The High Cost of Tax Exemptions

Here’s a bold idea for fixing Texas’ $23 billion budget deficit: repeal sweetheart tax loopholes for Big Business.

While this Legislature is unlikely to fiddle with the state’s myriad tax breaks, some lawmakers are at least trying to jumpstart the conversation. This morning, the Senate Finance Committee debated legislation that would require a periodic review of state and local tax “preferences,” i.e. favorable tax policies for corporations.

The idea dovetails nicely with the task of a special Senate panel set up last week to search for $5 billion in “nontax revenue.”

“We gave away 7.4 billion dollars of revenue between 2004 and 2009,” said Senator Rodney Ellis, D-Houston and author of the bill, referring to a tax exemption on high-cost natural gas. “Those against this bill will say that businesses need predictability. But the biggest thing we’ll do this session is decide what we give our schools, which are educating our future business leaders. Well, these schools have very little predictability. They just want the predictability that they’re going to open up again in the fall.”

As an example of how well-meaning tax breaks are breaking the state budget, Ellis pointed to the exemption on high-cost natural gas production created in 1989. Over the years, the Legislature kept extending the tax break until, finally, in 2003, lawmakers made it permanent. Remembered as an especially acrimonious session, the minute change that year passed without much debate, and with no objection.

But the tax break has cost the state dearly. In 2009, 55 percent of statewide natural gas production in Texas was high-cost gas – up from 5.5 percent in 1990 – and therefore taxed at 2 percent rather than the standard 7.5 percent rate. This tax loophole costs the state $1.2 billion/year in potential revenue.

Senator West also pointed out that the exemption was designed to encourage expensive and technically-difficult gas production. But with technological advances, the exemption may simply amount to a subsidy for profitable gas producers.

The bill, of course, is not solely targeted at the tax exemption for high-cost natural gas production, but rather puts a system in place to systematically review all of the tax breaks that the Legislature puts in place.

Scott McCown, executive director of the Center for Public Policy Priorities, said the bill would require the state to pause and see if things are still working. “Even with a giant deficit, it’s very difficult to get people to look at exceptions to exemptions,” he said.

Dale Craymer, president of the Texas Taxpayers and Research Association, objected to the bill. He pointed out the danger of reviewing tax exemptions on an independent basis rather than as an overall structure. He compared it two blind men touching different parts of an elephant and coming away with completely different impressions of the animal.

It would seem that the gaping hole left by a $27 billion budget deficit would feel the same to everyone though, blind or not.