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Analysis: Killing a Tax Without Changing Taxpayers' Bills

Senate legislation that cuts property and business margins taxes also includes a clause that would outlaw taxes on real estate transactions. Texas has no such tax.

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Careful readers will find an Easter egg tucked in one of the tax measures approved by a Senate committee this week — a mostly unmentioned clause that would constitutionally ban taxes on real estate transactions.

Don’t count your savings: Texas doesn’t even have a tax on real estate transactions.

The senators were not being sneaky so much as they were emphasizing what they hoped (successfully, it turns out) would dominate the headlines: their efforts to cut residential property and business margins taxes. The business tax cut is easy enough — all the Legislature has to do is pass a law and get the governor to sign it. Because the governor has already said he would veto the state budget if he doesn’t see some tax cuts, that’s a pretty safe bet.

Property taxes are a bit trickier, because the state is in the position of trying to cut a tax that it does not levy. Since legislators can’t set property tax rates — those are set by local officials — senators are instead proposing to increase the size of homestead exemptions. Their current proposal would give the average Texas homeowner a break of about $206 per year.

The current homestead exemption is in the state constitution, so the change would need to be in the constitution, too. That requires approval first from two-thirds of the Senate and the House, and then from a majority of Texas voters.

Texas is one of the 13 states without a tax on real estate transactions; a constitutional ban would prevent future lawmakers from imposing one without voter approval.

It would make your friendly neighborhood Realtor happy, however. And it is especially delicious for the Texas Association of Realtors, the trade association for real estate agents and a wealthy and generous donor to political campaigns. For this industry, any talk of taxing home and building sales, leases and other transactions is a cardinal threat.

Their fears have some foundation. Most other states tax the transactions, and people and companies continue to buy and sell homes and buildings in spite of it. Unlike the property tax, a tax on a home sale doesn’t appear (and increase) year after year — the feature of property taxes that makes them economically and politically unpopular.

One other thing: A sales tax on real estate transactions would raise a ton of money. In a 2012 proposal to repeal property taxes and replace them with sales taxes, the Texas Public Policy Foundation, a conservative think tank based in Austin, cranked some of the numbers. That group estimated $49 billion in residential property transactions and $24 billion in commercial property transactions take place in Texas every year. The state’s sales tax rate is 6.25 percent. That’s $4.56 billion per year, on par with what the state brings in now from taxes on motor vehicle sales and leases.

It has been a while since anyone seriously proposed raising taxes. The state has plenty of money, for one thing. For another, politicians are scared to death of conservative voters who want to hold down the price of government.

So why the conversation about sales taxes on property? Because Sen. Jane Nelson, R-Flower Mound, the leader of the Senate budgeteers, included it in her bill. It might be slightly cynical at this point to mention that the two political action committees with the biggest warchests in the state both belong to the Texas Association of Realtors. But the people in the Capitol know that, so you should, too.

The Realtors have not joined other business groups that would rather see a different mix of tax cuts, possibly including reductions to the state’s sales tax, which unlike a bigger homestead exemption would help them and everybody else at the same time.

Sen. Royce West, D-Dallas, asked Nelson why the provision was needed. “I think it’s really nice to make a statement that we are not going to impose any taxes on our citizens that we don’t have to,” Nelson said. “I can’t imagine that we would do this, but I would like to make it clear in the constitution that we are not going to ask future generations to price themselves out of home ownership because of a new tax that is imposed on real estate transfers.”

West, saying Nelson was “putting a solution into the constitution for a problem that does not exist,” voted no.

If the measure makes it through the Legislature and onto next November’s ballot, however, Nelson’s move could help it pass, if help is needed. She’ll have a legion of real estate agents on her side.

Disclosure: The Texas Association of Realtors and the Texas Public Policy Foundation are corporate sponsors of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.

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