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Texas Taxation Policy Student’s Name Institution Course Professor’s Name Date Texas Taxation Policy Introduction States get their revenues from different sources, ranging from taxable fees to transfer from the federal government. Taxation is the main way that the state governments, across the United States, get their revenues. The taxation is classified into different categories which include income tax, general sales tax, excise tax, and ad valorem tax. Some states have all these taxes while others like Texas do not. Texas, in this case, lacks the income tax, which many other states have as their source of revenue. This report examines the effectiveness of Texas’ tax forms. Different Ways in Which States Fund their governments-Sources of State Revenue in Texas The operations of the governments and their programs for the people are managed and funded by the revenues collected through different means. In the United States, the main sources of income for the states include taxation, which per the 16th Amendment of the United States Constitution allows states to impose income tax (Overton & Nukpezah, 2020). All governments depend on different forms of taxes including Texas. However, not all governments make use of the available taxation like others do. Other sources of income for the government include federal grants, borrowing, and economic stabilization funds. Federal grants in aid are the funds that the state governments get from the federal government to help the states and the local governments to supplement their budget and fill their revenue deficits. Borrowing is also another form of revenue that many governments including Texas rely on to fund their programs and projects. Borrowing is the allowable practice by law that enables the states to borrow through bonds. The economic stabilization fund is another form of sourcing funds for the governments to implement their various projects and plans. An economic stabilization fund is a form of saving that involves money saved from the surplus of the previous budget cycles as well as money collected from other sources. All this money is channeled to the government coffers where they are saved for future use or when there is a deficit in the budget. Regressive and Progressive Taxes All tax schemes are categorized into two main classes, regressive and progressive. Progressive taxation is where members of the society with higher incomes pay a higher percentage of their income in form of taxation (Horton & Uradu, 2020). Regressive taxes are the opposite of progressive, in the sense that they allow those who have lower incomes to pay a higher percentage in form of taxes (Horton & Uradu, 2020). It is difficult to understand the fairness of taxation either as a regressive or progressive type. Apart from the two categories, taxation can also be classified as neutral or proportional where the taxation is made in such a way that it does not only target one group (low income, middle-, or high-income earners). In this form of taxation, everyone is made to pay the same rate irrespective of their income (Horton & Uradu, 2020). Texas adopts regressive taxation where the focus of paying taxes is concentrated among the low-income earners who pay a higher amount of taxes compared to their counterparts with high income. In this form of taxation, the government bases its rationale for taxing the low- income earners on the percentage value of the asset that the taxpayers purchase (Horton & Uradu, 2020). The only advantage of this form of taxation is that it creates a cap for every taxpayer (Horton & Uradu, 2020). Even though it gives the higher income earners the upper hand because they are taxed less than the low-income earners, the regressive form of taxation has been heavily criticized for being disproportionate and targeting those who do not have enough income. The other disadvantage of this taxation is that it is unhealthy economically and may negatively impact society. Some of the regressive taxations including sin taxes that seek to prohibit or discourage the purchase of alcohol and cigarette products are too hefty and can negatively affect those who are less well-off economically (Horton & Uradu, 2020). The progressive taxation structure is a different form of taxation that involves those with high income paying more in form of taxes compared to those who are in the low-income bracket. Progressive taxation is based on the taxable amount of every individual. This form of taxation follows the accelerating schedule, where the high-income earners are paying more compared to low-income earners (Horton & Uradu, 2020). This system is used in federal taxation which is based on marginal tax rates imposed on high-income earners. The percentage rate of taxation varies with the income group involved. This means that every dollar that an individual earns places them in a bracket that pushes the threshold to an upper-income group. The different forms of taxes imposed by the federal government that fit within the progressive category include estate taxes which include high-net-worth individuals and standard deduction that allows people to avoid paying taxes on the first portion of their income every year (Horton & Uradu, 2020). The progressive tax has been increasing with time, which explains the reason the federal tax has been increasing from 10% to 37%. The 10% taxation represents the bracket of lower-income earners, those who earn below $10,000 for single individuals and less than $20,000 for married couples (Horton & Uradu, 2020). The 37% tax rate applies to individuals with the highest income- earning, those who get above $523,600 for single taxpayers, and $1,047,200 for a joint married couple (Horton & Uradu, 2020). From this comparison, the regressive structure that Texas uses is not fair because it places everyone in the same tax bracket and yet they don’t have the same earnings. Texas is categorized as a low tax state ranking at position 45 as state taxes per resident survey (Castro & Lavine, 2013). This form of taxation is not fair because it lets those in the high-income earning category go home with a huge part of their earnings while leaving those from the low-income group with nothing. Winners and Losers in Texas’ Revenue Generation The winners and losers in the taxation structure adopted by the Texas government are those in the higher income bracket and low-income bracket respectively. This could be explained by the following scenario. If shoppers are paying about 6% sales tax on their shopping items, whether grocery or cars irrespective of their income, those with less income end up paying more in terms of taxation than those with high income. For example, if someone makes $20,000 annually and another person earns $100,000 annually. The two individuals would lose differently if they were all to pay a 6% sales tax for grocery. The one earning $100,000 will pay $6000 while the one earning $20,000 will have to pay $1,200 in the form of tax. This is not fair because the one with higher income will be going home with a bigger portion of his earnings while the one with low income will have to part with a smaller portion because the larger portion goes to the government. Recommendation Based on this evidence, the fairest way for the State of Texas to operate will be to adopt the progressive taxation structure. Many people continue to be exposed to poverty because the bigger part of their income is taken by the government while the ones with high income are left with a bigger portion of their income. This is widening the economic inequality in Texas. The best way is to ensure that people pay taxes based on their income. If one is earning well, they should be compelled by the law to pay higher tax rates and when someone is earning a little, they should be allowed to pay a small portion of their income and retain the rest to take care of themselves and their families. References Castro, D. E., &Lavine, D. (2013, February 27). “How Texas spends its money, How Texas gets its money, Why it doesn’t add up.” San Antonio Report. https://sanantonioreport.org/how-texas-spends-its-money-how-texas-gets-its-money-why- it-doesnt-add-up/ Horton, M., & Uradu, D. L. (2020, December 31). “Regressive, Proportional, and Progressive Taxes: What’s the difference.” Investopedia. https://www.investopedia.com/ask/answers/042415/what-are-differences-between- regressive-proportional-and-progressive-taxes.aspOverton, M., & Nukpezah, J. (2020). Investigating sales tax revenue competition among principal cities and their neighboring cities in Texas. International Journal of Public Administration, 43(11), 937-948. 1 2 3 4 5 6 7