Friday, December 7, 2007

The FairTax Comes to Texas

A few weeks ago, I wrote about the FairTax and had some criticisms, but overall I think it’s a pretty good, if not ideal, reform to the federal tax code. To review, the FairTax is a national sales taxes with a “prebate” (a rebate that happens at the beginning of the year) for all citizens so that the poor won’t face the same burden as those with more income.

Recently, a Texas State Representative named Phil King out of Weatherford has proposed a similar measure for the state of Texas. The Fair Tax is better suited for Texas because our tax code is already simple (compared to the Federal tax code) and the state already collects a large portion of its income from sales tax.

Texas has two major sources of income: Sales Tax and Property Tax. Rep. King is proposing that Texas eliminate much of the property taxes in favor of a higher sales tax. This is a good idea.

Why are sales taxes better than property taxes?

Through no fault of their own, someone can be taxed out of their home. In some areas property values have skyrocketed over the last few years, and people can no longer afford to live there because of the skyrocketing property taxes. How crushing would it be to retire to your dream house only to have to sell it because you could not afford the property taxes?

It also makes sense that a single and simple source of tax revenue reduces the size of government bureaucracy. Changing the sales tax rate should not require any additional staff to collect the income. Property taxes require appraisers to annually reevaluate every piece of property in the state.

Who does it help?

The first are those that are property rich and income poor. Generally, these are the elderly. Currently, the elderly can lock in the appraisal value of their homes, but still have to pay property taxes at whatever rate is being charged. This bill would eliminate a good chunk of their taxes. Poor elderly who survive on social security income would face higher sales taxes, but the prebate would reimburse them for a large portion of them. This would reduce the chance that they would be taxed out of their homes.

Another group to benefit is the poor who rent. While a homeowner in Texas can limit their property tax appraisal value by getting a homestead exemption, the owner of a rent house or apartment complex cannot. Assuming a competitive rental market, the price of rent includes the cost of property taxes. If property taxes drop, then rents drop, and poor people save money. The poor would also receive the prebate (like every citizen) that would offset the increase in sales taxes.

There are other winners, but I will limit the conversation to these two.

Who does it hurt?

The people who would be hurt the most are those that live in an inexpensive home but spend a large portion of their high income on retail services and merchandise. It would also hurt teenagers and other people who do not pay rent, but have an income.

I’m willing to accept the trade off.

I have written to my state representative (Larry Taylor) and told him that I support this bill and I hope that he will too. If you like this idea and live in Texas follow this link – and write your state Representative or Senator to express your support. For those that live outside of Texas you may want to pass it on to your representatives to suggest to them.

As always, let me know what you think.

6 comments:

Marsha said...

There are many Texans involved in the national grassroots movement of Citizens demanding the Fair Tax at www.OperationOffTheFence.org

Brian Shelley said...

Thanks Marsha, I'll be sure to mention it in my newsletter.

David Siegel said...

Eliminating the school M&O property tax would not eliminate the cost of appraising property, since property taxes would still have to be collected for school debt service, as well as for cities, counties, community colleges, hospital districts, etc.

When you turn 65, your tax bill freezes, not just your appraised value. It doesn't matter what happens to rates, you are protected. And if you still can't handle the tax, you can defer payment until you move out of the house or die. Your heirs can then sell the house and pay the back taxes.

Brian Shelley said...

David Seigel,

Yes these were details I overlooked or was not aware of when I wrote the post.

Correct me if I'm wrong, but doesn't your tax bill only freeze for school district taxes, not for city, county, etc..?

I still like the sales tax over the property tax because it gives incentives to save and should increase homeownership.

David Siegel said...

There is now an optional over-65 freeze available to cities, counties, and community colleges.

A tax on consumption (income minus savings) with progressive rates would be a great way to revive personal savings, but not increase income inequality. How about that, instead of a regressive sales tax?

The advantage of a property tax is that it maintains local control, since the rate is set locally. Also, a sales tax wouldn't generate enough revenue to rural areas to replace property taxes for local governments.

Brian Shelley said...

"A tax on consumption (income minus savings) with progressive rates would be a great way to revive personal savings, but not increase income inequality. How about that, instead of a regressive sales tax?"

I guess your idea would be a form of income tax. I think it would be more difficult to administer.

Also, while a sales tax on paper can be considered regressive there are a few things that limit or even negate that. First, is the idea of the prebate. Every person gets x amount of dollars as a check to reimburse them for sales tax expenditures. This means that those at the bottom are effectively paying a lower rate than the higher income people.

Second, under a property tax system their rent (the poor are vastly more likely to rent) includes property tax on that property with no homestead exemptions or 65-year old caps. They also can not receive tax deductions from mortgage interest or property taxes.