House Bill (HB) 3770 filed by Rep. James White (R-Hillister), aims to replace ad valorem property taxes with value-added taxation, commonly known as a “VAT.”
A VAT is a tax at each stage of the product supply chain at any point that value is added. When a product changes hands from producer to packager, or packager to delivery, a tax is collected on that transaction.
A kind of consumption tax, VAT differs from a sales tax in that its total cost burden is distributed across the product’s journey from point A to point B to the consumer whereas a sales tax is shouldered chiefly by the end-consumer.
Consumption taxes are often criticized for shifting the tax burden in the direction of poorer individuals rather than the top-heavy property tax system that hones in on property owners — typically those with more income. But property taxes are still paid by those who do not own property through the rent they pay landlords.
The other problem with property taxes, which neither income nor consumption taxes pose, is they’re not commensurate with the taxpayer’s ability to pay. Even before the pandemic, annual appraisal increases, sometimes drastic ones, made it more and more difficult to pay. And when whole sectors of income disappeared with the one fell swoop of the pandemic and government-mandated business closures, that intensified the cost burden.
Supporters of consumption taxes believe they inject taxpayer choice into the taxation equation. They are, however, generally vulnerable to macroeconomic factors such as that caused by the pandemic. If something happens that depresses consumption, then the tax collections drop along with it. That happened in 2020 as the state’s coffers, financed heavily by sales and other consumption taxes, were hit hard as tax collections dried up.
Oil and gas severance tax and state sales tax collections evaporated due to factors beyond those sectors’ control.
A higher degree of volatility exists with consumption taxes, but the VAT tax, because it’s spread out across the whole supply chain, is less vulnerable to unforeseen events that may substantially affect one stage.
The state sets a VAT percentage and that is added to every transaction. This proposed bill sets it at 6.72 percent. So, if a producer sells a widget to a packager for $5.00, a tax of $0.34 cents would be tacked onto the transaction. Another 6.72 percent tax would then be tacked onto the packager’s sale to the distribution company, and so on and so forth until the product reaches the consumer.
Three exemptions to the VAT exist within the bill: small businesses, government entities, and religious, educational, and public service organizations. Per the legislation, all state VAT collections would flow directly into the general revenue fund.
Localities may levy their own VATs under White’s bill, but it may not exceed 2 percent and school districts may not levy a VAT above a half percent.
Revenues from a school district’s VAT “must be used exclusively for school enrichment facilities and activities and for the payment of the principal of and interest on debt incurred to fund school enrichment facilities and activities.”
In its abolishment of property taxes, the bill provides that, after 2022, the legislature may explicitly permit the establishment of an ad valorem tax by a political subdivision.
That abolishment is contingent upon the passage of a constitutional amendment by 2026. The five-year-out effective date provides a transition period for the i’s to be dotted and t’s crossed.
School districts, like other localities, finance their expenditures through two separate tax rates: the Maintenance and Operations rate (M&O) and the Interest and Sinking rate (I&S).
The M&O is for day-to-day general expenses such as salaries, supply costs, etc. while the I&S pays for debt service issued for construction projects. HB 3770 prohibits either of these kinds of taxes from being issued without explicit permission from the legislature.
Property taxes — despite being overshadowed this session by coronavirus, budget stress, redistricting, and now electricity reform — remains an issue of extreme importance to the day-to-day lives of Texans. Calls for more substantive reform have come since the close of the 86th Session.
And this bill by Rep. White is a swing for the fence.
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Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.