Texas is often viewed as a bastion of economic conservatism and fiscal responsibility. While certainly well-governed relative to other states, as Texans for Fiscal Responsibility president Michael Quinn Sullivan points out, that’s not the best metric for Texas to judge its fiscal and budgetary health.
“Sure we outperform most states, but other states, all of which face serious fiscal challenges, are not the standard by which Texas should judge itself,” says Sullivan. “Just because a guy is the least drunk person at the bar, doesn’t mean he should drive home.” Along those lines, the Texas Public Policy Foundation recently issued a sobering report about the Lone Star State’s finances.
In a report titled “The Real Texas Budget,” TPPF researchers found inaccuracies in state spending data published by the Legislative Budget Board, the state’s official keeper of budget information. According the findings of the report, the Texas budget – when adjusting for back-filling and other accounting gimmicks – actually increased by nine percent to the current 2014-2105 biennium from the previous, as opposed to the more modest five percent increase advertised by the state’s official scorekeeper (the Texas legislature in session every other year and passes two-year budgets).
While not as egregious of an offender as states like Illinois, California, and New York, Texas still spends too much. Since 2004, Texas government spending has grown 8.8 percent faster than the rate of population growth and inflation. This excess spending, according to TPPF, has cost Texas taxpayers an additional $8 billion this year alone. A new report released in Austin last week titled “The Conservative Texas Budget,” outlines a series of policy recommendations and reforms to rectify Texas’s overspending problem that, while not as bad as that of some states, is still a major problem.
The Texas Comptroller last year projected a more than $2 billion surplus by the end of the current biennium. However, stronger-than- expected economic growth and job creation has lead to sales tax revenues coming in well above projections. As a result, Texas lawmakers may very well be greeted with as much as a $10 billion surplus when they return to Austin for the 84th session of the Texas legislature next January. The recommendations outlined in the new TPPF report and supported by the Texans for a Conservative Budget coalition would, if implemented, make sure lawmakers keep spending in check and not squander surplus revenues.
The Conservative Texas Budget would require state lawmakers to cap spending so that it does not increase faster than the rate of population growth and inflation, an important metric for measuring fiscal sustainability and increase in need for public services. These limits would hold Texas government spending to the following spending levels for the 2016-17 biennium, which lawmakers will approve before adjourning next year:
Capping spending at these levels would still permit a sizable increase in state spending of over six percent, which amounts to a $8.2 billion increase in state funds and $12.5 billion increase in total outlays compared to the previous budget. These new spending limits, if lawmakers can adhere to them, represent a vast improvement over current practice and the growth in Texas government spending witnessed during the last decade.
This proposed spending cap is based on actual growth in population and inflation over the two previous fiscal years, and this 6.2 percent cap would apply to both state funds and total outlays. This is done, as The Conservative Texas Budget explains, to “avoid possible manipulation of the budget based on the volatility of federal funding and shifting items from general revenue funds to other areas of the budget.”
Such spending restraint will also permit lawmakers to tackle needed reforms to the state tax code. While Texas has a more hospitable business tax climate than most states, there is still plenty of room for improvement, starting with getting rid of the gross receipts tax the state assesses on businesses, known as the margin tax.
The margin tax reduces the job creating capacity of Texas employers and is assessed in an incredibly complex and convoluted manner. Aside from the harm this tax does to employers, economists of all political stripes agree that it is one of the worst ways to raise revenue. Professor John Mikesell, an expert in public finance at Indiana University, has described the margin tax as a ”badly designed business profits tax…combin[ing] all the problems of minimum income taxation in general—excess compliance and administrative cost, penalization of the unsuccessful business, undesirable incentive impacts, doubtful equity basis—with those of taxation according to gross receipts.”
The margin tax applies to different industries and businesses in different ways. This complexity drives up compliance costs. In fact, margin tax compliance costs for some businesses are greater than their tax liability. Perhaps the most egregious aspect of the margin tax is that it applies to companies without regard as to whether they were even profitable, meaning that businesses that lost money can still end up having a margin tax liability.
A bill to repeal the margin tax was introduced during the last session of the Texas legislature in 2013, but failed to pass. There will be another push to repeal the margin tax in 2015. As other states move to make their tax codes more competitive, it is important that Texas officials not rest on their laurels. The best way for Texas to maintain and improve the competitiveness of its tax code is to remove the major blemish from it – the margin tax.
Just as the spending restraint and budget savings from entitlement reform have allowed Wisconsin Gov. Scott Walker to reduce income and property taxes in his state in recent years, Texas lawmakers will need to exercise the type of spending restraint called for in The Conservative Texas Budget if they want to provide the tax reforms and relief necessary to ensure that Texas continues to be the economic envy of the nation.
Patrick Gleason is Director of State Affairs at Americans for Tax Reform. Follow Patrick on
