What Are We Replacing?
Understanding Scope 2 — the full replacement obligation of $178.1 billion
Most conversations about property tax reform focus only on the property tax bill itself. The Texas Property Tax Replacement Plan goes further. The plan is built on what is called Scope 2: the goal of replacing all Texas property taxes and all existing state and local sales taxes, the franchise tax, and every state excise tax with a single unified flat rate. In one stroke, Texans would no longer pay a property tax, a separate state sales tax, a franchise tax, a motor vehicle tax, an oil and gas severance tax, a hotel tax, a tobacco tax, an alcohol tax, or a utility tax. One rate. One system.
This is possible because Texas’s economy is enormous, and the math works: the combined obligation of every tax being replaced totals $178,091,924,600 for fiscal and tax year 2024. Spread across a properly constructed tax base, that obligation can be met at a rate well below Texas’s existing 8.25% cap — with household essentials fully exempted on top of that.
Scope 1 ($150.2 billion) is the minimum viable replacement: all property taxes, the current state and local sales taxes, and the franchise/margin tax. That alone eliminates property tax bills for every homeowner, renter (indirectly), and business in Texas.
Scope 2 ($178.1 billion) goes further by also replacing every state excise tax — the fees Texans pay at the gas station when they buy a car, when they pay their insurance bill, when they order a drink at dinner, or when they stay in a hotel. These are taxes most Texans don’t even realize they’re paying. Scope 2 is the full comprehensive replacement that produces the cleanest, most transparent tax system possible.
The Texas Property Tax Replacement Plan is designed to meet the Scope 2 obligation in full.
Table 1.1 — All Revenue Streams Being Replaced
| Revenue Stream | Annual Amount | Collected By | Scope 1 | Scope 2 |
|---|---|---|---|---|
| State-Level Taxes | ||||
| State Sales & Use Tax | $47,159,947,193 | State Comptroller | ✓ | ✓ |
| Franchise / Margin Tax | $7,081,852,807 | State Comptroller | ✓ | ✓ |
| Motor Vehicle Sales & Use Tax | $6,840,000,000 | State Comptroller | — | ✓ |
| Oil Production Tax (Severance) | $6,300,000,000 | State Comptroller | — | ✓ |
| Insurance Premiums Tax | $2,980,000,000 | State Comptroller | — | ✓ |
| Natural Gas Production Tax (Severance) | $2,130,000,000 | State Comptroller | — | ✓ |
| Alcoholic Beverage Tax | $1,770,000,000 | State Comptroller | — | ✓ |
| Cigarette & Tobacco Tax | $1,070,000,000 | State Comptroller | — | ✓ |
| Hotel Occupancy Tax (State) | $760,000,000 | State Comptroller | — | ✓ |
| Mixed Beverage Tax | $670,000,000 | State Comptroller | — | ✓ |
| Utility Tax | $670,000,000 | State Comptroller | — | ✓ |
| Other State Taxes & Fees | $4,660,000,000 | State Comptroller | — | ✓ |
| Local Taxes — All in Both Scopes | ||||
| County Property Taxes (254 counties) | $15,729,755,794 | County Tax Offices | ✓ | ✓ |
| County Sales Taxes | $840,721,618 | County Tax Offices | ✓ | ✓ |
| City Property Taxes (1,187 cities) | $15,746,727,156 | City Tax Offices | ✓ | ✓ |
| City Sales Taxes | $8,747,725,627 | City Tax Offices | ✓ | ✓ |
| School District Property Taxes (1,013 ISDs) | $41,657,752,748 | ISD Tax Offices | ✓ | ✓ |
| Special District Property Taxes (2,530 SDs) | $13,499,241,657 | Special Districts | ✓ | ✓ |
| Totals | ||||
| Scope 1 Total — Property taxes + sales taxes + franchise tax | $150,241,924,600 | |||
| Scope 2 Total — All of Scope 1 + all state excise taxes ✔ Official planning figure | $178,091,924,600 | |||
You may notice that the School District line in the table above shows $41.7 billion in ISD property taxes. What is not reflected there — but is folded into the State tier of this plan — is the additional state funding that flows to schools through the Foundation School Program (FSP).
Texas currently funds public education through a combination of local property taxes and a state-level transfer: in FY 2024, the state contributed approximately $27 billion to K–12 education from general revenue. On top of that, the state also operates the “Robin Hood” recapture system — formally, excess local revenue recapture under Education Code Chapter 48 — which compels property-wealthy school districts to remit a portion of their local tax collections back to the state for redistribution. That recapture has ranged from $2.7 billion to $4.5 billion per year since 2018 (Texas Education Agency, 2025).
Under the Texas Property Tax Replacement Plan, both the state education transfer and the Robin Hood recapture system are eliminated entirely. School funding becomes a direct, transparent line item in the Tier 4 (ISD) apportionment of the flat sales and use tax. Every dollar that districts currently receive — whether from their own property tax levy, from state FSP allocations, or redistributed through recapture — is replaced by a direct revenue share from the unified rate. The perverse incentive of Robin Hood, which penalizes communities for rising property values, disappears. Funding becomes consumption-based, not property-value-based.
Building the Tax Base
How Texas constructs a $4.40 trillion gross tax base broad enough to keep the rate low
The most important design decision in any tax replacement plan is the construction of the tax base — the total pool of economic activity to which the rate is applied. A narrow base forces a high rate. A broad, well-designed base allows a low rate.
The Texas Property Tax Replacement Plan uses what is called a Full Hybrid Gross Sales Tax Base. It begins with the Texas Comptroller’s own official gross sales data — the full dollar value of every transaction reported by every permitted seller in the state, including online sellers — and adds five additional sectors of economic activity that are not currently in the sales tax base but represent real, measurable exchanges in the Texas economy: oil and gas production, insurance premiums, residential real estate transactions, banking service fees, and healthcare services.
Together, these six components produce a pre-exemption base of $4,399,657,387,036 — nearly $4.4 trillion.
In 2018, the U.S. Supreme Court’s decision in South Dakota v. Wayfair established that states can require out-of-state online retailers to collect sales tax if they do significant business with customers in that state. Texas already enforces this. The Comptroller’s quarterly gross sales data includes all remote and marketplace seller transactions — meaning your Amazon, Walmart.com, or Chewy.com purchase is already counted in the official data used to build this base.
Table 2.1 — The Six Components of the Tax Base
| # | Component (Plain Language) | Annual Amount | % of Base | Status |
|---|---|---|---|---|
| C1a | All In-State Business Sales Every sale by every permitted Texas seller — retail, wholesale, manufacturing, construction, services, and more (Comptroller Q3 2025 ×4) |
$2,577,168,340,904 | 58.6% | Confirmed |
| C1b | Online & Out-of-State Remote Seller Sales Wayfair-compliant remote and marketplace sellers selling to Texas customers (Comptroller Q3 2025 ×4) |
$891,089,046,132 | 20.3% | Confirmed |
| Subtotal — Comptroller Gross Sales Base | $3,468,257,387,036 | 78.8% | ||
| C2 | Oil & Gas Wellhead Production Value Crude oil and natural gas valued at the point of production (Railroad Commission volumes × EIA wellhead price, CY2024) |
$165,400,000,000 | 3.8% | Confirmed |
| C3 | Insurance Premiums — All Lines P&C premiums confirmed by TDI ($83.1B); Life, Health, HMO, Title implied from Comptroller tax back-calculation ($186.9B) |
$270,000,000,000 | 6.1% | Partial Confirmed |
| C4 | Residential Real Estate Transactions Total dollar volume of all Texas home and condo sales (Texas REALTORS® 2024 Annual Report, 327,906 homes at median $337,500) |
$111,000,000,000 | 2.5% | Confirmed |
| C5 | Banking & Financial Services Revenue Gross interest income and non-interest fee revenue from all Texas-operating banks and financial institutions (FDIC CY2024, conservative) |
$90,000,000,000 | 2.0% | Confirmed |
| C6 | Healthcare Services Revenue Hospital, physician, dental, and home health services billed in Texas (CMS National Health Expenditure Accounts 2024, TX 9.5% share). Note: Fully exempted by TLES-5 — included for architectural completeness. |
$295,000,000,000 | 6.7% | Derived |
| Total — Texas Hybrid Gross Sales Tax Base (Pre-TLES) | $4,399,657,387,036 | 100% | ||
You may notice that the tax base above includes categories like healthcare services, residential rent, and groceries - things that many Texans would immediately flag as essentials that should not be taxed. That instinct is exactly right, and the plan agrees.
The reason these categories appear in the gross base is deliberate and important: the full base must be accounted for honestly before exemptions are applied, so that the impact of those exemptions can be measured precisely and transparently. This is how rigorous tax modeling works - you start with the complete economic picture, then subtract the protected categories explicitly, so that readers and policymakers can see exactly what is being removed and why.
The next section of this article - the Texas Living Exemption Set (TLES) - removes six categories of essential household spending from this base entirely: groceries, residential rent, residential utilities, prescription drugs, medical care, and education (tuition at licensed providers). Those six categories account for $574.3 billion in annual spending that is fully exempted before the rate is ever calculated.
No Texan will pay the replacement tax on groceries, rent, utilities, prescription drugs, medical care, or tuition at a licensed school. Showing those categories in the gross base is not a sign that they will be taxed - it is the mechanism by which we prove, in hard numbers, exactly how much protection the TLES provides and how it drives the final rate down to 4.655%.
Table 2.2 — In-State Business Sales by Industry Sector
| Industry Sector | Annualized Gross Sales | % of In-State Total |
|---|---|---|
| Retail Trade | $796,552,000,000 | 30.7% |
| Manufacturing | $677,160,000,000 | 26.1% |
| Wholesale Trade | $244,236,000,000 | 9.4% |
| Natural Resources & Mining | $189,660,000,000 | 7.3% |
| Construction | $179,240,000,000 | 6.9% |
| Transportation & Warehousing | $118,064,000,000 | 4.6% |
| Administrative & Support Services | $100,876,000,000 | 3.9% |
| Information Technology | $77,896,000,000 | 3.0% |
| Accommodation & Food Services | $62,628,000,000 | 2.4% |
| Arts, Entertainment & Recreation | $33,904,000,000 | 1.3% |
| Professional, Scientific & Technical | $28,520,000,000 | 1.1% |
| Other Services & Unclassified | $91,264,000,000 | 3.3% |
| Total In-State Gross Sales | $2,577,168,340,904 | 100% |
What Gets Taxed?
Defining “agent transactions” — the clear principle governing what is and is not in scope
One of the most common questions about any tax replacement plan is: what exactly gets taxed? The Texas Property Tax Replacement Plan answers this with two precise definitions that together capture every transaction in the tax base - and leave no ambiguity about what is in and what is out.
A transaction is taxable under the Texas Property Tax Replacement Plan when a clear product is being purchased or a service is being rendered as part of the exchange or sale.
This is the foundational test. If something is being bought - a good, a service, a commodity, a policy, a property - that exchange qualifies. If nothing is being bought or rendered - a loan repayment, a stock purchase, an insurance claim payout, an interest payment - it does not qualify.
Most transactions in everyday life pass this test immediately: buying groceries, paying rent, hiring a plumber, purchasing a home, paying an insurance premium. The definition is intentionally simple so that it applies consistently and without carve-outs. What it excludes are financial flows that are not purchases - paying down your mortgage principal, buying shares of stock, receiving an insurance claim payout, or earning interest on savings.
The second definition addresses a specific and important scenario: what happens when someone is buying or doing something on your behalf?
An Agent Transaction is any transaction performed by an agent - a person or business acting on behalf of a principal - where the agent purchases a product or service on the principal’s behalf, and separately renders their own labor or provides their own product to the principal.
- Products or services purchased by the agent on behalf of the principal are taxed at the point of purchase. That tax cost is passed through to the principal in the final bill - it is not taxed again.
- The agent's own labor or product rendered to the principal is a separate taxable transaction, and sales tax is collected on that portion of the bill independently.
A practical example: A homeowner hires a contractor to remodel their kitchen. The contractor is acting as the homeowner's agent. When the contractor goes to the supply house and buys lumber, tile, and fixtures, they are purchasing those materials on behalf of the homeowner. Sales tax is paid at that purchase - once - and the cost passes through to the homeowner in the final invoice. When the homeowner pays the contractor's bill, there is no second tax on those materials. However, the contractor's labor - the service being rendered - is its own separate taxable transaction, and sales tax is collected on the labor portion of the bill. One tax on the materials at purchase. One tax on the labor at billing. Each taxed once, at the right moment.
This same principle applies to every business-to-business transaction in the tax base. A manufacturer buying steel, a restaurant buying food supplies, a developer buying concrete - in each case, the purchase is taxed once at the point of sale. The product that eventually reaches the end consumer is a separate transaction at a different price with a different buyer. The Comptroller's gross sales data already captures this correctly: each transaction is reported once, by the seller, at the point of sale.
Some people wonder: if a construction company buys lumber and that sale is taxed, and then the homeowner pays for the house and that sale is also taxed, isn’t the lumber getting taxed twice? The answer is no — and here is why.
The tax applies to the gross value of each distinct transaction in the economy. The lumber purchase is one transaction. The finished house sale is a completely separate transaction with a different buyer, a different product, and a different price. This is how the existing Texas sales tax already works for B2B transactions on taxable items — the plan simply extends that principle consistently. The Comptroller’s gross sales data already captures this correctly: each transaction is reported once, at the point of sale, by the seller.
Table 3.1 — Transactions That ARE Taxed
| Transaction Type | Why It Qualifies | Everyday Example | Base Component |
|---|---|---|---|
| Retail and service purchases | Seller renders product or service; buyer pays the price | Buying clothes, getting a haircut, hiring a plumber | C1 — Comptroller Gross Sales |
| Insurance premium payments | The product being purchased is an insurance policy for certain coverage | Monthly auto insurance, homeowners policy premium | C3 — Insurance Premiums |
| Home purchases | The product is a home; the full sale price is the transaction value | Buying a house, condo, or townhome | C4 — Residential Real Estate |
| Oil & gas production sales | Producer extracts and sells a commodity at the wellhead — clear product transaction | Oil company selling crude to a pipeline operator | C2 — O&G Wellhead Value |
| Bank service fees | Service rendered: account management, loan origination, transaction processing, advisory | Loan origination fee, wire transfer fee, advisory fee | C5 — Banking & Finance |
| Healthcare services | A medical service is rendered; the patient pays for it | Doctor visit, hospital stay, dental cleaning | C6 — Healthcare (then fully exempted by TLES-5) |
| Rent payments | Rent is the purchase of a place to live for a period of time | Monthly apartment rent, home rental payment | C1 (then exempted by TLES-2 for residential) |
| Education / tuition payments | A licensed education provider renders instruction leading to a credential; the student purchases enrollment. Tuition is the price of the educational service being delivered. | Semester tuition at a university, trade school enrollment fee, private high school tuition | C1 — Comptroller Gross Sales (then fully exempted by TLES-6 for qualifying licensed providers) |
Table 3.2 — Transactions That Are NOT Taxed
| Transaction Type | Why It Is Excluded | Plain-Language Explanation |
|---|---|---|
| Mortgage principal & interest payments | Loan repayment, not a purchase | Paying your monthly mortgage is paying back money you borrowed — not buying something new. The home purchase itself was already taxed when you bought it. |
| Stock and bond purchases | Investment, not a product or service | Buying shares of a company is acquiring an ownership interest, not purchasing a product or service in the traditional sense. |
| Interest income | Revenue, not an agent transaction | Interest earned on a savings account or bond is income earned — not a purchase you made. There is no product delivered. |
| Insurance claim payouts | Income for the beneficiary, not a transaction | When your insurance company pays your claim, that is compensation coming to you — you are not buying anything. |
| Credit card & loan balance payments | Payment method, not a taxable event | Whether you pay cash or credit, the purchase is taxed when you buy. Paying off the credit card later is not a second purchase — it is settling a debt. |
| Investment dividends & capital gains | Financial returns, not purchases | Dividends and gains are a return on an investment — income, not a product or service being exchanged. |
Protecting Household Essentials
The Texas Living Exemption Set (TLES) — $574.3 billion in household necessities exempted from the base
A flat tax applied to every transaction, no matter how broad the base, raises a legitimate concern: does it fall harder on lower-income households who spend a higher share of their income on basics? The Texas Property Tax Replacement Plan directly addresses this concern through the Texas Living Exemption Set (TLES).
TLES removes six categories of essential household spending from the taxable base entirely. Groceries. Rent. Utilities. Prescription drugs. Medical care. Education. These are not partial credits or deductions that require a tax return to claim. They are structural exemptions built into the base itself — no one pays the replacement tax on these purchases, regardless of income. The exemptions remove $574,245,994,072 from the gross base, reducing it from $4.40 trillion to $3.825 trillion.
Table 4.1 — The Six TLES Exemption Lines
| # | Exemption Category | What This Covers | Amount Exempted | Primary Source |
|---|---|---|---|---|
| TLES-1 | Groceries & At-Home Food | All food purchased at grocery stores, supermarkets, and similar retailers for preparation and consumption at home. Does not include restaurant meals or takeout. | $97,185,000,000 | USDA ERS Food Expenditure Series CY2024 |
| TLES-2 | Residential Rent | All monthly rent payments made by Texas renters. Covers apartments, houses, and any residential rental. Approximately 4.72 million Texas renter households. | $71,023,582,572 | U.S. Census Bureau ACS 2024 1-Year Estimates |
| TLES-3 | Residential Utilities | Electricity, natural gas, water, and wastewater services for Texas homes. Does not include commercial or industrial utility use, or cable/streaming/internet. | $40,598,422,000 | U.S. EIA State Energy Data System (SEDS) CY2024 |
| TLES-4 | Prescription Drugs | All outpatient prescription drug purchases, whether filled at a retail pharmacy, mail-order, or specialty pharmacy. Does not include over-the-counter medications. | $41,563,000,000 | CMS National Health Expenditure Accounts 2024 |
| TLES-5 | Medical & Healthcare Services | All medical services: hospital care, physician and clinical visits, dental services, and home health care. Healthcare is included in the base for architectural completeness, then fully deducted here. Net contribution to taxable base: zero. | $295,000,000,000 | CMS National Health Expenditure Accounts 2024 (TX 9.5% share) |
| TLES-6 | Education (Tuition at Licensed Providers) | Tuition and mandatory enrollment fees paid to licensed education providers — public and private K–12, colleges and universities, trade and vocational schools, and professional licensure programs. Does not include textbooks, school supplies, cafeteria meals, tutoring, or unlicensed coaching services. | $28,875,989,500 | SHEEO State Higher Education Finance FY2024, Table 2.2; TX Demographics Center (2025); STVT/TWC (2025); College Board 2024 |
| Total TLES Deductions (6 Lines) | $574,245,994,072 | |||
The TLES is specifically targeted at the most inescapable household necessities. The following are not exempt: restaurant meals and takeout (food away from home), hotel stays, cable and streaming subscriptions, gym memberships, luxury goods, and vacation travel. These are discretionary expenditures — spending choices, not survival necessities — and they remain part of the taxable base.
For the education exemption specifically: the TLES covers tuition and mandatory enrollment fees at licensed institutions only. Textbooks, school supplies, and items sold by third-party retailers are taxable tangible personal property. Cafeteria meals, tutoring services, test prep courses at unlicensed providers, and entertainment-based learning platforms (such as streaming services) are also not exempt.
TLES Step-Down: From Gross Base to Net Taxable Base
The Math: From Gross Base to Final Rate
Dividing the $178.1 billion obligation by the $3.825 trillion net base yields a 4.655% minimum rate
Once the net taxable base is established, the math is straightforward. The Scope 2 replacement obligation — every tax being replaced — totals $178,091,924,600. The net taxable base after all six TLES exemptions totals $3,825,411,392,964. Dividing obligation by base produces a required flat rate of 4.655%.
It is important to understand what this rate represents: it is the minimum rate required to cover the full replacement obligation at the current scale of the Texas economy, with all six TLES household essentials exempted. It is not a fixed ceiling. In practice, individual cities and school districts have different tax loads — some will require slightly less, others slightly more — but across the full aggregate of all taxing entities in Texas, 4.655% is the number that makes the math work at Scope 2 with household essentials protected.
Texas’s constitutional cap on the combined state and local sales tax rate is 8.25%. The 4.655% rate sits nearly four percentage points below that cap, leaving substantial headroom for economic fluctuation and local variation.
Table 5.1 — Rate Scenario Comparison
| Scenario | Tax Base | Rate Required | Room Under 8.25% | Room Under 6.00% |
|---|---|---|---|---|
| In-state sales only (no remote sellers) | $2,568.2B | 6.93% | +1.32 pts | −0.93 pts |
| Full Comptroller gross sales including Wayfair remote sellers | $3,468.3B | 5.13% | +3.12 pts | +0.87 pts |
| Hybrid Base — all six components, before TLES exemptions | $4,399.7B | 4.05% | +4.20 pts | +1.95 pts |
| Hybrid Base Post-TLES 1–5 — Five household essential categories exempted (prior baseline) | $3,854.3B | 4.621% | +3.629 pts | +1.379 pts |
| ▶ Hybrid Base Post-TLES 1–6 — Official Planning Scenario Six household essential categories exempted (incl. Education); full Scope 2 obligation covered |
$3,825.4B | 4.655% | +3.595 pts | +1.345 pts |
Where Does the Money Go?
A four-tier apportionment structure ensures every level of government receives its minimum required funding
When property taxes are abolished and replaced with a unified flat sales and use tax, the most important question for most Texans is simple: will my schools still be funded? Will my county still be able to maintain roads? Will my city still be able to run emergency services? The answer is yes — and here is how.
The Texas Property Tax Replacement Plan uses a four-tier apportionment structure. Revenue collected under the unified rate is allocated to four distinct governmental tiers: the State, counties (absorbing county-area special districts), cities (absorbing city-area special districts), and independent school districts. Each tier receives a share of the flat tax revenue calculated to replace, at minimum, every dollar those entities currently collect through property taxes and existing sales taxes. Special districts are absorbed into whichever tier best reflects the geographic area they serve: districts serving primarily unincorporated county territory are absorbed into Tier 2 (Counties), while districts operating within incorporated city limits are absorbed into Tier 3 (Cities).
The 4.655% overall rate and the tier rates shown below represent the aggregate minimum needed to cover full Scope 2 replacement across all taxing entities in Texas. They are not the final legislated rate.
In practice, some cities and school districts have lower per-capita tax burdens than average and may require slightly less than their tier’s aggregate share. Others in high-growth or high-cost areas may require a marginally higher allocation. The final implementation will require a revenue-neutral calibration process at the entity level during transition. What the aggregate math demonstrates is that the overall rate required to cover all taxing entities in full is 4.655% — well within the constitutional limit and well below what Texans currently pay in combined taxes.
Four-Tier Apportionment at a Glance
Table 6.1 — Four-Tier Revenue Apportionment (Scope 2)
| Tier | What It Covers | Scope 2 Amount | % of Total | Min. Rate Contribution |
|---|---|---|---|---|
| Tier 1: State | All state-level taxes being replaced: sales & use, franchise, motor vehicle, oil & gas severance, insurance premium, alcohol, tobacco, hotel, mixed beverage, utility, other state taxes | $81,870,000,000 | 45.97% | 2.1402% |
| Tier 2: Counties + County-Area Special Districts | County property taxes (254 counties), county sales taxes, and special district property taxes absorbed at the county level: Emergency Services Districts (ESDs), flood control districts, groundwater conservation districts, drainage districts, navigation districts, and other SDs serving primarily unincorporated county areas | $30,069,719,069 | 16.88% | 0.7861% |
| Tier 3: Cities | City property taxes (1,187 municipalities), city sales taxes, and special district property taxes absorbed at the city level: Municipal Utility Districts (MUDs), Municipal Management Districts (MMDs), Water Control & Improvement Districts (WCIDs) within city limits, and other SDs serving areas within incorporated city boundaries | $24,494,452,783 | 13.75% | 0.6403% |
| Tier 4: Independent School Districts | Property taxes from all 1,013 ISDs — the largest single layer of property tax in Texas | $41,657,752,748 | 23.39% | 1.0890% |
| Total — Full Scope 2 Obligation | $178,091,924,600 | 100.00% | 4.655% | |