Introduction
Public policies are crucial to promoting public economic well-being, health, infrastructure, and K-12 education accessibility. In Texas, recent financial reports have revealed an increased concentration of wealth among high-income households. Local and state tax policies have played a major role in promoting inequality (Lavine). Texas’s tax system is primarily regressive, where the highest-income quintile contributes the least in state and local taxes while the bottom eighty percent pays more. Thus, Texas’s regressive tax system is unfair to low-income earners as it heavily taxes them compared to high-income earners.
Sources of Government Revenue
Texas draws its revenue from sales tax and franchise tax. The state’s sales tax rate is 6.25 percent with additional add-on taxes of about two percent from local authorities (Moreno and Uradu). Due to its overreliance on sales tax, unexpected changes in sales and excise tax revenues affect Texas’s revenue. Although sales tax is commonly associated with retail sales to consumers, in Texas, about 47 percent of the sales tax is derived from transactions between businesses (Champagne et al. 952). Texas imposes one of the highest sales tax burdens on businesses compared to most states. Consumer sales tax is primarily on consumption commodities, except household food, medicine, residential utilities, and medical equipment (Champagne et al. 960). While various services are not subject to sales tax, the authorities have advocated for their inclusion.
The franchise tax is Texas’s general business tax that applies to a moderately broad range of taxable businesses, including limited liability companies, subchapter-S corporations, and standard subchapter-C corporations (Lavine). However, partnerships, professional associations, and sole proprietorships are not subject to taxation. Small businesses are also exempted from taxation until their gross receipts exceed 150,000 dollars (Moreno and Uradu). Arguably, due to the income-based calculation approach used in to raise revenues from franchise tax, Texas has a corporate income tax. However, compared to states with corporate income taxes, Texas’s 4.5 percent is among the least tax rate applied to the tax income-based component (Moreno and Uradu).
Analysis of Texas’s Regressive Tax System
A regressive tax system is one in which higher tax rates are imposed on low-income earners compared to top-earning taxpayers. A regressive tax structure also differs from progressive taxation which imposes higher tax rates on those with higher income, therefore, those who earn more are taxed at a higher rate. In Texas’s regressive tax system low-income earners are the losers while high-income earners are winners. It is an unfair way to generating revenue because high-income earners pay a lower effective tax rate than low-income earners (Popescu et al. 1). Such adversely affects a state’s capacity to raise revenue due to income growth being primarily concentrated among the wealthy. This is commonly evident in states that immensely rely on taxes overly focused on low- and middle-income households.
However, the degree of unfairness may differ due to varying degrees of regressivity in Texas tax structure. For instance, sales tax is the least fair form of taxation compared to school property tax which is the fairest compared to other states. Unlike a regressive tax structure, a progressive tax structure is more favorable to low-income families who typically spend about 75 percent of their income on commodities subject to sales tax (Lavine). However, given that Texas exempts residential utilities, groceries, and medicines from sales tax, the extent of unfairness may be lower compared to states such as Washington State. The sale tax regressivity could also be reduced by increasing the tax payable by professional services and businesses catering to high-income earners.
Additionally, businesses with higher profits are imposed a higher business property tax rate. The tax freeze for senior citizens and $15,000 homestead exemption are particularly favorable to low-income homeowners (Lavine). Adopting programs similar to Massachusetts’ circuit breaker tax credit would promote fairness by considering homeowners’ capacity to pay property taxes. Without a circuit breaker tax credit, property taxes might increase without a rise in the homeowner’s income.
There are various advantages and disadvantages to the adoption of regressive tax laws in Texas. One of the main advantages of regressive tax laws is that they provide individuals with incentives to increase their earnings (Papanikolaou 2). Given that regressive tax laws are more lenient on high-income earners, individuals may aspire to reach such tax brackets to avoid incurring the higher tax rates associated with regressive tax laws. Supporters of regressive tax policies in Texas have also suggested that the decreased tax burden on the rich reduces incidences of tax evasion, which ultimately increases government revenue. The increased government revenue can be utilized to improve the quality of public services such as education and healthcare.
Regressive tax laws also facilitate saving, which is crucial in generating adequate capital to invest in businesses, significantly boosting the economy (Popescu et al. 6). The simplicity of a regressive tax system, such as that adopted in Texas, is also considered a major advantage. For instance, Texas’s sale tax policies provide for a consistent tax percentage on all commodities, making it easier to implement. Other tax policies such as income tax are challenging to implement due to their complexity and might require the utilization of government resources to promote their effectiveness (Papanikolaou 2). Texas’s regressive tax policies are also considered more favorable for the retention of skilled workers within a state. The regressive tax structure differs from a progressive tax structure which imposes taxes based on one’s earnings making them unfavorable for workers.
Despite the apparent benefits of adopting a regressive tax system in Texas, there are some limitations to the approach. One of the main disadvantages of regressive tax laws is that it promotes inequality, making them increasingly unfavorable to low-income households. Regressive tax policies are more lenient on high-income earners to increase government revenue and stimulate economic growth. However, most of the tax burden falls on low-income households, diminishing their capacity to afford basic needs and their spending aptitudes (Hall and Kanaan 469).
Additionally, the increase in prices brought about by regressive tax policies may have a detrimental impact. For instance, in Texas, tariffs imposed on commodities such as fuel may result in increased fuel prices. The increase in prices also has an impact on the demand for certain commodities. A decrease in the demand for given products makes it challenging for some businesses to turn a profit due to unsuitable economies of scale. The nation’s regressive taxes have also caused political turmoil because they favor high-income earners. Most of the debates on the issue have focused on the ethicality of such laws because are oppressive to the poor.
Conclusion
Despite the apparent benefits of adopting regressive tax policies, Texas should strive for increased equality. Adopting tax policies that do not aggravate the gap in income distribution would increase opportunities for economic growth. Although regressive tax policies might be beneficial to the economy and generate government revenue, they immensely oppress low-income earners. However, the fairness of the tax system should be considered before implementing any reforms. The Suits Index is a crucial approach to mathematically assessing the fairness of a tax system by comparing the income earned to the percentage allocated to taxes.
Works Cited
Champagne, Anthony, et al. “Chapter 11: Public Finance.” Governing Texas, 5th ed., W. W. Norton & Company, New York, New York, United States, 2021, p. 952.
Hall, Jeremy L., and David Z. Kanaan. “State Tax Policy, Municipal Choice, and Local Economic Development Outcomes: A Structural Equation Modeling Approach to Performance Assessment.” Public Administration Review, vol. 81, no. 3, 2020, pp. 459–474.
Lavine, Dick. “Who Does Not Pay Texas Taxes?” Every Texan, 2021.
Moreno, Tonya. “A Guide to All Taxes in Texas.” Edited by Lea D. Uradu, The Balance, The Balance, 2022.
Papanikolaou, Nikolaos. “Tax Progressivity of Personal Wages and Income Inequality.” Journal of Risk and Financial Management, vol. 14, no. 2, 2021, p. 60.
Popescu, Madalina Ecaterina, et al. “Flat-Rate versus Progressive Taxation? an Impact Evaluation Study for the Case of Romania.” Sustainability, vol. 11, no. 22, 2019, p. 6405.