In 2015, two bills were proposed in Texas’ 84th Legislative Session: one would reduce the state sales tax rate from 6.25% to 5.95% (House Bill 31), and the other would expand the Homestead Exemption from $15,000 to approximately $30,000 (Senate Bill 1). Both bills would have a positive impact on the average taxpayer. However, the two different public policy changes would impact different subsets of taxpayers. Most people pay sales taxes, therefore the majority of the population would benefit from a reduction to the state sales tax rate. The expansion to the Homestead Exemption would only benefit homeowners, but the tax benefit would be larger per household. In essence, the question is: is it better for a larger number of people to have a small tax benefit, or a smaller number of people to have a large tax benefit?
In 2015 the Texas Association of Realtors hired AngelouEconomics to determine the answer to that question. The answer was framed in four primary sections:
- The economic impact of House Bill 31 – a biennial economic impact of $4.9 billion would result from a reduction in the state sales tax rate.
- The economic impact of Senate Bill 1 – a biennial economic impact of $4.2 billion would result from an expansion to the Homestead Exemption.
- The comparative impacts – over the biennial observation period, a reduction to the state sales tax would generate $668 million more in economic impacts to the state of Texas.
- An economic development perspective – includes an examination of other qualitative factors that should be considered when proposing changes to the tax structure. These factors include:
- Sales taxes are more regressive than a property taxes. Therefore, House Bill 31 would provide a greater benefit to lower-income households.
- For property taxes, the proportional tax burden is not as drastic across income levels. Thus, the tax benefit would be more equally distributed across households.
- Property tax reductions constitute a stronger economic incentive for potential residents.
- Households at different income levels are likely to spend their tax breaks differently. Sales tax breaks will have a larger impact on lower income households and therefore a larger impact on retail sectors. A higher Homestead Exemption will have a larger impact on higher income households and therefore a larger impact on sectors relating to savings.
Armed with both quantitative as well as qualitative information, the Texas Association of Realtors was able to more easily understand the real life impacts of complex tax policies. The results of the study were made manifest in the client’s ability to be intimately knowledgeable about both bills’ economic potential, and ultimately make a better informed decision about which bill to endorse
- Comparative Economic Impact of a Reduction in the State Sales Tax vs. an Expansion of the Homestead Exemption in Texas (20-25 page comprehensive professional report with full-color charts, graphs, and tables)