The Myth of Texas as a
Low Tax State
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th
Street, Suite 400, Austin, TX 78701 * 512-472-8838 * @txtaxpayers
Texas Taxpayers Research Report January 2023
^
Texas has a reputation as a low tax state, but
that reputation doesn’t live up to reality for all
taxpayers. For individual taxpayers, Texas is
unquestionably one of the nation’s lowest
taxing states. Texas state and local taxes on
businesses, though, are well above the national
average and are particularly burdensome on
capital-intensive businesses – the huge
marquee projects that states aggressively
compete for.
Who Pays What? There are essentially two
types of taxpayers: individuals and businesses.
Individuals are well familiar with the state and
local taxes they pay: sales tax is collected as a
percent of the purchase price whenever they
purchase many items, property tax is due on
their homes.
Businesses pay those same sales and property
taxes, plus a host of other taxes individuals
never see. In their annual survey of state and
local taxes on business, EY
1
estimates that
business pays about half of all sales taxes and
roughly3/5 of all Texas property taxes.
Businesses pay sales tax on supplies,
1
EY (Ernst & Young), STRI (State Tax Research
Institute), and COST (Council on State Taxation),
Total State and Local Business Taxes, State-by-State
Estimates for FY21, Washington, D.C., December
2022.
computers, and even the utilities to run their
offices.
2
Businesses also pay tax on the
properties they occupy or use. In addition, they
pay taxes individuals never see, such as
corporate franchise taxes, wholesale excise
taxes, severance taxes, payroll taxes, utility
taxes, etc.
2
Though business typically acts as the sales tax
collector for the state, collecting tax from customers
who buy their goods, these are not considered
“business-paid” taxes. Only those taxes businesses
incur on the purchase of items they use in the course
of their operations are considered “business-paid”
taxes in the EY Study.
Tax systems are made up of two
types of taxpayers: individuals
and businesses.
For individuals, Texas indeed is a
low tax state – only 5 states
have lower overall taxes.
For business, Texas is actually a
high tax state as 36 states have
lower taxes.
The Highs and Lows of Texas Taxes Page 2
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Figure 1
State and Local Taxes on Individuals
Relative to Personal Income
0% 2% 4% 6% 8% 10%
Wyoming
Alaska
South Dakota
North Dakota
Florida
Texas
Tennessee
New Mexico
New Hampshire
Nevada
Oklahoma
Louisiana
South Carolina
Georgia
Alabama
Montana
Washington
Mississippi
Arizona
Missouri
West Virginia
Kentucky
Colorado
Nebraska
Virginia
Delaware
North Carolina
Idaho
Ohio
Wisconsin
Arkansas
Iowa
Pennsylvania
Michigan
Vermont
Indiana
Kansas
Maine
New Jersey
Illinois
Massachusetts
Rhode Island
Utah
Oregon
Maryland
Minnesota
California
New York
Connecticut
Hawaii
Property
Sales
Income
Other
50-State
Average
= 6.0 %
Texas =
3.7 %
Source: Total State and Local Business Taxes: State-by-
State Estimates for Fiscal Year 2018, Council on
State Taxation and Ernst & Young, October 2019.
Figure 2
Share of Taxes Paid by Quintile of Income
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Percent of Tax Paid Tax Paid Vs Income
Quintiles of Income: Low to High
Quintiles of Income: Low to High
Wealthier
Texans pay a
higher portion
of the overal
state and local
tax bill ...
... but relative
to family
income, those
taxes are less
burdensome.
Source: Who Pays? A Distributional Analysis of the Tax
Systems in All 50 States, Institute on Taxation &
Economic Policy, October 2018.
In purely academic terms, businesses don’t
ultimately pay taxes, people do. But that does
not mean that taxes don’t have an impact on
business decisions—they most certainly do.
Businesses either pass their taxes forward to
consumers in the form of higher prices,
backward to investors in the form of lower
returns, or internalize them by cutting costs
such as payroll. Each of these actions has
adverse consequences for the business, so it
will always seek to minimize the necessity to
employ any of these actions. Taxes are a major
operating cost, and businesses will gravitate to
those locations where costs are least.
Consequently, direct taxes on business are a key
factor impacting economic growth and job
creation.
The EY study, prepared annually for the Council
on State Taxation, compares state and local
taxes across the states based on who pays
them—individuals or businesses. Applying a
consistent methodology across states reveals
that Texas’ tax structure falls more heavily on
business than that of 44 other states. Without a
state personal income tax, Texas relies more on
sales and property taxes, which fall in large part
on businesses. Almost three-fifths of the taxes
Texas state and local governments collect
(59.3%) are paid by businesses versus 43.6% in
the average state. Individual Texans pay 40.4%
of all state and local taxes, well below the
national average of 56.4%.
A Familiar Tale: Low Taxes in Texas. Though it
may not feel like it when our property tax bills
arrive each October, the total amount of state
and local taxes paid by individuals in Texas is
among the lowest of any state. The lack of a
personal income tax saves the average Texas
family of three close to $4,000 annually. Texas
state and local government taxes on average
amount to 3.7% of family income— far below
the national average of 6.0%. That ranks Texas
6
th
lowest (or 45
th
highest) among the 50 states.
The good news of low taxes on individuals is
somewhat tempered by the fact that Texas’
state and local taxes are “regressive”—i.e.,
lower income families see a higher portion of
The Highs and Lows of Texas Taxes Page 3
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their income go to paying taxes than do
wealthier families (Figure 2). Consumption and
housing costs—subject to sales and property
taxes—tend to claim a greater portion of the
family budget for those with lower incomes
than for those with higher incomes. Most other
states rely heavily on personal income taxes,
which are typically structured to limit the
impact on those with lower incomes, resulting
in a more “progressive” tax system across
income groups.
It is important to understand what regressivity
is, and what it is not. A “regressive” tax system
does not mean the poor pay the most. It is
simply a measure of how taxes relate to income
levels. In fact, almost 70% of Texas’ state and
local taxes are paid by upper middle class and
wealthier Texas households. The poorest
quintile of Texas families pay only about 6% of
all state and local taxes.
The Tale Not Often Told: Texas is a High Tax
State. Relative to economic output, Texas’
effective tax rate on businesses is 5.4%—well
above the national average of 4.9%, and ranking
us 14
th
highest among the states (Figure 3).
While that doesn’t make Texas an outrageously
high tax state, it clearly dispels the myth that
Texas is a low tax state for businesses in
general. In fact, some of the “competitor”
states to which we are often compared—
California, Georgia, Louisiana, Oklahoma,
Tennessee, Virginia, and even Massachusetts—
all have generally lower business tax burdens
than Texas.
These figures take into account all taxes
businesses pay, including severance taxes
(included in the Excise and Other Taxes
category). Other resource-rich states also tend
to rank high: New Mexico is second, North
Dakota is third, Wyoming is fifth. However,
these less-populous states are far less
economically diverse than Texas. North
Dakota’s severance and production taxes
account for over half of its state tax revenue
and in Wyoming they equal about a third. In
contrast, severance taxes accounted for just 8%
of Texas’ state tax revenue in 2021.
It should be emphasized that “business” is not a
single enterprise—far from it. It is a mix of
profit-seeking pursuits ranging from the very
large to the very small; from capital-intensive to
labor-intensive; and from goods-producing to
services-producing. These diverse businesses
are impacted in very different ways by the
state’s tax structure. Relying so much on sales
and property taxes, Texas’ tax burden falls most
heavily on goods-producing and capital-
intensive industries, but relatively lightly on
service-producing industries.
Texas sales tax rates are among the highest
nationally, and the tax base is broader than that
of most other states. Texas’ combined state and
local sales tax rate tops out at 8.25%, though
the effective rate across the state is a bit lower
at 8.2% according to the Tax Foundation, as not
all sales occur in local areas imposing a full 2%
Figure 3
State and Local Taxes on Businesses
Relative to Economic Output
0% 2% 4% 6% 8% 10%
North Carolina
Michigan
Missouri
Georgia
Massachusetts
Utah
Ohio
Arizona
Indiana
Maryland
Connecticut
Wisconsin
Minnesota
New Hampshire
Tennessee
Washington
Kansas
Idaho
Alaska
Virginia
South Carolina
Iowa
Pennsylvania
Louisiana
Colorado
Florida
Kentucky
Arkansas
California
Delaware
Nebraska
Alabama
South Dakota
Illinois
Oregon
Oklahoma
Texas
Nevada
Rhode Island
New York
Montana
West Virginia
New Jersey
Hawaii
Mississippi
Wyoming
Maine
North Dakota
New Mexico
Vermont
Property
Sales
Income
Excise
50-State
Average
= 4.9%
Texas =
5.4%
Source: COST.
The Highs and Lows of Texas Taxes Page 4
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local tax.
3
That ranks Texas’ combined sales tax
rate 14
th
highest among the states.
Texas’ sales tax base is relatively broad as well,
ranking 15
th
broadest by TTARA estimates.
4
While state sales taxes commonly apply to
purchases of tangible personal property, Texas
is among the more aggressive states when it
comes to taxing purchases of services.
5
While the lack of a personal income tax results
in higher business property and sales taxes, it
also offers some advantages to the business
community. Small and start-up companies are
better able to retain capital and reinvest in their
businesses. Further, without a state personal
income tax Texas is an attractive location for
CEOs looking to locate company headquarters.
The irony, though, is that many manufacturers
headquartered in Texas find it cheaper to build
their production facilities elsewhere.
A Closer Look at Property Taxes. The property
tax falls differently on individual homeowners
and on owners of business, or income-
producing properties. All real estate (i.e., land
and buildings) is subject to property tax, but
businesses must also report and pay tax on the
personal property they own (machinery,
equipment, supplies, and even inventories of
raw materials and finished products).
For homeowners, effective property tax rates
(the amount of actual tax paid relative to the
property’s full market value) are high in Texas
3
Janelle Fritz, Tax Foundation, State and Local Tax
Rates, Midyear 2022,
https://taxfoundation.org/publications/state-and-
local-sales-tax-rates/.
4
To calculate the breadth of sales tax bases, data on
general sales tax collections from the US Bureau of
the Census for 2020 for each state was divided by
their effective sales tax rate as determined by the
Tax Foundation. This estimate of taxable sales was
then divided by private sector gross state product
from the US Bureau of Labor Statistics to determine
what share of each state’s economy was subject to
that state’s sales tax.
5
Federation of Tax Administrators, By the Numbers,
FTA Survey of Services Taxation – Update, July-
August 2017.
relative to other states, at 1.69%
6
. Property
taxes on a median-valued Houston home rank
10
th
highest nationally (Figure 4), and 27%
above the national average. Texas raised its
school homestead exemption in 2022; had the
exemption been in effect in 2021, Texas’
effective property tax rate would have dropped
to 1.60% and Texas would have dropped two
places in the rankings to 12
th
highest, or 20
percent above the national average.
Effective property tax rates on industrial
property in Texas, such as a manufacturing
plant, are about a third higher than that for
homeowners at 2.27%, ranking us 6
th
highest
and a whopping 62 percent above the average
rate across the 50 states. Texas business
property taxes apply not just to land and
buildings, but also to tangible personal property
used in the production of income, including
inventories. Personal property is wholly or
largely exempt in 12 states and 43 others
provide a specific exemption for business
inventories.
7
In Texas, local jurisdictions are
6
Lincoln Institute of Land Policy and the Minnesota
Center for Fiscal Excellence, 50-State Property Tax
Comparison for taxes paid in 2021, July 2022.
7
Tax Foundation, States Should Continue to Reform
Taxes on Tangible Personal Property, Fiscal Fact No.
668, August 2019.
Figure 4
The High Cost of Texas Property Taxes
Effective Rank Among
Tax Rate the States
Residential Property
Median-Valued Urban Home 1.69% 10
Median-Valued Rural Home 1.18% 23
Urban Apartment 2.22% 10
Rural Apartment 2.39% 8
Industrial Property
Urban $1 ml. Value 2.27% 6
Urban $25 ml. Value 2.27% 6
Rural $100,000 Value 2.26% 4
Rural $1 ml. Value 2.26% 4
Source: 50 State Property Tax Comparison Study for
Taxes Paid in 2021, Minnesota Center for Fiscal
Excellence and the Lincoln Land Institute, July
2022.
The Highs and Lows of Texas Taxes Page 5
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able to offer a limited “Freeport” exemption,
but it only applies to goods to be shipped
outside the state within a certain period of time
and not inventories in general.
Texas businesses also do not benefit as much
from various exemptions, as do homeowners
(Figure 5). Various homestead exemptions
remove, on average, 25% of the market value of
a home from property taxation.
8
Business
property can avail itself of exemptions for
goods in transit, pollution control equipment,
and certain new investment projects under the
no-longer-available Chapter 313 of the Tax
Code. These exemptions amount to about a 7%
discount of the market value of business
property in the state.
Agricultural property is subject to special
methods of appraisal based on the productivity
of the land. These effectively exempt most of a
farm and ranch property’s value – saving many
farmers and ranchers from bankruptcy if forced
to pay tax on full market value.
Though Texas property taxes consistently rank
among the highest of states, there is progress
to report. In 2019 Texas lawmakers passed far-
reaching reforms in HB 3 by Huberty/Taylor and
SB 2 by Bettencourt/Burrows. These bills
essentially bring tax rates down as property
8
Figures developed using school tax data from the
Comptroller.
values rise. From 2018 to 2021, Texas’ effective
tax rate on homeowners dropped from 30%
above the national average to now 27%; the
effective tax rate on industrial property
dropped from 65% above the national average
to now 62% higher. Rates are dropping slowly,
though the changes have had little impact on
how Texas compares overall.
Taxes are not the sole determinants of business
investment decisions. Clearly, market
conditions that drive revenues head the list, and
on the cost side, labor, land, and transportation
are important—most of which fall in Texas’
favor. Regulatory issues are also key—another
boost for Texas. Still, when it comes to taxes,
Texas is at a disadvantage when compared to
many of our competitor states.
Figure 5
Taxable/Non-Taxable Property in Texas
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
Residential Business Agricultural
Taxable
Exempt/Not Taxable
Trillions of Dollars of Market Value
Source: Texas Comptroller of Public Accounts.
About TTARA
The Texas Taxpayers and Research
Association (TTARA) is a non-profit
membership-supported organization of
businesses and individuals interested in state
and local fiscal policies in Texas and the way
those policies impact our economy. For
almost 50 years TTARA has provided
informative analysis of Texas state and local
tax policy.
TTARA Staff
Dale Craymer, President
dcraymer@ttara.org
Carl Walker, Property Tax
cwalker@ttara.org
Frank Battle, State Tax
John Kennedy, Property and State Tax
Sheryl Pace, School Finance
space@ttara.org
Ryan Ash, Communications
Angela Dowell, Membership
Rikkie Gonzalez, Office Manager
rikkie@ttara.org
