How Texas Can Replace Property Taxes texaspolicyresearch.comThe question comes up almost immediately whenever the idea of eliminating property taxes in Texas is raised.
“If we get rid of property taxes, how do we fund schools, police, roads, and other local services?”
It is a fair question, but it often starts from the wrong premise.
Before asking how to replace property tax revenue, Texans should first ask what the government should be funding at all. If the government is already too large, then eliminating property taxes is not just a tax reform conversation. It is an opportunity to reset priorities, restore accountability, and rethink the proper role of government.
Only after answering that question should we seriously evaluate how to fund what remains.
Consumption-Based Taxes as a Replacement Strategy
If Texas chooses to replace a portion or all of property tax revenue, consumption-based taxes are the most straightforward alternative.
A consumption tax, such as a sales tax, is based on spending rather than ownership. That aligns taxation more closely with economic activity and personal choice. Texas already relies heavily on sales taxes at both the state and local levels. Expanding that system provides a clear and practical path forward.
There are two primary ways this could be done.
The first is broadening the tax base. Many goods and services are currently exempt from sales tax. Expanding the base to include more services would generate additional revenue without necessarily raising the rate.
The second is adjusting the rate itself. A modest increase in the sales tax rate, combined with a broader base, could generate significant revenue to offset reductions in property taxes.
Some have proposed going even further by adopting a value-added tax, or VAT, similar to systems used in Europe, which would tax consumption throughout the production process rather than only at the point of sale.
Consumption-based systems offer several advantages. They are more transparent, as taxes are paid at the point of purchase. They grow with the economy, and they do not penalize ownership in the same way property taxes do.
That said, consumption taxes can be regressive if structured poorly. Lower-income individuals tend to spend a larger share of their income on taxable goods and services, meaning they can bear a disproportionate burden if the tax base is not carefully designed. A system that heavily taxes everyday necessities while exempting large portions of the economy can amplify that imbalance.
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