No New Taxes? Not a Chance

There is no way to fill Texas’ $18 billion budget gap through cuts alone.


Dave Mann

Texas Republican leaders won’t even begin addressing the state’s estimated $18 billion budget deficit until the Legislature convenes next year. But they’ve already made perfectly clear what they won’t do—raise taxes.

As Lt. Gov. David Dewhurst told reporters in May, the state should balance its budget “by tightening our belt just like millions of families and Texas businesses are doing every day.”

That very same week, House Speaker Joe Straus, a San Antonio Republican, told the press that he wouldn’t raise taxes, and that lawmakers “must make tough choices and put every cost-saving idea on the table.”

Not to be outdone, Gov. Rick Perry told Austin’s KVUE-TV in June that he planned to: “Fill that budget gap, if there is one—which we suspect there will be—with appropriate reductions in spending without raising taxes.”

Fair enough. Texas Republicans don’t want to raise taxes—not exactly a shocking development.

“All this talk of, ‘we’re going to do this with cuts alone,’ every time I hear someone say that, I think, ‘Have you looked at the numbers?’” says Eva DeLuna Castro, a budget analyst with the Center for Public Policy Priorities, an Austin-based think-tank.

The $18 billion deficit equates to about 20 percent of all state spending. Eliminating 20 percent from the budget would necessitate deep reductions in the two biggest-ticket items—health care and education (including higher ed)—which together account for about 80 percent of state spending. That means every other part of state government—from prisons to the court system to the Texas Medical Board to the Texas Department of Transportation—makes up just 20 percent of state spending….or roughly equal to the projected budget deficit.  If you want the quickest way to balance the budget, you could simply cut all the criminal justice and regulatory agencies, and the transportation department, and, presto, the deficit is gone. And while you might think, in your weaker moments, that Texas could be better off without TxDOT or TCEQ, it’s really not a viable option. Try getting reelected on that platform.

Whether they call it a tax or a fee or something else, lawmakers will have to generate more revenue. They can’t cut their way out of a budget mess this big.

Lawmakers have long known they would face a budget gap next session, when they will plot state spending for 2012 and 2013. The exact size of that shortfall won’t be official until early next year. But estimates have ranged from $15 billion to $18 billion or more. The $18 billion figure was first uttered in public by Jim Pitts, chair of the House Appropriations Committee, at a hearing in early May, and was quickly confirmed as a reasonable prediction by the head of the Legislative Budget Board, the bean counters for state government.

Of course, lawmakers aren’t going to close all the prisons or do away with the state’s entire regulatory structure. Reducing health care and education spending by a third is a good way to destroy the state and end a political career.

A more likely scenario involves a mix of targeted spending cuts, the state’s Rainy Day Fund and, yes, some tax increases.

The Rainy Day Fund, which pools money from oil and gas leases, contains about $9 billion. If lawmakers choose to use that money—and some have advocated against spending it—they could cut the deficit in half.

That still leaves a roughly $9 billion gap—or about 10 percent of state spending— to cover. Again, it would be extremely difficult to cut that entire amount without closing prisons or making deep reductions in education and health care.

Savings in health and human services will be difficult to find because lawmakers can’t simply winnow the Medicaid and Children’s Health Insurance rolls—as they’ve done before during lean times—because the national health care reform bill will soon require the state to expand those programs.

Moreover, deep cuts to education not only harm schools, but can lead to property tax hikes: If the state reduces its share of education spending, that forces more of the education burden on to local governments, which finance education with property taxes. In that scenario, a lawmaker could be on record voting to cut education spending, which then led to a property tax hike. Good luck defending that approach come election time.

Even during the infamous 2003 session, when lawmakers instituted deep budget cuts, the reduction in state spending amounted to about $4 billion. Now imagine trying to double those cuts.

There are quite a few ways to raise more revenue for the state that would be considerably less painful and less politically risky than cutting $9 billion from the budget.

Texas’ sales tax is outdated. It taxes goods but few services and doesn’t generate the revenue it should from our service-based economy. The state could expand the sales tax to cover services provided by lawyers, real estate brokers, accountants, architects, consultants and many others. (Doctors and other medical services could be exempted.) Upper-income families predominantly use services from lawyers and architects. So this approach brings in more money without hiking the sales tax rate, which numerous studies have shown disproportionately effects poor families.

The advantage of this approach is the state could bring in $3 billion to $5 billion, (depending on which services were covered), according to calculations by CPPP.

That isn’t a new idea. Lawmakers have long rejected expanding the sales tax into the service sector. But a budget crisis may provide the necessary motivation.

Another possible source of revenue is the franchise tax, which was implemented in 2006. The franchise tax hasn’t generated nearly as much money as state leaders expected—$3.8 billion less, in fact, over the past two years, according to figures from the comptroller’s office. That’s one of the reasons the budget gap is so big. Lawmakers could raise the franchise tax rate from 1 percent to 1.25 percent. That would deliver $2 billion to state coffers, according to CPPP.

There are many other options—some likely to be unpopular—including raising the beer tax or the cigarette tax. Hiking taxes on cigarettes to $2 a pack would bring in an additional $1.2 billion.

If the state can raise $5 billion to $6 billion in new revenue, combined with the $9 billion from the Rainy Day Fund, then lawmakers could balance the budget with $3 billion to $4 billion in cuts. Of course, slicing even $4 billion will be painful and inflict lasting damage on the state, but it’s at least feasible.

But no new taxes? Not a chance.

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