Taxes in Texas—A State Tax Profile
Texas is pretty tax-friendly compared to other states
Texas is one of only seven states that has no personal income tax. Most of taxes in Texas are sales taxes and taxes on businesses and specific industries. The state does have a property tax, but it's collected by cities, counties, and school districts, not by the state, and it can only be used for local needs.
All told, Texas is rather tax-friendly. According to the World Population Review, its overall state and local tax burden ranks 33rd among all states as of 2020. The tax burden here comes in at just 8.18%. Compare that to New York, which came in first, at 12.97%.
The Tax Foundation ranks the state even better according to its own criteria. It assigns Texas a tax burden of just 7.6%, ranking it 46th among all states.
The Texas Franchise Tax
Texas has no individual income tax, but it does levy a franchise tax of .475% on some wholesalers and retail businesses as of 2020. The rate increases to .95% for other non-exempt businesses. Also called a "privilege tax," this is a type of income tax based on total business revenues exceeding $1.18 million.
Sole proprietorships and some general partnerships are exempt.
Franchise tax reports are due annually on May 15, or the next business day when this date falls on a weekend or a holiday. Interest on past due franchise debts begins accruing 61 days after the due date, and penalties of up to 10% can apply.
"Death" Taxes in Texas
Inheritance and estate taxes are often grouped under the label "death taxes." Texas repealed its inheritance tax on Sept. 15, 2015. There's no estate tax in Texas, either, although estates valued at more than $11.58 million can be taxed at the federal level as of 2020.
Property Taxes in Texas
Property taxes are based on the assessed current market value of real estate and income-producing tangible personal property. "Income" is the key word when it comes to personal property. Your vehicle might be considered tangible personal property, but it's not subject to a tax as long as you don't use it to earn a living.
As for real estate, appraisals are performed by county districts. The appraiser will compare your home to other similar homes that have recently sold in the area and determine its value from there. The appraised value of your real estate is then multiplied by the local tax rate to determine your tax bill.
These rates are set by counties and school districts. They're based on yearly budgets and how much revenue the districts need to cover their costs.
Local governments regularly hold public hearings to discuss tax increases, and Texas citizens can petition for a public vote on an increase if it exceeds certain limits.
Owners of agricultural or timberland property can apply for special appraisals based on the value of crops, livestock, and timber produced by the land. This can result in lower appraisals and lower taxes.
Texas Property Tax Exemptions
Property tax exemptions reduce the appraised value of your real estate, and this can in turn reduce your tax bill. For example, a tax rate of 1.8% applied to an appraised value of $200,000 works out to more than 1.8% of an appraised $175,000 value—it's a difference of $450.
The following exemptions are available in Texas:
- The homestead exemption: You can qualify for a $25,000 reduction in your home's appraised value if it's your principal place of residence as of January 1 of the tax year. The Texas State Code allows school districts the option of offering a separate exemption of up to 20% of appraised value that can't be less than $5,000.
- Exemptions for seniors and the disabled: Homeowners who are age 65 or older, or those who are disabled, can qualify for an additional $10,000 exemption for school district taxes and an exemption for other local property taxes that can't be less than $3,000. The school district can't tax any more than what homeowners paid in the first year they qualified, so the tax is effectively frozen. Widows or widowers age 55 or older whose deceased spouse qualified for the 65 or older exemption can continue to receive the exemption themselves if they apply.
- Exemption for disabled veterans: Veterans of the U.S. Armed Forces who have been disabled as a result of their service might be eligible for a very generous disabled veteran's exemption. This exemption is equal to 100% of the appraised value of their primary residence.
Texas also offers a property tax exemption for solar- or wind-powered energy devices, as well as several exemptions for charitable organizations and businesses.
Sales Taxes in Texas
Texas' state-level sales tax is 6.25%. Localities can add their own sales taxes on top of this, however, which can bring the rate up to as much as 8.25% in some areas. Unprepared food, prescription drugs, and over-the-counter drugs are exempt.
Businesses that have suffered economic fallout from COVID-19 might be eligible for a short-term payment arrangement for sales taxes they owe to the state. The Texas Comptroller indicates that you should file your sales tax return by the due date, pay as much as you can at that time, and contact the Texas Enforcement Hotline at 800-252-8880 to find out what assistance might be available to you.
The state offers sales tax "holidays" each year. Certain purchases are exempt from sales tax on these occasions if you spend over a certain dollar amount. The holidays usually take place in April, May, and August, and August's dates often conveniently exempt clothing, backpacks, and back-to-school supplies.
Other Texas State Taxes
The state's gas tax has been set at 20 cents a gallon on diesel and unleaded fuels since 1991. This works out to just less than $10 a month for the average driver.
Texas taxes cigarettes at $1.41 a pack , and a stay in a hotel will cost you 6% of the cost of the room.
Tack on 2% if you're thinking of purchasing fireworks to celebrate the next Fourth of July, and be warned: Texas only allows the sale of fireworks from June 24 through July 4, and from December 20 to January 1 each year as of 2020. Individual counties can approve additional sales periods, including the state's Independence Day, San Jacinto Day, Memorial Day, and Cinco de Mayo—but only if you're located within 100 miles of the Texas/Mexico border.
A Summary of Texas Taxes
All in all, there are worse places to live than Texas if you're concerned about your tax burden.
- Cigarette Tax: $1.41 a pack
- Estate Tax: None
- Fireworks Tax: 2% of sale
- Franchise Tax on Businesses: .475% to .95% on revenues exceeding $1.18 million
- Gas Tax: 20 cents a gallon
- Hotel Tax: 6% of the cost of accommodations
- Individual Income Tax: None
- Inheritance Tax: Repealed in 2015
- Personal Property Tax: None except for property used for business purposes. Set by county districts.
- Property Tax Exemptions: A homestead exemption is available, as well as exemptions are available for senior citizens, disabled persons, and disabled veterans.
- Real Estate Tax: Set and appraised by county districts. There is no state real property tax.
- Sales tax: 6.25% at the state level. Local taxes can be added on.
Minnesota Center for Fiscal Excellence. "Comparison of Individual Income Tax Burdens by State." Page 1. Accessed Aug. 17, 2020.
World Population Review. "Tax Burden by State 2020." Accessed Aug. 17, 2020.
Tax Foundation. "Taxes in Texas." Accessed Aug. 17, 2020.
Comptroller.Texas.gov. "Franchise Tax." Accessed Aug. 17, 2020.
IRS. "Estate Tax." Accessed Aug. 17, 2020.
The American College of Trust and Estate Counsel. "State Death Tax Chart." Accessed Aug. 17, 2020.
Comptroller.Texas.gov. "Property Tax Exemptions." Accessed Aug. 17, 2020.
Comptroller.Texas.gov. "Sales and Use Tax." Accessed Aug. 17, 2020.
Texas.Comptroller.Gov. "Motor Fuels Taxes in a Changing Texas Transportation Scene." Accessed Aug. 17, 2020.
Comptroller.Texas.Gov. "Cigarette Tax." Accessed Aug. 17, 2020.
Comptroller.Texas.Gov. "Hotel Occupancy Tax." Accessed Aug. 17, 2020.
eLaws.us. "SECTION 3.1281. Fireworks Tax." Accessed Aug. 17, 2020.