Combining as it does a projected budget shortfall of up to $12 billion and a slew of newly elected Republicans running–and winning–on a pledge to hold the line on taxes, the 78th Legislature may be remembered in years to come as the session that asked the question: Can the State of Texas get any more fiscally conservative than it already is? There’s always a little fat to cut, incoming legislators reassured voters on the campaign trail, in a two-year budget of $114 billion. Having now attended a week of new legislator school, some freshmen were no doubt chagrined to learn that only perhaps ten percent of that budget is discretionary spending. The remainder is federal funds with strings attached, or state money spent in accordance with a state or federal law, regulation, or funding formula. And the discretionary spending most likely to be cut, health care and insurance for children of the poor and working poor, are the areas with the greatest unmet need. That is, the money we are having trouble coming up with to meet the budget for 2002-2003 isn’t enough to begin with.
The problem, according to the Center for Public Policy Priorities, is not with the how the state spends money, but with how we collect it. As it does before the start of every session, the Austin-based non-profit distributed to elected officials and the press its primers on the state budget and the state tax system. At a capitol press conference on December 4, the group also introduced its new director, F. Scott McCown, the former state judge from Austin. McCown gives the think-tank something it has not had in the past: a spokesman who is a charismatic politician. As a state judge, McCown made a name for himself in 1998 when he took on what he termed the “scandalous” state of the Department of Protective and Regulatory Services, the state agency charged with protecting abused and neglected children. McCown took his case directly to the legislature, pleading for the system to be funded at a level that would allow enough caseworkers to do the job right. The media ate it up, and then-Governor Bush made it a priority in his budget.
The purpose of the December press conference, McCown told reporters, was to shift the focus from spending, and how to cut it, onto revenue, and how best to collect it. Everyone knows that Texas has one of the lowest state tax burdens in the country (currently 49th out of 50), but few appreciate the corollary, which is that the state has one of the highest local tax burdens per capita. That’s because the state Legislature, simply by refusing to collect revenue, has foisted off the cost of many government services, most notably public education, onto local governments. The state tax system also has what the CPPP calls a “structural deficit.” Over fifty percent of state revenue comes from the sales tax. In addition to being one of the most regressive ways to collect revenue, the sales tax is also an inefficient method, at least as it is currently employed. The code was written almost forty years ago, when the state economy was mostly goods-based. Over the last generation especially, the economy has shifted more to services (such as legal, financial, and advertising), but the tax code has not evolved along with it and most of these services remain untaxed. As a result, even when the economy grows, tax revenues do not keep up with the boom.
The solution, McCown said, is not to raise taxes, but to expand the tax base. The Comptroller’s office estimates that the state could bring in an additional $7.5 billion if we taxed all of these exempt services in 2004-5. Including all of the exempted services is probably not feasible, but if a few of the bigger ones–like legal and architectural services–were taxed, it would even be possible to lower the current tax rate (and thus lower regressivity) and still raise more revenue. Taxing the services of law firms, it should be pointed out, would have the added benefit of taxing a few lobbyists in the process.
That fact, unfortunately, only makes a tax on legal services all the more politically unfeasible. “Politics is not our business,” McCown told reporters. That’s the usual think-tank mantra: We’re not lobbying, we’re just here to educate the members. But make no mistake, as Bush would say: McCown’s team, which includes long-time Texas budget guru Dick Lavine, will be down at the capitol every day, testifying at hearings and educating anyone who will listen.
And they seem to have a pretty good grasp on the politics of the budget process in Texas. When a reporter asked if Texas would eventually need a personal income tax–the third rail of Texas politics–McCown couched his answer in terms a Texas politician could appreciate. “If you want to avoid a state income tax,” he said smiling, “then you absolutely have to do what we’re recommending here.”