Texas takes pride in being a low-tax haven, thanks largely to being among the states that don’t have an individual income tax.
That’s a solid proposition for most families, even if annual property tax bills take a hefty bite.
But businesses are shouldering a heavier burden in Texas, paying a larger share of state and local taxes than in all except a handful of small states.
In fiscal year 2021, businesses paid 59.3% of state and local taxes in Texas compared with a national average of 43.6%, according to an annual assessment led by Ernst & Young. Business’ tax burden in Texas was fifth-highest among all states and easily the highest among the most populous states.
By another metric, business tax burden as a share of gross state product, Texas was also well ahead of the U.S.
Texas offers many benefits for business, including a diversified economy, growing labor force, affordable cost of living and light regulation. That’s why it consistently ranks among the leaders in business expansions and relocations.
“Still, when it comes to taxes, Texas is at a disadvantage when compared to many of our competitor states,” concludes a research brief from the Texas Taxpayers and Research Association, whose members include many of the state’s largest employers.
Its recent report is titled: “The (partial) myth of Texas as a low-tax state,” and the message is aimed largely at Texas lawmakers, who are currently working on the next state budget.
“One of the things we consistently hear from folks is how happy they are that Texas is a low-tax state,” said Dale Craymer, president of the policy group, known as TTRA, and a former state budget director. “We just want to educate them and let them know there’s another side to this.”
That will make eyes roll.
Dick Lavine, a senior fiscal analyst at Every Texan, a left-leaning advocacy group in Austin, said many businesses are effective at challenging tax appraisals and keeping property values low – often well below market rates.
Texas is a textbook example of a regressive tax system, he said.
With a heavy reliance on sales tax, the state’s low- and middle-income families spend a much greater proportion of their income on taxes. Sales tax exemptions for professional services, such as accounting, consulting and law, usually benefit higher earners, too.
“Just having business do well is not the whole story,” Lavine said. “You want whole communities to do well.”
His take on Texas businesses carrying a heavy tax burden? “I’d say the corporate sector is doing a pretty good job of looking out for itself,” Lavine said. “And my organization is trying to look out for everyone else.”
For families and individuals, Texas makes good on its low-tax reputation. That’s largely due to not having a state income tax, which saves a family of three an average of $4,000 annually, the TTRA report said.
The state’s tax burden consumes an average of about 3.7% of family income, well below the national norm of 6% – and the sixth-lowest burden in the U.S., according to the report.
“Forgoing its income tax gives Texas an important tool for economic growth,” said Janelle Fritts, a policy analyst with the Tax Foundation, a Washington think tank specializing in tax policy.
Property taxes are a genuine concern for both families and businesses. Texas has the sixth-highest property tax rate for homeowners, the Tax Foundation said, and lawmakers again are pledging relief on that front.
In past years, the Lege has increased homestead exemptions, capped appraisal increases and passed measures to lower tax rates. But some moves helped homeowners only while business property taxes also include equipment, machinery and inventories.
Various homestead exemptions remove an average 25% of market value from a homeowner’s property tax, the TTRA report said. Exemptions on business amount to about a 7% discount.
Effective property tax rates on a Texas manufacturing plant are about a third higher than the rate for homeowners – and 62% higher than the average rate in the U.S., the report said.
Texas has a record budget surplus of nearly $33 billion, and lawmakers have pledged more tax cuts to come. Craymer’s group doesn’t object to increasing the homestead exemption but believes there should be “a balanced program” that spreads the savings around.
“The worst thing we could do with this huge surplus is to pick one set of winners to the exclusion of everything else in the economy,” Craymer said.
While the report does not prescribe specific policy changes, many see it as a way to justify more tax abatements and incentives – and replace the so-called Chapter 313 program that expired at the end of 2022.
The Chapter 313 program allowed school districts to temporarily abate a portion of property taxes, primarily for projects requiring large capital investments, and state funding made the districts whole.
The incentives were credited with helping attract auto plants, semiconductor factories and wind-power farms. But there were many critics, and even Gov. Greg Abbott cited concerns about oversight, transparency and the value to taxpayers.
Certainly, the approach can be improved, said Glenn Hamer, CEO of the Texas Association of Business, which calls itself the state chamber of commerce.
No one would argue the state surplus would be larger if Texas didn’t use tax breaks to help land a Tesla plant or chip factories for Samsung and Texas Instruments, he said.
He insists a replacement tax-break tool would continue to pay off.
“We can make the state even more competitive and attract more advanced manufacturing and more energy development,” Hamer said. “The real issue is how are we going to move forward?”
