The Issue

Texas’ school maintenance and operations (M&O) property taxes collected by the local taxing entity were an estimated $51 billion in the 2018-19 two-year period, which make up almost half of all property taxes in Texas. This property tax has numerous problems, which resulted in several lawsuits over the past 5 decades, with the current system barely qualifying as constitutional. Beyond the legality of this tax, property taxes are inefficient, and Texans would benefit from the elimination of the M&O property tax.

Given the high burden this tax has on Texans’ prosperity, we provide two options to eliminate school districts’ M&O property taxes: 1) Swapping property taxes with sales taxes immediately or 2) Buying down property taxes over time, with both options requiring spending restraint.

For the sales tax swap option, we recommend broadening the sales tax base because it would provide a more efficient tax that limits the number of exemptions to provide the lowest tax rate possible, keeping it competitive with other states. By expanding the sales tax base, the combined state and local sales tax rates could increase from 8.25% to a max of 10%. Texans benefit from this immediate swap because it avoids temporary property tax relief, sales taxes tend to grow slower than property taxes, and sales taxes are based on objective metrics from mutually beneficial exchanges rather than the guess work of appraisal districts.

For the buy down option, we recommend that the state limit the increase of general revenue-related funds per biennium and use 90 percent of the resulting surplus to exchange with school districts’ M&O property taxes over time until they are eliminated. If state tax receipts kept up with past trends and spending was limited to 4 percent per biennium, this elimination process would take about a decade. While this option would be dependent on legislatures sufficiently limiting spending every session until eliminated, it means that there is a clear tradeoff between providing property tax relief and increasing spending.

Given high taxes are always and everywhere a spending problem, whichever elimination path is chosen must be paired with limiting government spending. By doing so, Texas could shift to a more efficient and fairer sales tax-dominated system. In this way, Texans can be assured meaningful, lasting property tax relief and an improved Texas Model that will sustain economic prosperity for generations.

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