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AUSTIN — Texans doubled down in 2019 against having a state income tax, voting for a revamped ban on one in November.
Now, if the state ever wants to establish a personal income tax, two-thirds of the Texas House and Senate must vote to repeal the constitutional amendment banning one and call a statewide election to let voters decide.
But without a state income tax, Dallas Morning News reader Rick Best asked Curious Texas where the state gets its funding.
The short answer is that Texas relies on other taxes, particularly from sales and property, to fund public services such as schools and health care. The long answer involves a lot of sources of revenue.
The state’s sources of revenue
Texas is one of seven states without a personal income tax.
The office of the Comptroller of Public Accounts oversees the state’s finances and the collection of over 60 different taxes, fees and assessments. State sales taxes, which are imposed at a rate of 6.25% on all retail sales, most rentals and taxable services, make up about 57% of the taxes the office collects, said Kevin Lyons, a spokesman for the agency.
And for fiscal year 2019, the $34 billion collected in sales taxes made up about 26.6% of the state’s net revenue of $127.9 billion, according to agency data.
Another $25.4 billion, or roughly 19.8% of the net revenue, came from taxes on other goods and transactions, such as oil production, motor vehicles, cigarettes and natural gas.
The state also received $41.9 billion in federal funding to help cover the costs of Medicaid and Medicare and other health, education and transportation services. This made up 32.8% of its net revenue for the 2019 fiscal year. The rest of the net revenue came from sources such as lottery proceeds, income from state lands and investments.
About 37% of the state’s revenue, not including federal funds, went toward education, with the majority of it supporting public schools, said Eva DeLuna Castro, a budget analyst for the progressive Center for Public Policy Priorities. Another 23% paid for health and human services, and the next biggest costs were transportation and prisons, she added.
But these funds only go so far. Local governments must pick up the tab for the rest of costs by levying their own taxes.
“Property taxes is the single largest way we pay for public services in Texas,” DeLuna said, noting that property taxes collected by school districts pay for more than half of school funding.
Cities, counties and local entities such as hospital districts pay for the rest of local services using property taxes and other revenue. They can also levy a local sales tax of up to 2%.
That’s why when Best and his partner moved to Dallas in 2015 from Iowa, which does tax personal income, he noticed his property taxes were higher.
“We were glad to see that there was no state income tax, although the local property taxes are much higher than Iowa,” he said in an email.
Texans are taxed less overall by the state and local governments, but they pay some of the highest sales and property taxes in the country, according to the most recent data from the Tax Policy Center, a partnership between the liberal Urban and Brookings Institutes.
During the 2015 fiscal year, 3.7% of Texans’ income went to property taxes and 4.5% went to sales taxes on general goods and on motor vehicles. Across the country, 3.1% of people’s income went to property taxes and 3.5% went to sales taxes, according to the center.
The impact of no state income tax
Best also wondered whether Texas contributes less to education per student than other states as a result of not having a state income tax.
Texas ranked 39th among all states and the District of Columbia in total education spending per student during the 2017-2018 school year, according to the latest National Education Association report.
But it’s not only because Texas doesn’t have an income tax, DeLuna said, it’s also because state leaders have kept overall taxes low and made cuts during economic downturns instead of dipping into the state’s savings account.
“The main issue, aside from the income tax, is a matter of political will and priorities,” said Clay Robison, spokesman for the Texas State Teachers Association.
Talmadge Heflin, director of the Center for Fiscal Policy for the conservative Texas Public Policy Foundation, also pointed to Texas lawmakers’ restraint on spending as key to funding the state without an income tax.
“I’m not saying they starve agencies or don’t put in money for schools, but they look at the actual needs rather than the wants and try to match that,” said Heflin, a former state representative and chairman of the House Committee on Appropriations, which helps determine the state budget.
During the 2019 legislative session, lawmakers boosted funding for public schools and capped the revenue that can be generated from local property taxes.
“This is the first time this was done in years,” Robison said, noting that this additional funding is not yet reflected in the NEA’s rankings.
Michael Fripp, a reader from Carrollton, also asked Curious Texas how the lack of an income tax changes people’s behavior.
Heflin said the lack of an income tax gives people more agency to decide how to spend their money.
“It encourages people to earn without having to give the government part of their earnings, and it gives them more discretion over the taxes they pay when they spend money,” he said. “When they buy products, they pay a sales tax so they can have more control by what they buy.”
But sales taxes can hit poor people the hardest, said Melissa Rogers, an associate professor at Claremont Graduate University in California who studies fiscal policy.
“Poor people have lower disposable income, and they’re spending a higher percentage on things like food and clothing and things that we would buy that have sales taxes,” she said.
Still, many Texas lawmakers have long credited the lack of an income tax for helping fuel the state’s growth.
Rogers said a strong Texas economy attracts companies and job seekers to the state. But she said people also consider the cost of living and quality of public services, such as schools, before moving.
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