Texas State Tax

Introduction

Texas, one of the most populous states in the US and the second-largest state by land area, has a reputation of having a low taxation system. However, the state, like any other in the US, raises revenue through various methods, including the collection of taxes. In this article, we will examine the Texas state tax system, how it works, and its impact on the state’s economy.

Overview of Texas State Taxes

Texas has no state income tax or corporate tax. The state, therefore, relies on sales tax, property tax, and other miscellaneous taxes to finance its services. According to the Texas Comptroller, the state collected $65.9 billion in taxes in fiscal year 2020. Sales tax and franchise tax are the two main taxes that generate most of the state’s revenue.

Sales Tax

Texas sales tax is one of the major sources of revenue for the state. The tax is a 6.25% rate statewide, with local governments allowed to impose an additional sales tax of up to 2%. The average sales tax in Texas is 8.19%. The tax is imposed on the sale of most goods, including cars, furniture, clothing, and electronics. Food and prescription drugs are exempted. Online purchases made by Texas residents are also subject to sales tax.

The sales tax has been an important source of revenue for Texas, accounting for about $37.3 billion in 2020. The tax is also a regressive tax as it takes a larger portion of a low-income earner’s earnings compared to a high-income earner. However, Texas has implemented programs such as sales tax holidays to reduce the impact of the sales tax on low-income earners.

Property Tax

The property tax is another significant source of revenue for Texas. The tax is imposed on the market value of the property, including land, buildings, and any improvements made on the property. The tax rate is set by local governments, including cities, counties, and school districts. The tax is collected by county tax assessor-collectors and used to finance local government services such as schools, roads, and public safety.

The property tax rate in Texas is among the highest in the US, with an average rate of 1.83% in 2020. However, Texas has implemented measures to make property taxes more bearable for homeowners. The state allows homeowners to claim a homestead exemption on their primary residence, which reduces the taxable value of the property by up to $25,000.

Franchise Tax

The franchise tax, also known as the Texas Margin Tax, is a tax on businesses’ gross receipts. The tax is imposed on every taxable entity doing business in the state, including corporations, LLCs, partnerships, and other business entities. The tax rate is 1% for most businesses, while retailers and wholesalers pay 0.5% tax rate. The tax is collected by the Texas Comptroller and used to finance state government services.

The franchise tax is an important source of revenue for Texas, accounting for about $7.1 billion in 2020. It has faced criticism from some businesses as it is seen as a disincentive for businesses to relocate to Texas. However, the tax has been praised for its simplicity and fairness, as it taxes businesses based on their gross receipts, regardless of their profitability.

Other Taxes

Besides sales tax, property tax, and franchise tax, Texas imposes several other taxes on goods and services. These taxes include excise taxes on gasoline, diesel fuel, cigarettes, and alcohol. The state also imposes taxes on hotel stays, rental cars, and sporting events. Texas also has a severance tax on the extraction of oil and gas. The tax is collected by the Texas Comptroller and used to finance state government services.

Impact of Texas State Taxes on the Economy

The Texas state tax system has had a significant impact on the state’s economy. The low taxation system has contributed to the state’s economic growth, and it has been an essential factor in attracting businesses to Texas.

According to the Tax Foundation, Texas ranks 11th in its State Business Tax Climate Index. The index measures the tax-friendliness of a state’s tax system, including its business tax policies. The low tax system in Texas has attracted many businesses to relocate from other states, leading to the state’s economic growth. Texas is home to many Fortune 500 companies, including AT&T, ExxonMobil, and Dell.

However, the low taxation system has had a negative impact on the state’s ability to fund public services such as education and healthcare adequately. The state has faced challenges in adequately financing its public education system, leading to lawsuits from school districts and families.

Conclusion

Texas’s state tax system is unique, with no state income tax and a low corporate tax rate. The state’s reliance on sales tax, property tax, and other miscellaneous taxes has raised concerns about the fairness and equity of the system. While the system has contributed to the state’s economic growth and attracted businesses to Texas, it has also faced criticism for its impact on public services. The state will continue to grapple with the challenges of balancing the need for adequate public services and a competitive tax system.

The Texas tax burden, at 7.9% of income is well below the national average of 9.8%.  there is no state income tax, which leads to higher sales and property taxes.  There are also property taxes that must be given consideration.  Tax returns are due on April 15.

Texas state sales/use tax – 6.25%, prescription and non-prescription drugs and non-prepared food exempt, local sales tax can add 2%.

Texas personal income tax

There is no state income tax

Texas excise taxes

Taxes will be assessed on alcohol, tobacco, gasoline and other miscellaneous items, at the discretion of the state.

– $1.41 per package of 20 cigarettes

– $2.40/gallon on spirits

– $.204 per gallon on table wine

– $.20 per gallon of beer

– Fireworks are taxed at 2% + sales tax, which funds rural fire departments

– $.24/gallon on gasoline

Texas inheritance/estate tax

Only federal laws are in effect.  No state estate tax has been collected on deaths after Jan 1, 2005.  There is no Texas inheritance tax.

Texas payroll taxes

State Disability Insurance – none

State Unemployment Insurance – 0.66% to 8.25%, wage base is $9,000.  New employer contribution is 2.7%.  Construction employers use 5.4%.

State minimum wage follows federal standards.

Texas state property tax

Texas does not impose a property tax, but cities, counties and school districts will.  Vehicles that do not produce income are exempt from taxation.  Intangible property is not taxed.  There is a homestead exemption available for homeowners that live in their property as a primary residence.  Property taxes are comparatively higher to other states due to the absence of personal income taxes.

Texas state corporate tax

Although Texas does not levy a corporate income tax, there is a tax on gross receipts called the Texas margins tax.  Texas is only one of five states that has a gross receipts tax in lieu of a corporate tax rate.

Exemptions

There is a $10,000 property tax exemption to the property’s assessed value for school district taxations.  This can be in addition to a $15,000 homestead exemption.  $3,000 will be exempt from all other local taxes.  School distract taxes are frozen for seniors and the disabled.
The tax ceiling on properties that undergoes renovations is dropped to compensate for the cost of renovations and increased value of the property.