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Lack of Texas Income Tax Draws Out-of-State Envy

A growing number of Republicans across the country are working to repeal their states’ income tax, using Texas’ economic success to make their case. Inside Texas, however, the state’s tax system is not universally beloved.

Bobby Jindal with Rick Perry in Maquoketa, Iowa - Dec. 20, 2011

When Gov. Bobby Jindal of Louisiana wanted to sell his plan to replace his state’s income tax with a higher sales tax, he pointed to Texas as both the problem and the solution.

Too many Louisiana residents are moving to Texas, because that is where the jobs are, he said. The jobs are there, he argued, because Texas does taxes right.

“You go to Dallas, you go to Houston, and there are entire neighborhoods that are filled with our neighbors from Louisiana,” Jindal said last month during a speech to the St. Tammany West Chamber of Commerce.

Jindal, who has since acknowledged that opposition to his proposal remains insurmountable, is among a growing group of Republicans across the country who are working to repeal their states’ income tax, using Texas’ economic success to make their case.

Inside Texas, however, the state’s tax system is not universally beloved. Although few are calling for Texas to impose its own income tax, the way the state employs property, sales and business taxes to finance services, particularly education, draws criticism and debate across the political spectrum.

“There’s no question that it’s a positive to not have a personal income tax,” said Dale Craymer, president of the business-backed Texas Taxpayers and Research Association. “But that has to be balanced out in some manner, and the way Texas has balanced it out is with lower-than-average spending, higher-than-average property taxes and higher-than-average sales taxes.”

Along with Louisiana, high-ranking officials in Georgia, North Carolina and Ohio have also cited Texas in recent months as a model for tax reform.

In his January State of the State speech, Gov. Sam Brownback of Kansas underscored his plan to phase out that state’s income tax by proclaiming: “Look out, Texas. Here comes Kansas.”

The focus on Texas is largely because of the state’s outsize economic performance throughout the recent recession. During his failed presidential campaign, Gov. Rick Perry touted Texas’ low taxes, and its lack of an income tax in particular, as central to what has become known as the “Texas miracle.”

Perry has maintained that focus over the past year. On April 15, the federal income tax filing deadline, he bragged to reporters that an estimated 1,000 residents were moving to Texas every day. His message to them: “You can stop trying to figure out how to pay the state income tax, because we don’t have one.”

Most states finance local and state government largely through some mixture of sales taxes, property taxes and income taxes. Texas is one of nine states that do not levy an individual income tax.

The Tax Foundation, a conservative-leaning research group, ranks Texas ninth-best on its State Business Tax Climate Index, largely because of the state’s lack of an income tax. On three of the foundation’s other major rankings — property taxes, sales taxes and corporate taxes — Texas ranks in the bottom 20 states.

Texas does not have a statewide property tax, but local property taxes remain a key complaint among businesses and homeowners.

“That’s the least attractive thing we have in our tax code,” said state Rep. Harvey Hilderbran, R-Kerrville, who is chairman of the House Ways and Means Committee. This session, he has taken a lead role in efforts to renew a state program that allows school districts to offer property tax breaks to companies as an economic incentive tool. The program has drawn criticism from conservative and liberal groups that argue that it is too expensive — each job costs more than $300,000 on average — and allows districts to pick winners and losers in the marketplace.

But a bill extending the program another decade at a cost of $4.4 billion passed the House nearly unanimously this month amid fears that Texas communities would lose out on jobs to, among others, Louisiana, where property taxes are lower and incentives are also available.

“Absent the ability to offer some sort of short-term break on property taxes, we couldn’t compete for most major industrial investments,” Craymer said. “Our high property taxes would just scare folks off.”

In 2006, Texas lawmakers approved a tax reform package that lowered property taxes and created a new business franchise tax to help pay for it. The new tax has never generated as much revenue as projected and has been derided by businesses. This session, more than 90 bills were filed aimed at reforming the tax, including nine proposing to repeal it entirely.

“It’s been a pretty onerous tax on small and medium-sized businesses,” said Talmadge Heflin, the director of the Center for Fiscal Policy at the Texas Public Policy Foundation, a conservative research and outreach organization. “I think there will be a continued effort to do away with it.”

Ironically, a chief complaint about the tax is that it does not operate more like an income tax. Businesses pay the franchise tax on gross receipts, leading to some having to pay it even in years when they make little or no profit.

“When a small business is unprofitable and must pay the tax, they use their personal savings, mortgage their home or borrow money from their family to meet their obligation,” said Will Newton, executive director of the Texas chapter of the National Federation of Independent Business.

While businesses say the Texas tax system leaves much to be desired, cities and school districts argue that the state falls short on the financing end, particularly considering its surging population growth. Local debt has shot up over the past decade, in large part to cover the costs for new schools and public maintenance projects.

“The state is doing less building of highways and roads and pushing that funding down to cities and counties,” said Bennett Sandlin, executive director of the Texas Municipal League, which lobbies for local governments.

Last year, lawsuits representing more than 500 school districts were filed against the state arguing that it does not properly finance public education. A district court judge found the state’s school system unconstitutional, a ruling that the state is expected to appeal. Many lawmakers expect Perry  to call a special session next year on school finance.

Groups like the liberal Center for Public Policy Priorities say the varied complaints with the current tax system in Texas illustrate why a state income tax makes sense. The group’s senior fiscal analyst, Dick Lavine, said an income tax would give the state’s revenue stream a more balanced approach.

“The great strength of the income tax is that it can be made proportional to a taxpayer’s ability to pay,” Lavine said. “In the Texas tax system, those with the lowest income pay the highest proportion of their income in taxes.”

Conservatives counter that an income tax would stifle the state’s economic success, the very success that has elicited envy from officials around the country. This month, Republicans in the North Carolina Senate released a tax-cut proposal they described as the first step in phasing out that state’s personal and corporate income taxes. Phil Berger, president pro tem of the Senate, said strong economic growth in states like Texas helped inspire the initiative.

“I wouldn’t say we’re in a position to replicate everything in Texas,” Berger said. “We don’t have much tumbleweed here.”

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