Recently I have been defending Texas Rep. Phil King's sales tax idea on Paul Burka's Blog on Texas Monthly Magazine's website. Follow the link to see my comments. Mr. Burka linked to a position paper put out by Dick Lavine the Center for Public Policy Priorities.
Below is a critique I wrote to Dick Lavine and cc:'d to Rep. Phil King and my district's Rep. Larry Taylor. I thought the line in bold was the most damning.
I have read your “REPLACING PROPERTY TAXES WITH SALES TAXES WOULD BE BAD FOR TEXAS BUSINESSES, FAMILIES, AND PUBLIC EDUCATION“ and I have a few problems with your analysis and wanted to point out some contradictions and oversights.
While you state the obvious that if prices go up, demand will fall for retail purchase, you ignore a number of other effects of the sales taxes replacing the property tax. You state:
“Thus, if the state raised the sales tax to eliminate property taxes, Texas businesses would have trouble selling their goods and services because we would have the highest sales tax in the country.”
You are completely ignoring the costs savings through property tax elimination for retail properties. While the sales tax would increase, the underlying cost of business would decrease because, as you said, the price of rent (in a competitive market) will fall when property taxes fall. You also ignore the wealth effect on the budgets of residential property tax payers who would have more money to spend once their property taxes fell. Even though internet purchases are growing, the vast majority of retail purchases are made by locals at local retail establishments, it would be terribly inconvenient for Texans to avoid Texas retail establishments for most purchases.
You also mention on page 4 that:
“Businesses also pass on their property taxes to families and individuals in the form of higher prices, lower wages, or lower profits.”
This statement, in defense of property taxes, is not included in your analysis of who would benefit form the tax cuts. You argue that the sales tax would hurt businesses and increase prices, so the sales tax is bad. Then when defending property taxes you admit that they lead to “higher prices, lower wages, or lower profits” and this is ok? This is a blatant contradiction.
“The sales tax, which is based on consumption, is extremely regressive, meaning it takes a much larger percentage of the income of a low- or moderate-income family than of a higher-income family.“
Therefore, the sales tax is regressive because it hurts the poor, yet you also say in the defense of property taxes:
"Homeowners write checks directly, but renters also pay property taxes, which are passed on to them by their landlords in the form of higher rents. "
The poor generally rent at much higher rates than those with higher incomes. Because they are renters the property taxes calculated into their rent does not have homestead exemptions available. Secondly, renters cannot deduct mortgage interest or property taxes from their federal income tax and these extra costs pass into their rent. Their rent would fall with a conversion to the sales tax.
Your analysis also ignores the rebate mechanism Rep. King mentions, in an allusion to the FairTax, which is available to everyone. This oversight means that the sales tax, under Phil King’s plan, may actually be progressive depending on the size of the rebate.
Finally, you state:
"Property taxes do not imperil home ownership. Generally, Texas families buy homes based upon their annual income, giving the tax a rough correlation to the ability to pay."
This is a terrible contradiction. First, you claim that lower prices will not lead to higher demand for home ownership, which is patently absurd and contradicts the most fundamental principles of economics, and claim that “families buy homes based upon their annual income”. Under a switch from property tax to sales tax, the incentives would change to encourage more consumption of housing, which would be taxed less, and away from retail purchases, which would be taxed more. This would increase the level of home ownership.
While you do fine with your number crunching your economics is superficial. While you may not like the sales tax bill by Rep. King prima facie, you do a disservice to the parties you want to help by piling up evidence against a bill without fleshing out all of the effects. In the end, your points may be valid, but the gaping holes I noticed negate your entire argument for me.
P.S. I am sending copies of my rebuttals to Rep. Phil King and my representative Rep. Larry Taylor