive the way it's written).

The lower the income bracket, the greater the percentage of people who are tenants. So this penalty for renting falls more on the poorest than on anyone else.

Posted by: Demo Memo at March 4, 2005 07:07 PM

Let me extend my previous comment.

The Democratic alternative bill reduces, but doesn't eliminate, the regressive burden on renters and lower-income people. As long as the state and local governments live off the sales tax and property tax, regressive taxation will continue to be the Texan way. The payroll tax in the Republican bill is simply another way of hiding the pea.

For the system ever to change, some political party will have to find enough courage to demand an income tax.

Posted by: Demo Memo at March 4, 2005 07:26 PM

I would argue that some of the property tax reduction will find its way to renters in the form of lower rents.

But probably not all of it, this would depend on local market conditions.

I almost gagged at the avg. rate , my rough guess is that I'm paying about 3 times that (El Paso Co.).

Posted by: Gringo Salado at March 4, 2005 11:38 PM

The financial analysis is pretty loose considering that 1.5% is the cap, not the actual property tax rate, which varies by district. Wealthier districts tend to have lower property tax rates and vice versa for poor districts.

Property tax is included in rental rates.

See www.texastaxrelief.com/

Posted by: chrisken at March 5, 2005 11:42 AM

Yeah, you make an excellent point chris, but the majority of taxing units have hit the cap now. And the property tax is included in the rates, but unless there is a legal requirement to pass the savings on, most landlords will just reap higher profits (until market conditions force the rates down, but that could take years).

I stand by my analysis, and texastaxrelief.com is a great site.

Posted by: Andrew Dobbs at March 6, 2005 03:01 PM
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