This commentary originally appeared in The Hill on March 31, 2017.
“There are no great limits to growth because there are no limits of human intelligence, imagination, and wonder.” – President Ronald Reagan.
Imagine governments without general business taxes. Imagine many businesses wanting to open with growing consumer demand. Imagine people not bearing the ultimate burden of business taxes.
Congress is appropriately discussing cutting the federal corporate income tax from the highest in the industrialized world at 35 percent to a more respectable 20 percent. However, the 85th Texas Legislature looks to make Texas the leader in America—and even the world—in tax policy by ending the business franchise tax.
Business taxes in Texas date back to the late 1800s, with the latest version being the franchise tax. It was a poor tax and was made worse in 2006 in response to an unconstitutionally flawed property tax system. Instead of enacting an efficient solution, the legislature reformed the franchise tax to deal with a problem that created another problem commonly called the “margins tax.”
The margins tax forces businesses to calculate their tax liability from the product of the lowest of four tax bases dependent on their gross revenue, hence the term “margins tax,” and two tax rates. This unique tax worldwide can require businesses with a net loss to submit the tax if revenue is above $1 million, pushing them further in the red.
It doesn’t take a tax specialist or a Ph.D. economist to know that the margins tax, which is estimated to collect $7.8 billion or 7 percent of total tax collections in the upcoming 2018-19 biennium, is bad policy. While there are differing opinions on how to eliminate it, there’s a general consensus from both sides of the aisle to do so.
While SB 178 would end the margins tax on Jan. 1, 2018, the worry by some legislators of limited taxes available to fund essential government services this session gives the phase out approaches in SB 17 and HB 28 the most attention.
Of course, like most governments, Texas doesn’t have a tax revenue problem, it has a spending problem, as spending is up 11.8 percent above population growth plus inflation since 2004. By controlling spending and considering the economic growth generated without the tax to balance the budget, immediate elimination of the margins tax is possible.
SB 17 is a trigger bill whereby half of the estimated general revenue for the upcoming biennium that exceeds a 5 percent increase from the prior biennium would reduce the margins tax rates each period until elimination. This reform is estimated to cut the tax rates in the 2020-21 budget for a total taxpayer savings of $1.1 billion.
HB 28 would use the lesser of either surplus dollars at the end of a fiscal period or $3.5 billion to buy down the margins tax rates. The estimated ending balance for the current biennium of $1.5 billion could have been used this session.
These steps would substantially improve the competitiveness and prosperity in Texas.
The Tax Foundation ranks Texas’ business tax climate 14th best nationwide. However, if Texas eliminates the margins tax, the state could move to third place, joining South Dakota and Wyoming as the only states without an income tax or a general business tax.
My research finds that if the explicit margins tax liability and implicit compliance cost are abolished, then Texas could have increases of $16 billion in new personal income and 130,000 new private sector jobs above the status quo within the first five years. Even the most conservative estimates from other studies indicate that Texas could gain billions of dollars in new personal income and tens of thousands of new private sector jobs.
The Texas Comptroller notes that businesses will still technically submit taxes in Texas. Businesses are estimated to submit 42 percent of the projected $32 billion in sales tax and 51 percent of the expected $36 billion in property taxes for school districts in FY 2019.
The 2015 Texas Legislature helped reduce this burden on people by cutting the margins tax rates by 25 percent and lessening the compliance cost for a total taxpayer savings of $2.6 billion that began January 1, 2016. The Comptroller’s preliminary estimatesshow that margins tax collections in the 2016-17 period are 18.6 percent less than in the prior period, so less than the cut in rates even with slower economic growth from less mining activity, a weaker global economy, and other economic factors.
The evidence is clear: Texans are poorer every day that the margins tax exists. Eliminating it as quickly as possible, maybe by combining both bills above, would enhance Texas’ prosperity. This leadership in Texas, where almost one-third of jobs have been created since December 2007, should encourage Congress to control government spending and end the federal corporate income tax.
Testimony before House Ways & Means Committee for HB 28 by Dr. Vance Ginn, Economist in the Center for Fiscal Policy.
Vance Ginn, Ph.D, testimony before the Senate Finance Committee for SB 9 on Strengthening Texas’ Appropriations Limit. The following are excerpts from the testimony:
"Texas has done better economically and fiscally than most states during much of the last two decades. However, the state’s weak appropriations limit is a problem that needs improvement to consistently control excessive government appropriations. Since government spending must ultimately be paid for by taxation, limiting excessive spending increases is essential for a competitive economy that supports prosperity. The 84th Texas Legislature appropriated a 2016-17 budget that increased by 4.3 percent above the previous period’s appropriations. Although this budget increased by less than population growth and inflation, it should be the first of many given past excessive budget trends. Specifically, the total budget is up an estimated 11.8 percent above the pace of compounded population growth plus inflation since the 2004-05 budget.
"Population growth and inflation are two economic measures that account for most of the cost of funding public provisions to a changing population. Research finds that simply changing the appropriations limit to population growth and inflation will lead to tax relief and accelerated economic growth. The key is that a limit with the combination of these measures holds budget growth to no more than the means of taxpayers as more people pay taxes and wages are often tied to price inflation. Our recommendation is to add these measures to account for economies of scale whereby the average cost of providing many government provisions declines over time. Moreover, the appropriations limit growth rate’s current measure of personal income can be represented as population growth plus inflation plus productivity. However, a more productive private sector signals that the marginal return per dollar would be greater in the private sector, meaning that more dollars should remain there instead of being taxed to pay for higher government spending. If government productivity is considered in this calculation, it would be practically impossible to measure and would likely be zero over time, thereby leaving population growth plus inflation.
"The current appropriations limit has contributed to excessive government spending. Texas needs to adopt a more responsible appropriations limit to better control the budget so it can be a model for other states to follow. Although SB 9 could use some changes to strengthen it, we believe that it will help limit the size and scope of government in Texas, allowing Texans many more opportunities to improve their well-being. Thank you for your time and I look forward to answering your questions."
I had the opportunity today to testify before the Texas House Business & Industry Committee against raising the state's minimum wage. There were 9 bills filed to raise the government-mandated minimum wage and I testified against them all. As outlined in the following resources and research links in many of them, it is clear that the minimum wage hurts most those its intended to help. The Texas Legislature would be wise to not raise the minimum wage but rather focus on strengthening the Texas model of limited government and free markets.
Here is my oral testimony at time 01:26:30.
Here is my written testimony and KVUE interview
Here are recent interviews: KXAN, EverythingLubbock
Here is a video of my minimum wage game for students.
Here are previous op-eds in the Statesman, Houston Chronicle, Tyler Morning Telegraph, Morning Consult, Fort Worth Star-Telegram, The Daily Signal
Here is a blog post: Just Say No to a Higher Minimum Wage
Here is a list of more than 500 economists who signed to not raise federal minimum wage.
The House supplemental appropriations bill (HB 2) appropriates state funds for the 2016-17 budget beyond the limit of the Conservative Texas Budget (CTB) and appropriates $1.4 billion from the Economic Stabilization Fund (ESF), commonly called the “Rainy Day Fund.” Neither of these are necessary; the Texas Legislature should finish the current budget cycle by using only available general revenue (GR) and by limiting the appropriations of state funds to $1.2 billion or less.
The 2016-17 CTB limits are $142.3 billion in state funds and $215.2 billion in all funds. These limits keep biennial appropriations of state funds and all funds—including federal funds—from increasing by no more than population growth plus inflation. Accounting for appropriations from 2015, the 85th Texas Legislature can only appropriate $1.2 billion in state funds and $6.1 billion in all funds (see figure below) if it is to remain within the limits of the CTB. An examination of HB 2 shows that this is possible.
HB 2 includes $1.4 billion in state funds appropriated from the ESF, commonly called the “Rainy Day Fund.” Given that much of these appropriations are for Medicaid, they are matched with federal dollars of $1.7 billion, for an all funds increase of $3.1 billion.
Here are highlights from the supplemental bill:
Of these, the only essential appropriation in this list is that which is federally-mandated for Medicaid. Here, the House found savings in HHSC to reduce their supplemental request from $1.3 billion to $931 million in GR. This allows for room under the CTB state funds limit for about $269 million. The Legislature should allocate the $269 million to other programs and, if needed, provide additional funds for these programs in the 2018-19 appropriations bill.
The ESF was created by the Legislature and approved by voters in 1988 “to be used to offset unforeseen shortfalls in revenue.” Staying with the CTB limits confirms that there is no need to dip into the ESF because there is enough GR available to fund a conservative supplemental budget. Here’s a snapshot of what the Texas Comptroller noted in the Biennial Revenue Estimate:
You’ll notice that the 2018-19 beginning balance, i.e., the 2016-17 estimated ending balance, is $1.53 billion. This is sufficient revenue to cover appropriations under the CTB limit—or for the $1.4 billion in HB 2. In either case is it not necessary to use the ESF.
Moreover, there’s no reason to “loot” the ESF for the upcoming 2018-19 budget because there is no revenue shortfall, as noted in the Comptroller’s BRE:
"For 2018-19, the state can expect to have $104.9 billion in funds available for general-purpose spending, a 2.7 percent decrease from the corresponding amounts of funds available for the 2016-17 biennium. If not for the new constitutional provision dedicating up to $5 billion in biennial sales tax revenue to the State Highway Fund (SHF) starting in fiscal 2018-19, projected funds available for general-purpose spending for 2018-19 would be $109.6 billion, 1.7 percent greater than in 2016-17."
Of course, this is just for GR-related funds. If you consider state funds or all funds that include federal funds, there is the potential for increases in government appropriations of more than 6 percent, which well exceeds the 2018-19 CTB growth limit of no more than a 4.5 percent increase.
There simply is no need to use the ESF or to appropriate taxpayer money beyond the limits of the CTB in either the 2016-17 supplemental budget or in the 2018-19 budget. Limiting the increase in appropriations to less than population growth plus inflation would boost the economy, make it possible to cut taxes, and limit the ability of government to interfere in the daily lives of its citizens.
This commentary originally appeared in The Monitor on March 5, 2017.
The rising burden of Texas’ state debt and public pensions must be stopped.
As families across the Rio Grande Valley must limit their reliance on debt, so too must the Texas Legislature. Legislators should do this to not only continue their AAA credit rating by all three major credit rating agencies, but they should also do it to keep the tax burden lighter on you.
While Texas ranks 2nd lowest in state debt per capita among the top 10 most populous states and 16th best nationwide in fiscal health, there are increasingly signs of fiscal fragility. Reforms to state debt and public pensions would help curb these dangers so they don’t come home to roost on Texas families.
When debt is mentioned, there’s usually a negative connotation associated with it. Debt is not inherently bad, but like many things, too much of it can be. State legislators must be vigilant in prioritizing taxpayer dollars in the most effective way, which includes expenditures and tax cuts, to then appropriately manage state debt.
At the end of the 2016 fiscal year, Texas state debt outstanding, which includes only the principal owed, was $49.8 billion. This amount is small compared with Texas’ $1.7 trillion economy. However, it has increased by 52.7 percent above the increase in the state’s population since fiscal year 2006 to $1,790 owed per every man, woman, and child in Texas.
Accounting for the full cost to taxpayers of both the principal and interest owed during the life of the loans, total debt service outstanding is $80.8 billion, bringing the amount owed by every Texan to roughly $3,000.
If these trends and amounts continue to accumulate without proper management and accountability, it could require either higher taxes that destroy economic activity or government spending cuts that could undermine essential government programs.
Lawmakers this session could slow the rising tide of debt by increasing ballot box transparency.
Currently, the Legislature passes bonds for things like roads and then voters consider approving the ballot proposition with just the bond’s purpose and amount available. To provide voters who don’t have sufficient time to obtain more information while working and caring for their family, bond propositions should include more information with so much at stake. This includes the total debt service required to pay the proposed debt and an estimate of the influence on the average taxpayer’s taxes.
Another potential burden plaguing Texans is the rising amount of unfunded liabilities in public pensions from the current setup of costly defined-benefit plans.
The state’s two largest pension systems, Employees Retirement System (ERS) and Teachers Retirement System (TRS), have $41 billion of unfunded liabilities. This amount is the net present value of future benefits paid less expected contributions and investment earnings. The estimated future funding gap that could quickly exhaust these defined-benefit plans is dependent on volatile annual rates of return and fewer contributors paying for more beneficiaries.
For example, the $41 billion unfunded gap for just ERS and TRS is derived by using an assumed 8 percent of annual return, which isn’t met every year despite fund managers taking on more risk. However, assuming a risk-free rate of an average 15-year Treasury note rate of 2.3 percent, research shows that all unfunded liabilities in Texas amount to $360 billion, or about $13,000 per person.
Until state pension systems are not based on payouts without appropriate funding, taxpayers will ultimately be on the hook to fund any potential shortfall.
While there are steps that can kick the can down the road, as past legislatures have taken, the best option is to transition pensions to defined-contribution plans. This would allocate payments of retirement funds based on matching deposited funds of employees and taxpayers instead of payouts today that correspond little with matched deposits.
By passing ballot box transparency for issuances of state debt and converting pensions to defined-contribution plans, legislators can reduce the growing burden of liability payments on current and future generations of Texans. Achieving this will help legislators prioritize taxpayer dollars for essential government provisions and tax cuts so you get the biggest bang for the buck for each dollar sent to Austin.
Dr. Vance Ginn's testimony before the Senate Finance Committee in support of simplifying Texas' business franchise tax and SB 142.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.