Some of the more prominent sources of tax revenue in Texas are summarized in the table below. Of these, the general sales tax is the largest source of revenue for the state, and property taxes are the largest source of revenue for local government.
|Franchise tax||imposed on any taxable (private sector) entities, organizations, or businesses formed or doing business in Texas; assessed regardless of whether the entity is profitable|
|Gasoline tax||20 cents per gallon for diesel and gasoline (this is in addition to a federal gasoline tax)|
|General sales tax||6.25% state tax, plus up to 2% local tax, imposed on applicable goods and services; the list of applicable goods and services has been expanded over time to generate more sales tax revenue for the state|
|Property tax||an ad valorem tax based on the value of a person’s home that is assessed and collected by local governments|
|Severance tax||imposed on the extraction of non-renewable natural resources including gas, oil, and condensate|
|Sin tax||tax on items or activities the Texas legislature considers undesirable or harmful (ex: taxes on tobacco, alcohol, and sexually oriented businesses)|
Other sources of state revenue include federal funds received from the federal government (block grants, categorical grants, and general revenue sharing), interest payments associated with state investment funds (like the PSF), lottery funds, and miscellaneous fees (fees for fishing licenses; motor vehicle registration fees; drivers license fees; etc.).
Low Tax State?
Texas is generally referred to as a low tax state: in 2016, Texas ranked 43rd out of 50 in taxes collected as a share of personal income (8.7 percent — which is 14 percent below the national average) (Institute for Taxation and Economic Policy, 2018). This is largely because, unlike many other large urban states, Texas does not have a state income tax.
The general sales tax (and most of the taxes that exist in Texas), however, are regressive taxes. As a result, those with less income tend to pay a greater percentage of their income in state and local taxes here in Texas:
. . . 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 . . . 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. (Institute for Taxation and Economic Policy, 2018)