The State of Taxes
Texas won’t get its financial house in order until lawmakers have a thoughtful conversation about the T-word. Don’t hold your breath.
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On a sunny day in late January, Rick Perry stood in a packed House chamber and delivered what may turn out to be his last State of the State address. The scene unfolded in a familiar way. Senators wriggled to find a comfortable position on the folding chairs that occupied the wide middle aisle of the House floor. Behind them sat the robed members of the Supreme Court. In the gallery, hardly a vacant seat was in sight. “It is my pleasure to report that the state of our state is stronger than ever,” Perry said. As is his habit, he followed with paeans to the state he loves: “Texas led the nation out of recession,” and “Dreams become reality in Texas,” and “If you want to be a CEO someday, Texas is the right place to start.”
It was no secret to anyone in the crowd that Perry planned to tout tax relief as one of his priorities for the session. He asked for a constitutional amendment to make it easier to return money to residents when the state runs a surplus, and he announced that he wanted to make the franchise tax exemption for small businesses permanent. “In a legislative session where we can see billions of dollars still on the table after we’ve funded our services and met the needs of an ever-expanding population,” he said, “I think providing tax relief of at least $1.8 billion over this biennium is a good place to start.”
That may well be, but last session the Legislature made billions of dollars of cuts to critical areas such as public education and health care. The question coming into this session was whether lawmakers would reinstate those funds or hold down spending once again, despite a massive surplus (policy wonks prefer to call it an “ending balance”) and an overflowing Rainy Day Fund. Perry left no doubt where he stood: the more cuts, and the more tax relief, the merrier.
Of course, the subject of taxes has never gotten a lot of love from Texas politicians—and certainly not from Perry. The only issue that Democratic governor Dolph Briscoe was said to take a personal interest in was insisting on no new taxes. The Legislature has not voted for a tax increase since 1991, when it imposed a 10-cent hike in the gasoline tax that funds much of the operations of the Texas Department of Transportation. A few years ago, business leaders in the traffic-clogged Metroplex pressed for a local-option gasoline tax, which would allow voters in Dallas and Tarrant counties to pay for new transportation projects—rail as well as concrete. The proposal was actually more about moving dirt than moving people, and its proponents envisioned an increase in property values at the rail hubs. It seemed like the proverbial good idea at the time, but conservative groups howled, branded it a tax increase, and watched as lawmakers ran for cover. The proposal died, and its chief proponent, Vicki Truitt, of Fort Worth, was ultimately defeated at the polls. In the Republican era, the only other mention of new taxes has come from the occasional Democrat who has floated a state income tax—generating comic relief and little else.
Perry has always been adamant about not raising taxes, even if it meant that essential needs went unfunded. For instance, as the state has struggled through an extended drought, legislative proposals to tax bottled water have been nixed, even as recently as 2011. From time to time there has been talk of levying “sin” taxes on beer and liquor, but the sin lobby is mighty powerful in this state, as it consists of just about everybody who has ever downed a cold one.
So the practice in Texas has been to avoid mentioning the t-word at all. For the thirteen years that Perry has been governor, he has held the line on spending and cut revenue; session after session, he and Lieutenant Governor David Dewhurst have imposed mandatory spending cuts on state agencies, prior to the actual budgeting process.
The only major tax bill that the Legislature has passed during the Perry years was the business franchise tax, in 2006. It was intended to balance out a huge mid-decade property tax cut of 50 cents per $100 of property value. That made sense on paper, but the franchise tax has never met its optimistic projections, falling some $1.5 billion short each biennium. Has this self-inflicted hole in the budget aroused any concern among state leaders? It has not. Instead, they have seized the opportunity to allow the hole to recur every biennium—assuring that each new legislative session will be handcuffed in its ability to pay for state services. Only in Rick Perry’s Texas could this make sense.
Writing a budget in Texas has become a race to the bottom, with the two chambers vying with each other to see which can take credit for the lower amount. I’m not making this up. At a recent meeting of the Legislative Budget Board, House and Senate members actually argued over who had spent less. There is a resistance to spending that is almost genetic in Texas politicians. Perry’s call for tax relief, however, doesn’t appear to have struck a chord with budget writers and other state leaders, who have their own ideas about how the money should be spent, with long-overdue transportation and water projects being the most likely beneficiaries. Fortunately, the bounty from the Eagle Ford Shale, mostly from oil and natural gas severance taxes, has filled the state’s coffers as never before, and various interests groups want their piece of the pie—in particular, higher education institutions and hospitals.
One spending idea, proposed by the oil and gas industry, makes a lot of sense. The industry has suggested that the severance taxes it pays into the Rainy Day Fund be banked and withdrawn as necessary to finance much-needed roads in the Eagle Ford, which are being damaged by heavy equipment. This plan effectively costs the state nothing to build new highways. Will the Legislature go for it? Just remember what happened with the local-option tax.
Still, the oil and gas boom, along with the improving economy, has given lawmakers the opportunity to undo some of the cuts made by the Eighty-second Legislature and put state budgeting back on sound footing. But just when it looks as if the revenue estimate is strong enough to rescue the state, two groups bent on reform want to turn state tax policy upside down. One is the Texas Public Policy Foundation; the other calls itself the Texas Center for Economics, Law & Policy. Both seek to eliminate property taxes altogether and swap them for expanded sales taxes. The current state sales tax is 6.25 percent; added to that is a city sales tax and often a tax for mass transit (in Austin, for example, that comes to a total of 8.25 percent). For the swap to balance the loss of property tax revenue, the state sales tax, depending on whom you talk to, would range between 14 percent and 22 percent. Imagine the tax bill that would result from selling your house.
The basic argument for the tax swap is both ideological—the libertarian belief that allowing a governmental entity to tax private property is an affront to liberty—and pro-growth. The TPPF calculates that the tax swap would lead to a net gain of between 124,000 and 337,000 new jobs over five years and an even greater increase in the number of new residents. Yet such projections often fall short because economic volatility is so hard to predict (the franchise tax being a great example). Needless to say, there are a lot of issues to be ironed out before the tax swap could be considered: For one thing, how will local governments be able to fund their services if property taxes go away? Cities and counties depend on property taxes to fund their basic services, from fire departments and libraries to roads and garbage collection. The same is true for schools: the property tax is their only source of income. Many local governments have held bond elections, and changing the method of taxation could affect the market for bonds. Let’s just say that lawmakers need to be skeptical about “magic bullets” that “solve” nonexistent problems.
Still, Perry is a man in search of a legacy, and he may put up a fight for the tax swap, though he was intentionally vague in his State of the State about how lawmakers should enact his suggestion for tax relief. But this should be a spending session, not a tax-relief session (Jim Pitts, the chair of the House Appropriations Committee, has already thrown cold water on Perry’s idea). The atmosphere in the Capitol is guardedly optimistic; there is a sense among members, at least those who have endured a string of dreary sessions, that they finally have a window to address some long-neglected needs. For one, the state’s fifty-year water plan remains unfunded; for another, the motor fuels tax for the Texas Department of Transportation can no longer keep pace with the demand for more and better roads. No doubt some fierce battles lie ahead over whether state leaders will allow budget writers to spend the state’s money, but the prospects of a surplus of more than $8 billion and up to $12 billion in the Rainy Day Fund provide the opportunity to shore up state services that have been starved in previous budget cycles. The question is, Will the state’s leaders finally take that chance?