 The education of our children is vital to our future, and that’s why reforming the state’s school finance system is a top priority for Texas’ 79th Legislature. How best to fund the state’s school districts in a reasonable and fair manner has long been an issue, and lawmakers seem determined that 2005 is the year things will change for the better.
As a result, legislators across the state are working to come up with creative solutions to the school finance dilemma – mainly, where’s the money going to come from? The legislative session is barely a month old, but many options have already been discussed – including new fees and taxes that would affect us as consumers, homeowners, and homebuyers.
Property taxes are one subject of great debate. Legislators have tossed around the idea of dropping the local tax rate on maintenance and operations for schools from the current maximum of $1.50 to about $1 per $100 of assessed value and instituting a statewide property tax in its place. A statewide property tax would require a constitutional amendment, which means a statewide voter referendum. The basic idea is to lower a portion of the school property taxes that homeowners pay now, pass a new statewide property tax, and fill in the remaining funding gap with other sources of revenue.
School-funding options
One option for generating revenue is increasing the sales tax. The current Texas state sales tax rate is 6.25 cents, one of the 10 highest rates in the country. Lawmakers could apply the sales tax to newspapers and bottled water, as well as some non-medical services. A cigarette tax is a popular option; raising the tax by $1 could generate $750 million a year for school finance. Business and franchise taxes are another option, though experts have said that a more broad-based business tax seems more likely. Various forms of gambling and taxing the proceeds of gambling activity have also been mentioned as possible new funding sources for Texas public schools.
Taxing real estate … again?
The week before the current legislative session convened, sources in the Texas Senate confirmed that a new 1.5% real estate transfer tax was also being quietly considered as a school funding source. A real estate transfer tax would have a big effect on homeowners and potential homebuyers – those who wish to be part of the American Dream of owning a home, and those who wish to sell their home someday.
Research shows that a real estate transfer tax would hurt the Texas economy. A study published in November 2004 by the Real Estate Center at Texas A&M University concluded that the creation of a transfer tax on real estate would result in $955.5 million in foregone economic activity and 11,575 Texas jobs eliminated. Right now, Texas is one of the most desirable states for businesses to invest in and relocate to. A real estate tax would change that.
What a transfer tax would
do to you
Essentially, a real estate transfer tax would take effect whenever property, including single-family homes, changes hands. On a $125,000 home, a 1.5% real estate transfer tax (sometimes also referred to as transfer fees) would mean a homebuyer would pay $1,875 more at closing. It might not seem like much to some people, but it’s enough to put many homebuyers’ goal of owning a house out of reach. And real estate transfer fees cannot be rolled into a mortgage loan; therefore, unlike mortgage interest paid, real estate transfer fees are not tax-deductible.
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The fact is that a real estate transfer tax would prevent a lot of Texans from achieving their dreams of homeownership. For current homeowners, it would result in a diminished market when it comes time to sell. Moreover, a new tax like this would not generate nearly enough revenue to fund Texas schools anyway. The benefits do not outweigh the risks.
Tax on services:
Another bad idea
Another idea that would raise the cost of homeownership is a tax on professional services. During the regular session of the 78th Texas Legislature, the Senate passed a tax-on-services bill for public education funding. It would have taxed virtually all professional services in the state – such as accounting, legal, real estate, hair salons and even advertising. This proposal would have increased the state portion of the sales tax from the current rate of 6.25% to 7.25%, and expanded the state sales tax to all services except medical and dental. Add in local taxes, and consumers would pay a 9.25% sales tax in many parts of Texas.
A tax on services, like a real estate transfer tax, would significantly raise the amount of money that Texas families would have to come up with to buy a home.
Real estate has been very, very good for Texas
Did you know that real estate transactions have what’s called a multiplier effect? That means that for every dollar spent on a home purchase, an estimated seven more dollars are spent at home-improvement stores, furniture stores, and the like. Those funds go a long way in generating a healthy, positive economy.
Real estate has been a constant, significant force in the Texas economy. In fact, many economists believe that real estate has saved Texas from a severe economic downturn during the past six to seven years. Taxing real estate transactions would undermine one of Texas’ economic pillars.
Our children’s education is paramount – the future of Texas depends on it. But replacing one type of property tax with another is not the answer. Any tax changes by the Legislature should encourage Texans to invest in their families and future, not make the barriers to homeownership even higher. Texas already lags woefully behind the rest of the nation in homeownership levels –
64% compared to the U.S. average 68%, according to the Census Bureau. Ultimately, our lawmakers will have the wisdom to realize this, and come up with fair and equitable ways to pay for our schools.
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