October 17, 2018

Low Tax for Whom? Texas is a “Low Tax State” Overall, But Not for Families Living in Poverty

State legislators often lock themselves into a race to the bottom in pursuit of being labeled a “low tax state.” Analysis of data from the U.S. Census Bureau appears to lend support to Texas’s reputation as a “low tax state.” Specifically, Texas ranks 43rd nationally in taxes collected as a share of personal income.[1] The state’s lack of a personal income tax also tends to lead casual observers to conclude that the state is “low tax.”

But this narrow lens does not provide a full picture, as it overlooks the fact that Texas’s tax system has vastly different impacts on taxpayers at different income levels. For instance, the lowest-income 20 percent of Texans contribute 13 percent of their income in state and local taxes — considerably more than any other income group in the state. For low-income families, Texas is far from being a low tax state; in fact, it is tied with Arizona as the sixth highesttax state in the country for low-income families. [2]

Upside-Down Tax Code

According to the most recent data from the Census Bureau and Bureau of Economic Analysis, the state and local tax contributions of Texas taxpayers total 8.7 percent of personal income. This relatively small share of personal income collected in state and local taxes is 14 percent below the national average, affording Texas a reputation as a “low tax state”. But the state tax code is upside-down, that is, it requires taxpayers with the lowest earnings to contribute a larger share of their incomes in state and local taxes than the wealthiest taxpayers.

Analysis from the sixth edition of Who Pays? by the Institute on Taxation and Economic Policy (ITEP) finds the lowest-income 20 percent of Texas taxpayers — who earn an average income of $13,000 per year — contribute 13 percent of their income in state and local taxes, the sixth highest state and local tax bill for this income group in the country. Similarly, among the next 20 percent of taxpayers — whose average income is $28,400 — state and local taxes, on average, account for 10.9 percent of their income. Texas offers no targeted tax benefits for low-wage workers. It does not offer a property tax credit, a low-income credit to offset the cost of sales and excise taxes, or a child-related tax credit to offset the cost of child and dependent care.[3]

Meanwhile, the top 1 percent of households in the Lone Star State — a group with an average income over $1.6 million — contribute just 3.1 percent of their income in state and local taxes. Compared to the rest of the country, Texas’s state and local tax levy on the top 1 percent is the 9th lowest (or 43rd highest).

No Income Tax and High Reliance on Sales and Excise Taxes

Texas is one of just nine states that does not levy a broad-based personal income tax. Failing to levy a personal income tax comes at a high cost. To pay for state and local government services, Texas derives 50 percent of its tax revenue from sales and excise taxes — far above the national average of 35 percent. As a share of statewide personal income, Texas’s sales and excise taxes are 23 percent higher than the national average, ranking the state 10th highest in the country by this measure. According to ITEP’s Who Pays?, the lowest-income 20 percent of Texas households spend 9.3 percent of their income on sales and excise taxes, compared to just 1.2 percent of income spent on these taxes by the top 1 percent.

Texas’s upside-down tax code is pushing the state’s impoverished taxpayers deeper into poverty. The state’s lack of a personal income tax has been a major contributor to its reputation as a “low tax state,” but it comes at a steep price as the state relies heavily on sales and excise taxes that fall hardest on low-income families. Moreover, the state’s lack of any targeted tax credits for low-income workers leaves it with few options for offsetting the very high sales and excise taxes that it levies on families working hard to make ends meet.

[1] ITEP analysis of data from the U.S. Census Bureau and Bureau of Economic Analysis: U.S. Census Bureau. “2016 State and Local Government Finance Historical Datasets and Tables,” Sep. 12, 2018. https://www.census.gov/data/datasets/2016/econ/local/public-use-datasets.html.

Bureau of Economic Analysis. “State Personal Income and Employment,” Accessed Oct. 15, 2018. https://apps.bea.gov/regional/docs/DataAvailability.cfm.

[2] Meg Wiehe, Aidan Davis, Carl Davis, Matt Gardner, Lisa Christensen Gee, and Dylan Grundman. “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, 6th Edition,” Institute on Taxation and Economic Policy, Oct. 17, 2018. https://www.whopays.org

[3] Aidan Davis and Misha Hill. “State Tax Codes as Poverty Fighting Tools: 2018 Update on Four Key Policies in All 50 States, Sept. 17, 2018. https://itep.org/state-tax-codes-as-poverty-fighting-tools-2018/.