The State of Texas imposes a sales tax on leases and rentals of most goods, retail sales, and some services. All local governmental entities have the option of imposing an additional local sales tax for a maximum combined state and local tax of 8.25%.
Under the guise of property-tax relief, there are groups proposing a restructuring of the state and local taxing system. Their proposal includes eliminating (or greatly reducing) property tax and replacing lost revenue with an expanded sales tax that would include a dramatic increase in the sales-tax rate and an expansion of the tax base to include the sale and lease of real property.
Other entities seek to add a transfer tax to real estate transactions.
What does this mean for the real estate industry?
Any tax on real estate transactions would wreak havoc on the real estate market, an important part of the Texas economy.
A sales tax on real estate would initially destroy the first-time homebuyer sector. But the problem would quickly extend throughout the entire real estate market. Without the first-time homebuyer component, existing homeowners would have a difficult time selling their property, which would preclude them from moving up.
Texas REALTOR® position
Texas REALTORS® has conducted exhaustive, multi-year studies on local property taxes and believes applying sales tax to real estate is a short-sighted and flawed approach to property-tax relief.
Reducing property taxes with another tax does not achieve the true property tax reform that our state’s taxpayers deserve. Not only would adding real estate to the sales-tax base destroy the state’s real estate economy, it would disproportionately affect lower- and middle-class Texans.
Our association agrees with the 86% of Texas voters in 2015 (Proposition 1) who opposed a tax on real property by approving a constitutional ban on real estate transfer fees.
Property taxes continue to be a burden on Texas property owners. The Texas Legislature will no doubt see many proposals seeking to reduce the property tax burden.
Following the passage of 2015’s State of Texas Proposition 1, the Legislature would have to meet a supermajority threshold to approve any resolutions to repeal that constitutional ban and then get voter approval—a feat that while incredibly unlikely, is not impossible. Thus, Texas REALTORS® remains vigilant in reminding legislators that a transfer or sales tax on real estate in untenable.
In 2015, 86% of voters approved statewide Proposition 1, which constitutionally banned transfer taxes on real estate transactions and provided a $10,000 increase in the state-mandated homestead exemption. This overwhelming response is proof that Texans are demanding relief from burdensome property taxes.
Similarly, adding a transfer tax to a transaction would add another barrier to homeownership and impede the real estate market.