Bad Reasons to Sacrifice the Spending Cap

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As I said on Wednesday, the politics of the Texas Senate’s proposals to bust the spending cap are clear and unmistakeable: the budget chiefs want to exceed the spending cap, but they’re not willing to be transparent or accountable about it. That much is clear from Dan Patrick’s comments at the press release: unless they exempt certain types of spending, “when we leave, we will have approximately $4.5 to $5 billion in the state’s checking account.”

The only slight variation on that explanation that I can see would be that the Senate’s budget chiefs expect these proposals to fail. They can be killed by the House or by the governor’s veto or by voters, who would have to approve constitutional amendments before the proposals could take effect. Such a stunt may seem like a win-win for conservatives: either they succeed in providing property tax relief and paying down debt or they tried (at which point they will, perhaps, claim to have been thwarted by RINOs led by Joe Straus or by Abbott, who may, for all we know, face a 2018 primary challenge from Patrick).

Such a stunt might be an effective short-term political gambit. Immediately, Michael Quinn Sullivan of EmpowerTexans/Texans for Fiscal Responsibility approved the proposals; as predicted, he either fell for the ruse or is willing to play along out of tribal solidarity. Or it may not: the number of senators who have refrained from commenting makes me think that many of them are ambivalent, at least. And either way, I don’t think it’s respectable.

Meanwhile, on further reflection, I’ve become convinced that these proposals, if passed, would be profoundly damaging to Texas’s future, far more than simply overriding the cap would be. And I’ve become sincerely distressed that state leaders are willing to put so much at risk for no good reason—at the risk of being melodramatic, this is basically how I feel right now.

But I’ll address that tomorrow. Today I want to address the proposals themselves, because I’ve heard from a number of fiscal conservatives who are torn over the suggestion: they don’t like the idea of busting the cap, but they do like the idea of property tax relief and paying down debt. I understand that reaction, but if you look at the proposals in more detail, I’m not sure that either is a worthwhile reason to override the spending cap—much less sabotage it—from a fiscally conservative perspective.  

1) The property tax part of this, by Jane Nelson, proposes to provide “tax relief” for homeowners by raising the homestead exemption. This is an honorable intention, and one that Patrick has been campaigning on since 2006, when he first ran for his Senate seat: property taxes vary by county, but on average, Texas has one of the highest property tax rates in the country. And in conjunction with rising property values in most parts of the state—as Patrick, to his credit, has often noted—property tax burdens are disproportionately hard on lower-income and middle-income homeowners. Those Texans will benefit from rising home values if they decide to sell, but in the meantime, they’re seeing their annual property tax payments soar. And even if they wanted to sell, which many don’t, it might be imprudent to do so, because as a result of rising property values, affordable housing is getting harder to find.

Again, I think this is an honorable concern. It’s also one that is more often associated with Democrats than Republicans; that’s why CPPP’s Dick Lavine was cautiously receptive, and TAB’s Bill Hammond dismissed it. Democrats aren’t being frivolous in raising this concern, and I give Patrick and Nelson credit for crossing party lines to join them on it. Shoot, while I’m at it, I’ll give Sullivan some credit too. He called me “lazy,” “liberal,” and a “shill” for my post on Wednesday, which was inexplicable and ironic, and more generally, I don’t think much of his math or his motives. But the one time we met in person, he expressed seemingly genuine concern over affordability and gentrification in Austin; I respected that.

With that said, the proposal is poorly structured from a fiscally conservative point of view. The “tax relief” in question wouldn’t go to the homeowners, directly. Property taxes are collected by the county, so raising the homestead exemption means that local governments will bring in less revenue; the state is proposing to make up the difference to the counties. That’s why it counts as state spending, and why it should. It should also be understood as a recurring biennial expense, unless anyone thinks that the county governments are going to suddenly start wanting less money. And since most of the state budget is effectively entailed already, the Lege should be careful about creating additional demands on its scarce resources; this was Rodney Ellis’s objection to Robert Nichols’ transportation funding proposal, and it was a valid one. Further, state subsidies for homestead exemptions have some of the same problems that conservatives see with Obamacare’s subsidies for health insurance. They don’t lower the costs (or in this case, the tax rates); they just mitigate the sticker shock. By doing so, they also mitigate any pressure for change, and may, as a result, exacerbate the overarching problem.

To be fair, the state-local disjunct makes property tax relief a necessarily tricky goal for the Lege to pursue. But there are other ways to pursue it.  The one my colleague R.G. Ratcliffe wrote about earlier today, Eddie Rodriguez’s proposal to effectively means-test homestead exemptions, strikes me as a better approach. Rodriguez, as it happens, is my state representative, and if you’re walking your dog in our neighborhood, east Austin, it’s hard to dispute the idea that the young professionals with the homes that cost half a million dollars can afford Travis County property taxes more easily than the families living in tiny bungalows that were built in the 1940s and that could have been bought ten years ago for maybe $120,000, which is less than the land would cost today. But either way, from a fiscally conservative perspective, I’m not overwhelmed by the Senate’s proposal; I wouldn’t consider this a worthwhile reason to override the spending cap.

2) The second proposal, from Hinojosa, would exempt $3.9 billion from being counted against the spending cap, so the state can use that money to pay down debt. This is a straightforward priority, but I wouldn’t call it a pressing one. Texas does have one of the highest per-capita debt burdens in the country—but that’s if you’re talking about combined state and local debt. If you’re just talking about state debt, which is what Hinojosa’s proposing to pay down, we have one of the lowest debt burdens per capita, and although state debt has grown, it’s not grown as much or as quickly: the total state debt, as he notes, stands at $43.5 billion. Servicing that debt—paying back the principal plus interest—would cost $75.5 billion. Servicing the local debt, though? That’ll be $328 billion.

We’ll have to pay the state debt back eventually, and $3.9 billion would be a start. But if the Senate was proposing to override the spending cap to pass a budget that includes $3.9 billion for servicing state debt, I’d still be wary. It doesn’t seem necessary; if it was, why not draw down the $3.9 billion from the rainy day fund? It creates significant fiscal risk for the 2017 session; although I don’t think Texas is going to fall into recession, economic growth will probably slow over the next two years, and we’d proably be better off keeping the extra $4.5 or $5 billion as a hedge against a potential shortfall.

As for the idea of exempting debt service from being counted against the spending cap, that’s where my more serious concerns start. A one-time $3.9 billion outlay wouldn’t create a recurring demand in the way that the homestead exemption subsidies would, but it would create an extremely risky precedent. It would encourage future Legislatures to shift all its extra spending with borrowed money: if the 84th Legislature approves the idea that debt service doesn’t count against the spending cap, we might as well not even have a spending cap any more. That’s why, beyond the politics, I think last week’s proposal has the potential to be profoundly damaging to Texas’s future: the spending cap has been good for Texas. It’s worth preserving. If the Senate scraps it, they’ll be sacrificing more than just short-term fiscal discipline. Tomorrow, I’ll elaborate on what’s at stake.

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