(And the elimination of Property Tax in Texas)
August 5, 2010
Including a Brief Historical Synopsis and Summary of
Enhancing Texas’ Economic Growth, Through Tax Reform,
A study by the Texas Public Policy Foundation, April 2009
Private property ownership is, first and foremost, a freedom issue. History clearly testifies that the prosperity of a nation is inextricably linked to private property ownership. As such, repeal of property tax is essential to our freedom and future economic prosperity and growth.
Both the historical evidence presented here and elsewhere bears this out as does the empirical evidence presented by the Texas Public Policy Foundation in their April 2009 study entitled, “Enhancing Texas’ Economic Growth Through Tax Reform”. Empirical evidence clearly shows that the mode of taxation, even with the exact same amount of tax revenues collected, has a direct correlation to economic prosperity, and that income and property taxes are the most detrimental. Economic indicators such as growth, work, savings and personal investments positively increase when using a sales tax as the mode of taxation. Identification of the policy changes necessary to move from a property tax model of government funding to a sales tax model are, of course imperative, but how we accomplish this is adjunctive to returning true property rights to the people of Texas.
The Historical Evidence for Private Property Ownership
George Washington stated that “Liberty…is little else than a name, where the government is too feeble…to maintain all in the secure and tranquil enjoyment of the rights of person and property.” [1] The Founding Fathers reiterated the case for private property on many occasions. The Declaration of Independence asserts our unalienable rights to “life, liberty, and the pursuit of happiness,” which was derived from John Locke’s Two Treatises of Government (1689) in which Locke describes our reasons for forming government in the first place: man “is willing to join in society with others . . . for the mutual preservation of their lives, liberties and estates, which I call by the general name, property.”
Locke delves into the topic further and states in the same document:
Man being born . . . with a title to perfect freedom, and an uncontrouled (as spelled in the original text) originally enjoyment of all the rights and privileges of the law of nature, equally with any other man . . . hath by nature a power, not only to preserve his property, that is, his life, liberty and estate, against the injuries and attempts of other men; but to judge of, and punish the breaches of that law in others.
Our original Constitution states that we are endowed with “unalienable rights”. Unalienable property is the basis for individual freedom and prosperity. Webster’s 1828 dictionary defines unalienable as “not alienable; that cannot be alienated; that may not be transferred; as in unalienable rights.”
Before our founding fathers extolled the importance of private property, thoughtful people such as Aristotle, Aquinas, and Spanish Scholastics, Gotius and Lock, [2] proposed that property was an unalienable right of man. Tom Bethell, in his Book, The Noblest Triumph: Property and Prosperity through the Ages [3], ascribes the early colonies near demise to equitable distribution demanded by the funders; the potato famine to the lack of private property rights and cites Thomas Malthus’s observations of Ireland: “There is indeed a fatal deficiency in one of the greatest sources of prosperity, the perfect security of property.”
The fall of great empires bears out the fallacy of Plato’s premise and argument for communal property. Indeed, we can even see in the wealth and productivity levels of countries today that those who protect private property are more productive and thus enjoy a higher standard of living. As Murray Rothbard clearly noted, most all historians have made the same error: they have believed that the history of thought was a long history of progress rather than recognizing that sound ideas ebb and flow in history. We must rescue the great ideas from the past and compare them with the bad ideas of the new economics, big government and socialist philosophies.
Recent U.S. History
Unfortunately, policy makers in the United States have fallen susceptible to big government ideals and we’ve now seen the United States fall from the list of those nations that are free, ranking 8th on the Economic Freedom Index published by the Heritage Institutes behind 1. Hong Kong, 2. Singapore, 3. Australia, 4. New Zealand, 5. Ireland, 6. Switzerland, and 7. Canada.
Private Property in the U.S. scores an abysmal 8.5% on the Property Ownership Index.[4] As a result of our failure to recognize the principles of economic prosperity and to cling tenaciously to the great ideas from the past, those embodied in our Constitution, the United States has seen a decline in economic freedom. This is not acceptable in a society which grants in its Constitution that citizens have “unalienable rights” and is becoming less acceptable daily as people become more and more fed up with government overspending and no end in sight to taxation.
What About Texas?
When Texas is ranked among the states on economic freedom, we come in at 31 among the 50 states. The U.S. Economic Freedom Index published by Pacific Coast Research Institute [5] ranks states on economic freedom. The Institute notes, “great minds throughout history have observed and remarked on the relationship between political and economic freedom and have arrived at the same conclusions” namely as Jean-Baptiste Say concluded, “Of all the means by which a government can stimulate production, there is none so powerful as the perfect security of person and property.”
In 1999 Texas was ranked 8, in 2004 Texas ranked 17 and in 2008 Texas had dropped to 31 among the states! Yet we continue to hear from our elected officials that they have protected our individual rights; that taxes are low and productivity is high; that Texas is economically prosperous.
The literature is full of journals, articles, books and case studies by economists and great philosophers who conclude private property ownership is essential to freedom and economic prosperity. Isn’t it time to restore true private property ownership to Texans? We Texans believe that it is.
But don’t we own private property today some would ask?
According to Thomas Jefferson, “Nothing is ours, which another may deprive us of “.[6]
There is no question that Texans can be deprived of their private property today. Therefore, no one who pays property tax in Texas truly owns their land, we simply rent it from the government.
The Empirical Evidence for Private Property Ownership and Property Tax Elimination: The Texas Public Policy Foundation Study [7]
The Texas Public Policy Foundation (TPPF) used two methodologies to determine the effects of property tax on Texans and the economy. The study cites 19th century American economist Henry George who said: The mode of taxation is, in fact, quite as important as the amount. As a small burden badly placed may distress a horse that could carry with ease a much larger one properly adjusted, so a people may be impoverished and their power of producing wealth destroyed by taxation, which, if levied in any other way, could be borne with ease.
The study bore out George’s premise that the mode of taxation, with the exact same amount of revenues collected, has a direct correlation with economic prosperity. Economic indicators such as economic growth, work, savings and personal investments, all positively increase when using the sales tax mode of taxation.
All taxes, by definition, impose a cost on the economy—what economists call the “tax wedge.” While all taxes create a negative impact, property taxes create a larger tax wedge than consumption taxes, and are therefore inferior to consumption taxes.
Specifically, property taxes:
• Are less stable than consumption taxes;
• Create larger economic distortions;
• Are less related to taxpayers ability to pay;
• Are costlier and more complicated to administer; and
• Discourage capital-intensive industries from locating in Texas.
Migrating from a property tax and business franchise (property and income) tax to a sales tax structure creates many benefits for the state without changing the total tax revenues that the state and local governments currently raise. TPPF concluded that “regardless of the sales tax reform that is ultimately implemented, based on the theory of sound taxation and the empirical evidence, Texas should replace its current property tax revenue system with an expanded sales tax.” But before changing a system of taxation, one must determine what a sound tax policy would include.
A sound tax system:
- Is easy to understand;
- Is not overly costly to implement, and minimizes economic distortions (erroneous budget projections based on property tax revenues that do not grow proportionally to citizens ability to pay them);
- And should be transparent. (The Texas Comptroller’s website states that their office collects more than 60 separate, fees assessments and separate taxes, most of which are not transparent – Note by We Texans and not part of the TPPF study)
The Benefits of a sales tax are:
- Enhanced economic growth;
- Stronger job growth;
- Increased population growth,
- A stronger competitive environment; and
- A revenue stream that is more closely aligned with the citizen’s ability to pay
- Provide Transparency of taxation. Sales taxes, are significantly more visible—especially sales taxes paid by the purchaser at the final point of sale. Additionally, consumers can exercise greater control over their sales tax burdens compared to property taxes.
Specifically the TPPF study found:
- Texas imposes the 13th highest property tax burden in the U.S., 21 percent higher than the national average.
- Consistently, States with the lowest tax burdens experience faster economic growth, greater employment growth, and lower unemployment rates than the states with the highest tax burdens.
- Tax revenue growth for the states that do not levy either a sales or income tax has also outpaced those states where all three tax sources are levied. Consequently, arguments that all three tax sources are necessary to adequately fund the government are simply not supported by the facts.
- Beyond the faster growth rate, the states that did not levy either a sales or income tax also experience smaller declines in revenues during the recession of 2001 than the states that did levy all three major tax sources. Having more tax sources did not provide revenue stability during the last revenue downturn. A similar dynamic appears to be happening during the current economic downturn.
- When personal income is growing, so are sales tax revenues; when personal income is stagnating, so are sales tax revenues. The tax burden grows in line with taxpayers’ ability to afford it. On the other hand property tax revenues in Texas do not grow similarly to residents’ ability to pay them. This instability in revenues also leads to massive over- and under-estimates of general fund revenues. Instead, sales taxes can smooth out the revenue cycles.
- If property taxes were replaced with a sales tax, personal income in the state of Texas could potentially increase in the range of $3.1 billion to $3.3 billion in the first year or 2.0% and over a five year period, on a cumulative basis, would increase between $21.3 billion to $52.1 billion or 4.3%.
- The proposed tax reform would lead to a net gain of new jobs; during a five-year horizon, between 127,700 and 312,700 over the job growth Texas would have had if no tax reform were implemented. This would not only positively affect output, production and employment with the state, it would provide significant incentive for business to relocate.
Historically when Government has spent to the point that the citizen’s income cannot keep up with it, tax revolts happen. Property tax revolts have been well documented throughout the history of the United States. Our country was founded on one. We indeed believe that we have been endowed through our Creator with unalienable rights and the people of Texas want them restored. We Texans demand that the 2011 Texas Legislature pass legislation requiring a proposed Constitutional Amendment eliminating property tax be placed on the November 2011 ballot in Texas.
Conclusion:
Historical evidence clearly shows that the protection of private property rights leads to prosperity and economic growth. The historical evidence also supports the idea that private property was fundamental to freedom in the eyes of our founders and based on scholars and philosophers of the Enlightenment. We have also seen that the empirical data from the TPPF study bears out the economic and personal benefits of eliminating property tax to citizens and governments alike. If the government can deprive us of our property, then according to Thomas Jefferson we don’t have property.
Property taxes must be eliminated and replaced with a tax which is based on a citizen’s ability to pay it and not the whims and spending habits of state government. Nor should taxes be based on inflated revenue projections by legislators. We Texans would reiterate that tax reform is merely adjunctive to the right of people to the own and enjoy their own property and to exercise their unalienable rights as provided for in our Constitution.