Texas is once again witnessing the largest population growth in the nation as people increasingly migrate to what they see as the fiscal promised land.
While greater job opportunities and certainly “warmer” (often ultra-hot) weather await, the impact on their pocketbooks in terms of taxes and fees may leave them wondering if they should search elsewhere for their sought-after kingdom of economic milk and honey.
Texas has no personal income tax – a significant benefit compared to states like California, New York and New Jersey that have high income-tax rates. According to the Tax Foundation, the state’s total tax burden is the sixth-lowest in the nation.
However, for many new residents, including some retirees, the overall tax burden may not be much less than in the state they left. That’s because Texas’ state and local taxes fall disproportionally on lower-income individuals. That is, the lower a taxpayer’s income, the greater the percentage of income is paid in taxes. In fact, the state is currently ranked 46th in tax progressivity.
Texas’ tax regressivity is mainly the result of its heavy reliance on sales taxes in the absence of a state income tax. Texas has an average combined state and local sales tax of 8.20%, ranking it 14th among the states.
It also has the sixth-highest property taxes, after New Jersey, Illinois, New Hampshire, Vermont and Connecticut, according to the Tax Foundation. Without income taxes to share with local governments, property taxes are not only high but have grown dramatically in recent years. For example, someone purchasing a home in Leander, the second-fastest-growing city in America that sits just outside Austin, at the median market price in Travis County of $632,208 would pay $14,150 in property taxes.
In large part the increase in property taxes can be attributed both to soaring home prices and the resultant increase in tax assessments as well as the need to finance the infrastructure (such as schools, roads and utilities) required to accommodate the influx of newcomers.
Texas has been cited as having the second-most overvalued housing market in the nation. And, of course, renters can’t avoid these property taxes insofar as landlords are able to raise rents.
“Property taxes for a home in fast-growing Leander just outside Austin at the median market price in Travis County is $14,150. ”
For sure, some people may view inordinate property taxes as a reasonable payment for high-quality local services, especially schools. But such rationale cannot be used by residents of some “go to” areas, such as Austin, Dallas and Houston as well as some of their suburbs. Per Texas’ Robin Hood program the state must “recapture” property taxes from “wealthy” school districts and distribute them to their poorer brethren.
Beyond property taxes
The cost of commuting, like high sales and property taxes, may be another pocketbook shock to new transplants. Texas has 47 toll road facilities, the highest of any state and the fourth highest in terms of tolled miles. The toll costs will be especially onerous to lower-income individuals since tolls, like sales taxes, are notoriously regressive.
Consistent with conventional wisdom, Texas motorists do benefit from relatively low gas prices. These are attributable at least in part to one of the lowest gas taxes in the nation. However, this advantage may be outweighed by Texas’ urban sprawl and lack of public transit options that force people to drive longer distances and thereby to consume more gas.
Potential Texas transplants may be hopeful that Texas will somehow make its tax system more progressive. True, Gov. Greg Abbot has pledged to reduce property taxes, but his proposals so far would likely benefit mainly small-business owners and have only minimal impact on the state’s overall tax structure. Beto O’Rourke, his opponent in the forthcoming November election, has proposed legalizing and taxing marijuana as a means of generating new revenues. Needless to say, few experts believe that Texans can smoke their way to fiscal equity.
Serious property tax reform is likely to come about only if the state were to impose a statewide income tax. That, of course, is effectively off the table. In 2019 voters approved a constitutional amendment banning an income tax unless 2/3 of the legislature voted to repeal the amendment and called a statewide election to impose the tax.
The Great State of Texas undoubtedly has lots to offer newcomers in terms of food and culture, urban and rural living, fewer government regulations, and of course its incredible history. And, the business climate is certainly favorable for people looking to start a new enterprise. However, new residents would be wise to crunch some financial numbers before moving to the Lone Star State. They may find crossing the Red River is not the equivalent of crossing the Jordan.
Michael Granof is the EY Professor of Accounting Emeritus at the McCombs School of Business at the University of Texas at Austin. Martin J. Luby is an associate professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin.