In today's episode, I take the normal look at the financial markets, with stock falling primarily from brewing trade war with China.
But the big news today was the Texas Comptroller Glenn Hegar revising the Certification Revenue Estimate substantially up for the current 2018-19 budget period, such that instead of a $94 million surplus at the end of FY 2019 there is now an expected $2.67 billion surplus. This is one of the many benefits of the Texas Legislature passing conservative budgets to keep taxes lower than otherwise during the last 2 sessions resulting in faster economic growth and even more tax revenue. While many people will want to spend this additional taxpayer money, and there will likely be a need for a supplemental bill to fund expenditures above appropriations from last session for the $1.8 billion delayed funding to the State Highway Fund and some amount for Medicaid, the focus should be on sustaining a conservative budget and prioritizing extra dollars for tax relief. Options could be to buy down the school M&O property tax over time until it is eliminated or even cutting the business margins tax until elimination.
More money in the hands of Texans in the productive private sector is how people become more prosperous while government simply functions to preserve liberty.
BY VANCE GINN AND DREW WHITE, OPINION CONTRIBUTORS
Original can be found at The Hill
The good news keeps coming. Since the passage of the Tax Cuts and Jobs Act, announcements about increased investment in the U.S. and various companies offering employees bonuses haven’t stopped.
The vast majority of Americans will prosper from the Tax Cuts and Jobs Act. As an economist and policy analyst, we’ve been skeptical of the Trump administration’s direction on some issues, like NAFTA renegotiations, but we’re encouraged by the results of regulatory and tax reforms because they let people prosper, the flipside of what’s been stifling us.
This first major rewrite of the federal tax code in a generation is a historic moment for our republic. The institutional framework that stifled Americans can again work for We the People instead of for bloated governments.
We admit that the bill isn’t perfect and encourage Congress to follow this massive $5.5 trillion gross tax cut with spending restraint. That’s especially important because without spending reductions roughly $500 billion could be added to the national debt in the next decade. Also, doing so will help keep the roughly $112 trillion in federal IOUs from requiring government to further infiltrate our lives.
We’ve experienced government’s overreach during the worst recovery since WWII of about two percent annual growth while the national debt almost doubled under the Obama administration’s high tax and spend policies. This reshaping of institutions increased barriers to prosperity through excessive regulations, like ObamaCare, and higher taxes that redistributed resources among people.
America voted for a new institutional direction in 2016.
Regarding regulations, the Trump administration has already repealed 67 of them while creating only three. Entrepreneurs can now budget lower costs longer which contributes to more investments in workers and capital. The result is faster economic growth with a three percent average annualized growth the last three quarters of 2017 matching GDP’s long-term average, which has lifted consumer sentiment.
The tax bill’s most sweeping changes include cutting the corporate tax rate and individual income tax rates for most Americans. Sixty percent of the gross tax cuts go to families while the rest goes to businesses.
As expected, critics claim these changes benefit the rich. Interestingly, the corporate tax rate cut once had bipartisan support, as President Obama proposed cutting it to 28 percent, and progressives passed and extended much of President Bush’s personal income tax cuts.
Regardless, permanently cutting the corporate tax rate from 35 percent, the highest in the developed world, to 21 percent, slightly below the worldwide average, drastically improves employment prospects.
Often missed in the discussion is that corporations simply submit taxes to the government because people pay them through higher prices, lower wages, and fewer jobs available. Cutting the corporate tax rate means corporations can pass those savings along to people.
Businesses are reporting they will pay bonuses and higher wages, immediate pay increases to let people freely prosper.
On the individual income tax side, most taxpayers will pay less tax until at least 2026. According to good tax policy, the tax bill doesn’t flatten as it leaves seven income tax brackets, but it broadens the base by eliminating many exemptions and deductions and simplifies the code by doubling the standard deduction.
Critics claim that these changes could increase income inequality. But history shows that the tax code is not the place to deal with supposed income inequality as it fluctuates whether taxes are high or low. By changing the institutional incentives through this tax bill, more people can move up the income ladder.
But, do only the rich get a tax cut? No. The Tax Foundation calculated the changes in tax liability for multiple households and found that each of them would pay less tax.
An individual earning $30,000 with no kids could pay $379 less in taxes. An individual earning $50,000 with two kids could pay $1,892 less in taxes. A married couple filing jointly earning $165,000 with two kids could pay $2,224 less in taxes. And a married couple filing jointly earning $2 million could pay $18,904 less in taxes.
All income groups receive a tax cut.
Higher income people pay fewer dollars than those with lower income, but that’s because they pay more in income taxes. For example, the top 10 percent of income earners pay 70 percent of federal income taxes collected. However, the share of income taxes paid could become more progressive under these tax changes.
It’s not just more money in people’s pocket, but doubling the standard deduction lets many people spend less time on their taxes and more time with their families. This is great news for working Americans.
Icing on the cake would be for Congress to restrain government spending, the ultimate burden of government.
Bipartisan welfare reform in the 1990s helped cut spending but more importantly improved the lives of many Americans as they returned to work or received better assistance. The amount of waste, fraud, and abuse in these programs along with too many dollars to bureaucracy and not to people make welfare a good place to start.
Reforms to the major drivers of Medicaid, Medicare, and Social Security must be on the table to restrain spending growth while improving them for the truly needy.
Until then, let’s celebrate the Trump administration’s new institutional direction that has long supported prosperity. Skepticism is healthy to provide proper checks and balances on government. But when pro-growth policies like regulatory and tax reforms improve human flourishing, we’re much more optimistic about the future.
Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist and Drew White is senior federal policy analyst, both at the nonprofit Texas Public Policy Foundation.
Don't miss this 30-min episode on state of #Texas economy with moderator Dennis McCuistion with guests: Economist Ray Perryman, SMU Professor Cal Jillson, and me. We discuss jobs, education, fiscal policy, & more!
Here's the webpage's blurb about the episode:
Overall the Texas economy is sound and from 2005-2015 has been among the national leaders in economic output and personal income gains. Despite its reputation as a predominantly energy state, Texas’ businesses and industries are among the most diversified in the U.S. which position the state to better withstand economic downturns .
Joining Host Dennis McCuistion to talk about the state of the economy and offer projections for its future are:
Job creation is high and industry is sound. Technology and healthcare are also doing well; we have a young workforce and more corporate expansions are setting the tone for the entire economy. Texas is America’s job engine. In 2007- 2017 one out of every four jobs was created in Texas, a state that has less than 10% of the population. The Texas model supports prosperity, with the highest economic freedom of almost all states. Unemployment is under 5%., better than all comparable states- including New York, Florida, and California.
However, some of Texas’ workforce measures have plenty of room for improvement, especially the share of its labor force without a high school diploma. Education is an issue. Texas ranks #1 in workforce factors and 34 in education.
While Texas was among the national leaders in economic output and personal income gains from 2005-2015, its share of the population living in poverty, remains above the national average.
Texas’ uninsured rate was 17.1 percent in 2015, nearly double the U.S. rate of 9.4 percent
The 2015 home ownership rate in Texas was 61.9 percent, the ninth-lowest rate among states.
Join our experts to hear their input about our present tax structure, education, water, technology and climate issues and some of the other challenges down the road as well as potential solutions.
Be sure to watch more McCuistion TV programs on our website, www.McCuistionTV.com.
This commentary was published in The Dallas Morning News on September 15, 2017.
I appreciated the opportunity to testify before the Texas House Appropriations Committee regarding strengthening the state's current weak spending limit by passing a conservative spending limit. House Bill 208 gets Texas much closer to the ideal limit, which I outlined in my testimony. While there are some beneficial aspects of the House Joint Resolution 1, I provided some recommended changes to improve the resolution.
You can watch my testimony here at time 1:36:00: http://tlchouse.granicus.com/MediaPlayer.php?view_id=40&clip_id=14360.
Check out the press release here: https://www.texaspolicy.com/press_release/detail/tppfs-vance-ginn-to-testify-on-passing-a-conservative-spending-limit.
Here's my written testimony:
This commentary was originally featured in TribTalk on July 18, 2017
Not everyone, it seems, is excited about the Texas Legislature assembling in Austin for the special session set to begin on July 18.
One common complaint by those who’d prefer members stay home is the high cost of a special session to taxpayers. Past estimates for the cost of a 30-day special session have topped $1 million.
However, if the Legislature actually passes bills on the 20 charges specified in the call by Gov. Greg Abbott, Texans could see a return on their investment in the special session far surpassing their wildest expectations.
Spending caps and reform of the rollback process for property taxes would reduce the rapid growth of both state and local government spending. Previous proposals on these issues have focused on keeping spending growth below population growth plus inflation, which would be substantially less than recent growth.
For instance, local government direct spending in Texas from 2001 through 2014, the latest Census Bureau dataavailable, increased 23 percent faster than population growth plus inflation, costing taxpayers a total annual difference of an astonishing $144 billion per the Foundation’s calculations. Similarly, for the 14 years ending in 2017, increases in state spending outpaced population growth plus inflation by a cumulative difference of $116 billion.
In other words, if Texas taxpayers had spent $1 million or so on a special session to limit state and local spending 14 years ago, they could have saved $260 billion over time. They could see similar returns in the future if the Legislature uses this summer’s special session to keep state and local spending under control.
Also on the call is school choice for special-needs students. But what if the call was expanded to include school choice for all Texas students? Texans would not only see a tremendous financial benefit, but an increase in flourishing and prosperity for Texans from all economic, cultural, and ethnic backgrounds.
The Texas Public Policy Foundation’s research shows that a universal educational savings account program would generate more than 11,000 new high school graduates by 2022. These new graduates would provide as much as $5 billion in economic benefits to all Texans; their chances of living in poverty as adults drop by half when they obtain a high school diploma. Public- and private-school teachers would also benefit, with budget reallocations in districts and schools increasing the salaries of good teachers by as much as $28,000 in the first year.
Taxpayers would also benefit from the introduction of education choice. Our public schools are highly inefficient, spending almost $13,000 per student with dropout rates from 14 to 25 percent and with only 18 percent of graduates meeting the SAT or ACT college-readiness standards. Through education choice, Texas could actually spend less on K-12 education over time while increasing graduation rates and improving student performance.
Finally, Texans could see a significant return on their $1 million investment in a special session as the Legislature tackles local permitting delays and excessive regulation in order to reduce the costs of housing and doing business in our cities.
Overall, government regulation can add up to 25 percent to the price of housing units, much of that due to local restrictions. On the business side, one researcher found that permitting delays on average add 3.5 months to the development process in Austin, while in Harris County media outlets have reported delays of up to six months.
Imagine the benefit to Texas’ low-to-middle income earners, who are being priced out of living in our urban centers, if the Texas Legislature could erase even 10 percent of the cost of renting or buying a home. Consumers, too, would benefit through lower prices and better service if businesses could operate more efficiently because the Legislature reduced the regulatory burden placed on them by local governments.
Citizens usually dread when their elected representatives gather to pass new laws because the result is usually higher taxes, more regulations and less freedom, but the upcoming special session provides a unique opportunity for the Texas Legislature to move in the direction of liberty and opportunity. That would be an investment well worth making.
Here is the one-pager: https://www.texaspolicy.com/content/detail/2018-19-supplemental-appropriations-limits
Read the entire post with figures here: https://www.texaspolicy.com/blog/detail/spending-more-wont-solve-school-finance-or-property-tax-flaws-in-texas
Watch my explanation of the Conservative Texas Budget, school finance reform, property tax reform, and more in the @TXCapTonight interview at time 4:30 here: http://www.twcnews.com/tx/austin/capital-tonight/2017/06/13/capital-tonight-june-13--a-day-in-the-life-of-a-cps-caseworker.html
In addition to this fiscal recap of the 85th Legislative Regular Session, the file below provides an overview of the 2018-19 Texas Government Budget while avoiding any smoke and mirrors. Transparency and accountability are essential for the use of taxpayer dollars.
With the regular session of the 85th Legislature behind us, let us consider how effective they were at practicing fiscal responsibility based on the legislative priorities of the 14 member organizations of the Conservative Texas Budget Coalition.
This commentary originally appeared in Investor's Business Daily on May 26, 2017.
After suffering from rising federal tax and regulatory burdens, Americans may be on the precipice of the next huge economic expansion.
The evidence is already mounting as business and consumer confidence reach new highs after the Trump administration's regulatory reforms and other pro-growth proposals. The next impetus to support increased prosperity is cutting government spending and taxes.
President Trump's announced tax plan would cut the federal corporate income tax rate of 35%, the highest in the industrialized world, to a more competitive 15%. The plan would also reduce the number of personal income tax brackets from seven to three, double the standard deduction, and eliminate the death tax, Alternative Minimum Tax, and all deductions except for mortgage interest and charitable contributions.
The president's plan is similar to the GOP tax plan but unique in a number of ways. A major difference is the GOP's inclusion of what's been called a "border adjustment tax," or BAT, which is simply a new way of taxing business cash flow.
Specifically, the BAT would keep the corporate income tax base on goods produced and sold domestically but change the base from exports to imports.
One reason for pushing the BAT is to achieve revenue neutrality, which is when tax cuts are offset with increases in other taxes, but the GOP proposal could add to the current $20 trillion in national debt over the next decade.
Moreover, by favoring domestic goods over imported goods, the BAT will distort international trade and its associated benefits, which would harm economic activity.
Some economists favor the BAT, claiming it will level the playing field between imports and exports. Moreover, they speculate that the dollar's value will adjust to the BAT so that it doesn't cause increases in consumer and producer prices or change production patterns.
While these arguments theoretically could happen, they exclude how the BAT would result in less economic growth through at least the following three ways:
As an example of the cost of the BAT, the Texas Public Policy Foundation and the R Street Institute commissioned a study that found the BAT could contribute to a cost increase of $3.4 billion in Texas' property-casualty insurance premiums over the next decade from its effect on the reinsurance market.
To avoid these large costs, Congress should focus on cutting taxes while slaying what drives increases in national debt: government spending.
For every dollar of taxes cut, Congress should cut a dollar in government spending. This pro-growth combination would assure no additional increase in projected deficits under current policy.
In addition, this approach would support increased economic growth that would contribute to more taxes collected, resulting in reduced projected deficits.
The starve-the-beast approach, with the goal of reducing the size and scope of government, has been tried before from historic tax cuts under the administrations of Kennedy-Johnson, Reagan and Bush 43. However, in each case, government spending rose faster than increased tax collections, resulting in substantially more national debt.
To reduce the federal tax and regulatory burdens that hinder economic growth this time around, Congress should pursue a "budget neutral" approach of cutting both taxes and government spending.
Fortunately, President Trump's announced tax plan doesn't focus on revenue neutrality by including the BAT. This provides an opportunity for a discussion about taming excessive government spending.
Federal tax reform should focus on core principles of taxation that include a simple, efficient and competitive tax system. President Trump's tax proposal heads in that direction.
By following these principles and focusing on cutting government spending to achieve budget neutrality, without creating a costly BAT, Americans can be more prosperous and optimistic about their future.
FEDERAL TAX DEBATE: REFORM SHOULD FOCUS ON SIMPLIFICATION, EFFICIENCY, & BUDGET NEUTRALITY WITHOUT A NEW "BORDER ADJUSTMENT"
Here are my thoughts on the border adjustment and federal tax reform in general as they could influence the U.S. economy, especially Texas.
I disagree with some of the analysis and findings by Kotlikoff (see full article below), whom is a highly respected economist regarding life cycle economic modeling and analysis, but he tends to be Keynesian in his approach, as you can see throughout his piece. Much of what he states about the border adjustment, also known as the border adjustment tax (BAT) though it is not technically a tax, is reflected in the Tax Foundation’s (TF) talking points.
TF claims that the border adjustment will be more efficient than our current corporate income tax system by leveling the playing field for goods that are consumed in the U.S. Moreover, TF argues that it is not a tax but rather a “border adjustment” of the current corporate income tax such that corporations report consumption of their imported goods as income since it is consumed here instead of exports that are consumed elsewhere. TF and Kotlikoff also put a lot of emphasis on the far-reaching assumption that the dollar value will adjust accordingly to not make the border adjustment cause increases in consumer and producer prices.
While theoretically TF is correct on several points, the BAT argument fails on at least the following levels:
Tax revenue neutrality is a failed argument that has been tried multiple times (e.g., Kennedy-Johnson tax cuts, Reagan tax cuts, Bush tax cuts); tax reform should focus on budget neutrality such that the economic drain of a rising $20 trillion in federal debt is plugged as soon as possible.
The vision, like in Texas, should be to not tax businesses that simply submit taxes to the government while people pay the actual cost through the form of higher prices, lower wages, and fewer jobs available. In economic terms, the tax incidence is ultimately on people. Ending the corporate income tax would eliminate whether we are taxing income based on imports or exports, removing the concern over the border adjustment.
Considering we are unlikely to eliminate federal taxes on businesses today, reducing the corporate tax rate to as low as possible while not changing the tax base, thereby distorting the marketplace more than it should, balancing the budget should be based on economic growth and slowing and cutting government spending so budget neutrality is achieved. There’s no need to add a “new tax,” though it’s not technically a new tax, in the form of the border adjustment.
The Texas Public Policy Foundation (TPPF) recently commissioned a study with the R Street Institute that highlights the cost increase of $3.4 billion in Texas' property-casualty insurance premiums over the next decade from the border adjustment, which is just a small portion of the potential costs to Texas and other states. TPPF's research also shows that taxes on income and higher taxes in general are detrimental to economic activity among states; therefore, shrinking the size and scope of government by cutting government spending is the best path toward prosperity, not providing revenue neutrality with a new border adjustment.
Fortunately, President Trump’s announced tax plan does not include the BAT. While I have concerns about the contribution of Trump’s tax plan to the already estimated increases in the national debt from current policy, economic growth will reduce some of the static analysis revenue losses. Considering that neither President Trump's nor the GOP tax plan will pay for itself, as some economists suggest, the focus must be on budget neutrality as Congress cuts and restrains government spending.
At this point, I prefer the Trump tax plan and think it would best reduce tax burdens to allow more incentives by entrepreneurs to produce—the driver of economic activity. However, this is an opportunity to highlight that there shouldn’t be taxes on businesses, like TPPF argues to eliminate Texas' business franchise tax, and that the federal government should continue to simplify the tax code to provide more efficiency in the code by moving to a flat tax, which I prefer a flat consumption tax, and subsequent increased economic activity. This is also an opportunity for the U.S. to increase its economic competitiveness through tax reform to counter the unfortunate protectionist arguments in D.C. that could lead to potentially worse negotiated trade deals and fewer beneficial trade agreements, which is very disconcerting.
Below are two recent WSJ articles that provides different views on this issue. I hope the debate will continue so that the appropriate institutional framework for fiscal policy will prevail. In general, this framework should be based on the core principles of taxation, which includes simplicity, efficiency, and competitiveness. By following these principles and focusing on budget neutrality without shifting to a new tax base, the U.S. can be more prosperous and Texans will benefit in the process.
On Tax Reform, Ryan Knows Better
The House proposal beats Trump’s plan, which is more regressive and would induce huge tax avoidance.
May 11, 2017 6:58 p.m. ET
As Republicans push toward a major rewrite of the U.S. tax code, they must evaluate two competing proposals: the House GOP’s “Better Way” plan and President Trump’s framework, introduced last month. Either would greatly simplify personal and business taxation, but pro-growth reformers should hope that the final package looks more like the House’s proposal.
Let’s begin the analysis with personal taxes. Both plans eliminate the alternative minimum tax, deductions for state and local taxes, and the estate tax. The House plan eliminates exemptions, while Mr. Trump’s outline is unclear. Both raise the standard deduction, reduce the number of income-tax brackets, lower the top marginal tax rate, and provide a big break to those with pass-through business income. On this last point the Trump plan is particularly generous. It taxes pass-through income at 15%—far below its proposed top rate of 35% for regular income. The large gap between these rates would induce massive tax avoidance by the rich. The Better Way’s proposed rates are much closer: 25% and 33%, respectively.
Another criterion to judge tax reform is its effect on the budget. Absent any economic response, the Better Way proposal would lower federal tax revenue by $212 billion a year, according to a recent study I conducted with Alan Auerbach, an economist at Berkeley. But some economic response is likely. The House plan would cut the U.S. corporate tax rate from one of the highest among developed countries to one of the lowest. Computer simulations—which will be included in a forthcoming journal article I am writing with Seth Benzell and Guillermo Lagarda —suggest that increased dynamism could raise U.S. wages and output by up to 8%. Under this optimistic scenario, federal tax revenue would rise by $38 billion a year.
We are in the process of simulating the Trump plan, and it is too early to say whether it produces less revenue. The plan’s potential for tax avoidance, however, is a major red flag.
Which plan is more regressive? Both personal tax reforms appear to help the rich. But the Better Way’s business tax reform actually appears highly progressive. Despite the popular perception that the corporate income tax is paid by the rich, my research suggests it represents a hidden levy on workers. This causes American companies and capital to flee the country, reducing demand for U.S. workers, whose wages consequently shrink.
The Better Way plan transforms the corporate income tax into something different: a business cash-flow tax with a border adjustment. Notwithstanding innumerable mischaracterizations by the press, politicians and business leaders, the cash-flow tax implements a standard value-added tax, plus a subsidy to wages. Every developed country has a VAT, which is an indirect way to tax consumption. All of these levies have border adjustments, which ensure that domestic consumption by domestic residents is taxed whether the goods in question are produced at home or imported. Unlike the Better Way, Mr. Trump’s plan does not include a border adjustment, which means it effectively taxes exports and subsidizes imports. This undermines his goal of reducing the U.S. trade deficit.
Where is the progressive element to the cash-flow tax? It’s in the subsidy to wages, which insulates workers from the brunt of the VAT. They will pay VAT consumption taxes when they spend their paychecks, but they also will have higher wages thanks to the subsidy. The folks who truly pay the cash-flow tax are the rich, because they pay the VAT when they spend wealth that was earned years or decades ago.
As my study with Mr. Auerbach shows, this quiet but large wealth tax makes the overall House plan almost as “fair” as the current system. Our analysis—in contrast with studies done by congressional agencies and D.C. think tanks—assesses progressivity based on what people of given ages and economic means get to spend over the rest of their lives.
Consider the present value of remaining lifetime spending for 40-year-olds. The richest quintile of this cohort accounts for 51% of the group’s spending, and the poorest quintile for 6.3%. Under the House tax plan, those figures move only modestly, to 51.6% and 6.2%. And the Trump plan? Hard to say, given how easily the rich could transform otherwise high-tax wage income into low-taxed pass-through business income.
The Trump tax plan strikes out on all counts. Whoever knew tax reform could be this complicated? We specialists in public finance did. The bottom line is that the U.S. needs more revenue and less spending to close the long-term fiscal gap. The nation’s true debt—the present value of all projected spending, including the cost of servicing the $20 trillion in official debt, minus the present value of all current taxes—has been estimated by Alan Auerbach and Brookings’s William Gale to be as high as $206 trillion.
The Better Way plan moves in the right direction, but if the economy doesn’t respond as hoped, there’s a risk of larger deficits. One way to prevent that would be to eliminate the ceiling on earnings subject to the Social Security payroll tax. That could add $300 billion to the Treasury each year, according to our calculations. But even without that adjustment, the House plan seems far superior to both the current system and the Trump plan. The press, politicians, and business leaders should get things straight, including this key point: The Better Way tax plan is indeed a better way.
Mr. Kotlikoff, an economist at Boston University, is director of the Fiscal Analysis Center.
Economists Say President Donald Trump’s Agenda Would Boost Growth — a Little
The WSJ’s monthly survey of economists gauges the impact of a fully implemented Trump plan
Updated May 11, 2017 10:34 a.m. ET
One of the most-watched economic forecasts in Washington will come later this month when the White House releases its budget.
Here is what it would look like if done by economists surveyed by The Wall Street Journal.
Over the course of the next decade, the estimated cost of many items on President Donald Trump’s wish list will depend critically on his own team’s projections for economic growth, unemployment and interest rates.
Per the longstanding custom, however, the White House budget differs from most economic forecasts in one crucial way. Most forecasters estimate the path for the economy they believe is most likely, taking into account that many political promises will never come to fruition. But White House forecasts are an estimate of what the economy would be like if the president’s full agenda were implemented.
To establish a baseline of what a reasonable forecast might look like under Mr. Trump, respondents to The Wall Street Journal’s monthly survey of forecasters provided their own estimates of the economy if all of Mr. Trump’s initiatives were enacted.
If the president’s agenda were enacted, forecasters on average think long-run gross domestic product growth could rise to 2.3%, an 0.3 percentage point increase from their 2% baseline. Unemployment would average 4.4% under this scenario, instead of 4.5%. Interest rates set by the Federal Reserve would be about a quarter-point higher. Short-term rates would be about 3.1%.
So an improvement, but a modest one.
Early on, White House officials have reportedly considered penciling in growth rates as high as 3.2% a year. But the respondents to the Journal’s survey—a mix of academic, financial and business economists who regularly produce professional forecasts—say numbers so high will be hard to attain, because the policies under consideration just might not pack that punch.
Key Trump initiatives, which face a challenging road through Congress, include overhauling the health-care system, simplifying the corporate tax code, cutting income taxes, rewriting regulation and investing in the nation’s infrastructure.
“If you were to assume that such initiatives get passed later this year, there should be positive economic benefits, especially for 2018,” said Chad Moutray, chief economist of the National Association of Manufacturers.
Over the course of a decade, 3.2% growth would leave the economy nearly $2 trillion larger than 2.3% growth. So the lower estimates of economists are significant.
“Fewer regulations may raise long-term growth 0.1% to 0.2% by stimulating productivity growth,” said Nariman Behravesh of IHS Markit Economics. “It should have hardly any effect on the long-term unemployment rate and inflation rates.”
It is “hard to quantify, but measures would not boost long-term productivity,” said Ian Shepherdson of Pantheon Macroeconomics. “But they probably would push up both short and long-term interest rates.”
The White House always has some incentive to put forth overly optimistic numbers. For one thing, the White House staff generally believe in the wisdom and benefits of the president’s agenda. And if growth rates are boosted and unemployment comes down, it does wonders for budget projections.
Tax revenue climbs and spending on programs such as unemployment or Medicaid may dwindle.
In recent months, economists’ forecasts for the coming year haven’t changed much. They expect growth for this year of 2.2%, down from 2.4% in the March survey. They place the odds of recession in the next year at just 15%, compared with 20% at this time a year ago.
For now, many are waiting to see more detail in Mr. Trump’s agenda and retain doubts about how much he will be able to accomplish.
“Infrastructure spending is great, but it has to be paid for and that creates drag at some point,” said Amy Crews Cutts, the chief economist of Equifax. “The proposed tax breaks won’t stimulate the economy nearly enough to pay for themselves let alone fund other new initiatives, which leads to deep cuts in the long run."
The survey of 59 economists was conducted from May 5 to May 9. Not every economist answered every question.
The Conservative Texas Budget (CTB) limits the Legislature’s increase in appropriations for the 2018-19 biennium to no more than population growth plus inflation. As the budget heads to the conference committee for final negotiations before consideration by both chambers, the passed versions of SB 1 by the Senate and the House indicate that they can keep appropriations below the CTB limits.
This commentary originally appeared in The Gilmer Mirror on February 14, 2017.
Texas Governor Greg Abbott recently released his 2018-19 state budget proposal. He noted in that proposal, “Spending restraint must always be practiced, especially when the revenue projection is tight. While there are difficult choices to be made, the Governor’s budget funds the state’s priorities without issuing new debt, raising taxes, or utilizing the Economic Stabilization Fund.”
Some will claim that restraining or cutting government spending will slow economic growth. This point fails basic economics. Given that the state budget is funded by taxpayer dollars, fewer budgeted dollars means less takings from you, and more opportunities to prosper.
Of course, there are essential services provided by the government, but those limited, effective provisions are far fewer than we have today.
An indicator of this is the fact that the state’s current total budget—the footprint of government—is up 11.8 percent compared with compounded population growth plus inflation since 2004. This amounts to families of four paying roughly $1,600 more in taxes this year alone, thereby hampering your ability to satisfy desires and support economic activity.
The Governor gets it right that “spending restraint must always be made.” Like tightening your home budget when there’s less income and more essential expenses, so must state government. However, unlike your home budget, state government must collect tax dollars without generating income, so they must also consider how to leave more money in your pocket.
Fortunately, there are opportunities to achieve these goals of restraining spending through the Sales Tax Reduction (STaR) Fund and reducing tax burdens by eliminating the business franchise tax.
Texas House rules allow legislators to appropriate money cut from one program to another more preferred agency. This provides little opportunity for legislators to actually cut ineffective or excessive areas of the budget, leaving many legislators understandably frustrated with the budget process.
The STaR Fund, passed as ALEC model legislation in 2015, would be a budget-cutting mechanism to resolve this issue. It would operate by aggregating state surplus dollars from various sources (i.e., budget cuts, budget surpluses, and funds above the Economic Stabilization Fund cap) to temporarily reduce the state sales tax rate for a specified period. This would restrain the growth of government while keeping more money in your pocket.
As legislators consider which tax is the most costly for Texans, the reformed franchise tax, often called the margins tax, would top that list. It has been a failure since its reform in 2006 by restraining economic growth and job creation from the tax liability and cost of compliance. Since it is based on the gross revenue of a business with more than $1 million, businesses can have high revenues but be running net losses and be pushed further in the red by paying the margins tax.
Research shows that every year the margins tax is in place, Texans lose tens of billions of dollars in personal income and tens of thousands of new job opportunities. This leaves fewer opportunities for you to prosper. This must end.
By eliminating the margins tax, the Tax Foundation shows that the state’s business tax climate could increase from 14th highest nationally to third best. The combination of higher personal income, more job creation, and increased economic competitiveness makes abolishing this tax a no-brainer for legislators. While it may not be possible to entirely eliminate it this session, the largest cuts in the tax rates possible would be the best choice.
As the data make clear, Texas doesn’t have a revenue problem, it has a spending problem. By achieving the goals outlined by Governor Abbott to restrain spending, the 85th Legislature can take steps to create the STaR Fund and put the margins tax on a path to death as quickly as possible. These steps along with meeting the needs of Texas will hopefully allow for what could be a historic second consecutive conservative budget and better support the success of the Texas model.
Watch video here: http://tlcsenate.granicus.com/MediaPlayer.php?view_id=42&clip_id=11666
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Texas Comptroller Glenn Hegar released the Biennial Revenue Estimate 2018-19 report on January 9, 2017, which acts as a guidepost for how much revenue the 85th Texas Legislature has available. Given the state’s constitution requires a balanced budget, the report sets the stage for legislators on the amount of revenue available to appropriate and cut taxes in the 2017 Legislative Session.
The report shows that there is an estimated 2.7 percent decline to $104.9 billion in general revenue (GR)-related funds available for certification. However, the Comptroller notes that GR-related funds would be up 1.7 percent to $109.6 billion without the constitutionally-dedicated funds of $4.7 billion in sales tax revenue for transportation, which notes the importance of leaving GR available for legislative priorities.
When you include GR, GR-dedicated, and other funds, total state funds amounts to $149.9 billion. State funds plus federal funds equals the amount of all funds of $224.8 billion. The Conservative Texas Budget Coalition, composed of the Texas Public Policy Foundation and 12 other member organizations, has set maximum limits on appropriations of these funds for a conservative budget. These limits are $147.5 billion in state funds and $218.5 billion in all funds. These amounts are increases of 4.5 percent above the current budget based on population growth plus inflation during the last two fiscal years.
Therefore, the Comptroller’s revenue estimates highlight that the 85th Legislature can effectively prioritize taxpayer dollars to pass a conservative budget and cut taxes.
Baked in the Comptroller’s revenue estimates include oil price projections of $47.73 in fiscal 2017, $54.11 in 2018, and $59.26 in 2019. Although the U.S. Energy Information Administration (EIA) forecasts over calendar years and not fiscal years, the Comptroller’s oil price projections are in the same ballpark as the EIA. These oil prices during the upcoming budget period contribute to a 32.3 percent increase to $4.7 billion in oil production and regulation taxes compared with the current period.
Another part of the revenue picture is the Economic Stabilization Fund (ESF), known as the “rainy day fund,” that’s primarily funded by severance taxes (oil and natural gas production and regulation taxes). The ESF is expected to increase to $11.9 billion at the end of the 2018-19 budget period, which is below its constitutional cap of 10 percent of certain GR funds of $16.9 billion. Although some legislators may try to appropriate these dollars, there are plenty of GR-related funds available without touching ESF dollars, which should be used for only essential purposes.
When legislators use these revenue estimates to craft the 2018-19 budget, the Comptroller notes that they should also consider the uncertainty surrounding federal economic policy, oil prices, global economic growth, and other factors. Given these known and unknown variables, legislators must restrain spending by passing a historic second consecutive conservative Texas budget. This would allow them to allocate any extra dollars to killing the business margins tax, adhering to the overwhelming research showing elimination would boost personal income and employment for Texans.
The 85th Legislature has a grand opportunity to follow the proven recipe of restraining spending and cutting taxes to best support greater economic prosperity in Texas.
TPPF recommends passing the second straight conservative Texas budget.
AUSTIN – Today, Texas Comptroller Glenn Hegar released the report Biennial Revenue Estimate 2018-19 that provides the 85th Texas Legislature with an estimate of revenues available to be appropriated for the upcoming 2018-19 budget. Given the state’s constitution requires a balanced budget, this report sets the stage for how much legislators have available for spending and tax cuts in the 2017 Legislative Session that begins tomorrow.
The report notes that the 2018-19 budget will have available $224.9 billion in all funds (state funds and federal funds) and $149.9 billion in state funds. Included in both amounts is an available fund balance of $1.5 billion from the 2016-17 budget. The Conservative Texas Budget Coalition, which includes the Texas Public Policy Foundation (TPPF) and 12 other member organizations, has set conservative spending limits on the 2018-19 budget of $218.5 billion in all funds and $147.5 billion in state funds, based on a 4.5 percent increase in population growth plus inflation during the previous two fiscal years.
TPPF’s Center for Fiscal Policy Director Talmadge Heflin and Economist Dr. Vance Ginn made the following statements:
“The Comptroller’s revenue estimate today notes the importance of the 84th Legislature leaving money on the table, as there remains an expected $1.5 billion fund balance available for the 85thLegislature,” said The Honorable Talmadge Heflin. “By assuring that the 2016-17 budget remains conservative by not appropriating more than a total of $142.3 in state funds, legislators will be well on their way to passing a historic second consecutive conservative budget this session.”
“The 84th Legislature shows the benefits of leaving money on the table while passing a budget that included large tax cuts and keeping spending to no more than population growth plus inflation so that the economy has the best chance to grow,” said Dr. Vance Ginn. “This recipe will be an important mix this session to assure that the 2018-19 budget doesn’t increase by more than $218.5 billion based on the 4.5 percent increase in population growth plus inflation.”
The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. In the 78th Session, Heflin served as chairman of the House Committee on Appropriations and navigated a $10 billion state budget shortfall through targeted spending cuts that allowed Texans to avoid a tax increase. He may be reached at email@example.com.
Vance Ginn, Ph.D., is an Economist at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at firstname.lastname@example.org.
The Texas Public Policy Foundation is a non-profit free-market research institute based in Austin.Primary website: www.TexasPolicy.com
Facebook page: www.Facebook.com/TexasPublicPolicyFoundation
Twitter feed: www.Twitter.com/TPPF
This commentary was originally published in TribTalk on November 17th2016
You open a savings account to save for a rainy day so that you can cover unexpected income losses and unforeseen expenses. Similarly, the Texas Legislature insured itself from unforeseeable budget situations when they created the Economic Stabilization Fund (ESF).
Battered from nearly five years of oil-driven economic malaise and tax hikes to deal with budget shortfalls, Texans went to ballot booths in November 1988 to vote on the validity of the ESF. They overwhelmingly passed the ballot language that said the ESF would "be used to offset unforeseen shortfalls in revenue" caused by the relentless fluctuations of the oil market and unpredictable Texas weather.
However, since its inception in 1989, legislators have used less than one-third of the $10.7 billion spent from the ESF to fund budget shortfalls or natural disaster relief. With legislators already suggesting that the ESF should be used to fund their favorite program in what appears to be a tight budget session in 2017, reforms to restrict frivolous short-term expenditures and reduce idle taxpayer dollars in the fund are critical.
Although the Texas economy is much more diversified today than 30 years ago, economic and budget uncertainty remain from volatility in oil and natural gas markets. The ESF helps protect both individuals and businesses from widespread tax hikes or deep spending cuts in downturns.
Considering that oil and natural gas production taxes, known as severance taxes, primarily fund the ESF, it's not designed to be a source of consistent revenue. Therefore, the fund has a constitutional limit of 10 percent of biennial general revenue-related funds to restrict unnecessary legislative dependence on the ESF.
During the previous decade, the fracking revolution led to a huge expansion in oil and natural gas production that substantially increased the amount in the ESF. This helped to cushion the drop in tax revenue in 2011 from the Great Recession. However, the 2013 Legislature then backfilled the underfunded programs of 2011, which is not what voters approved on the ballot in 1988.
In other words, the ESF has too often become a tool for political gain instead of a rainy day fund.
Comparably, it would be fiscally irresponsible to pay a car note with savings. Instead, it would be better to cut expenses and find a way to live within the means of a steady paycheck.
To mitigate the risks of ESF abuses, the Legislature should consider the following key reforms:
Just like your savings account helps cushion your rainy days, the ESF must be preserved to do the same. Legislators will likely try to tap it next session, but they should be cautious when using the fund. They should prioritize expenditures within general revenue first — and they should be sure to pass a conservative budget.
We must remember that government spending is the disease, and taxes are just a symptom. If we want to cure the disease and keep taxes low, we must be vigilant in keeping spending constrained, no matter the source.
As the calendar year inches its way to a close, the 2017 Texas Legislature is primed to start session in January with an increasingly tight budget brought on partially by the slowdown of the oil industry. This has created a buzz around the state regarding spending money from the state’s Economic Stabilization Fund (ESF), often referred to as the “Rainy Day Fund.”
Texas voters overwhelmingly approved the creation of the ESF in 1988 as a means to help cover tax revenue shortfalls that had led to large swings in taxes and government spending. Funded predominantly by a portion of natural gas and oil production taxes, collectively called severance taxes, the ESF is expected to total $10.4 billion by the end of the current 2016- 17 biennium.
The Foundation recently released a paper detailing the specifics and issues related to the ESF
including the following recommendations on how to reform it:
Texas’ Legislative Budget Board (LBB) recently published research directing attention toward the often-overlooked effect of federal funds on calculating the ESF cap. Federal funds were typically deposited into special funds outside of GR before the ESF. However, with the abolishment of most special funds in the early 1990s, federal funds were consolidated into GR and initially represented only 1.5 percent of deposits into GR while increasing to 30.3 percent in 2015.
With federal funds now representing a significant portion of the deposits that are used to calculate the 10 percent ESF cap, the level of the cap has grown at a more rapid pace. With the 2016-17 biennium cap of $16.2 billion, the expected ESF balance of $10.4 billion is at 64 percent of the limit. The LBB notes that if federal funds were eliminated from the calculation, the ESF’s new cap would drop to $11.4 billion, bringing the expected balance to 91 percent of the cap. Similarly, pursuing the Foundation’s recommendation of lowering the cap from 10 percent to 7 percent of GR-related funds, including the current deposits of federal funds, would also drop the cap to approximately $11.4 billion. Implementing either option would mean that funds could soon exceed the cap and allow those dollars to be returned to taxpayers to reduce the size and scope of government.
Whether legislators would prefer to lower the percentage of total GR used to calculate the ESF cap or eliminate federal funds from the calculation, the message is clear that options on how to best use taxpayer dollars are available so that Texans benefit.
Since 1988, Texas has flourished with a less volatile state budget under the protection of the Economic Stabilization Fund (ESF); commonly referred to as the state’s “Rainy Day Fund.” This fund has allowed the state to protect itself from major budget shortfalls during economic downturns and natural disasters without large tax hikes or spending cuts.
However, recently the current ESF charter has shown weakness as multiple, non-emergency withdrawals have not only contributed in depleting the fund but also setting a dangerous precedent away from the original, emergency-only purpose that voters approved on the ballot in November 1988 (HJR 2).
Therefore, to better represent the will of voters, the Foundation recently released a paper highlighting that the ESF must be reformed to responsibly accumulate funds while definitively promoting greater economic stability and opportunity for all Texans.
The ESF receives funding from:
Withdrawals from the fund may be made:
While the ESF has served its purpose of covering revenue shortfalls as voters approved on the ballot, the fund has been increasingly ransacked through a two-thirds vote for non-emergency reasons. Figure 1 shows billions of dollars were allocated to non-emergency expenditures since 1989 where legislators have often found it in their best interest to dip into the ESF instead of funding these items with GR to bypass the constitutional spending limit.
While there’s no doubt that these expenditures are important, their funding from the ESF should be questioned if they are not to fund budget shortfalls ($3.2 billion) or disaster relief ($0.2 billion), which combines to less than one-third of the $10.7 billion appropriated. The other two-thirds appropriated risks the opportunity of the ESF to cover unforeseen budget shortfalls.
To eliminate these ESF abuses, the Legislature should pass a constitutional amendment that requires a four-fifths vote of all members (not just those present) to allocate ESF funds at any time and for any purpose outside of emergency funding. In doing so, the ESF will be more likely to retain its financial strength while also discouraging unnecessary budget growth.
Additionally, legislators should consider a constitutional amendment to reduce the current ESF maximum limit of 10 percent to 7 percent of certain biennial GR-related funds. Research indicates that the 7 percent maximum cap would provide sufficient funding, along with spending cuts, to cover substantial revenue shortfalls during the vast majority of economic recessions while allowing the other potential 3 percent to be used for more productive purposes.
The final consideration is for the Legislature to pass a constitutional amendment that requires funds above the ESF cap to go either towards payments of state liabilities or be returned to the taxpayer. In the former scenario, Texas would be able to decrease its debt— thereby reducing future tax burdens—and in the latter, funds above the cap would be returned to taxpayers by temporarily lowering the state’s sales tax through the Sales Tax Reduction (STaR) Fund.
The ESF is critical in maintaining a conservative budget, free of massive tax hikes or spending cuts in times of depressed revenues. However, it’s equally critical that we limit the scope by which the ESF can be tapped for non-emergency reasons to ensure that there’s not unnecessary spending. This is essential to restrain growth in the total budget to more than population growth plus inflation, thereby keeping taxes lower than otherwise to support economic stability and growth—key components of vast economic opportunity statewide.
The Texas Public Policy Foundation released the paper, Leaky Umbrella: The Need to Reform Texas’ Rainy Day Fund, today that highlights the history, problems, and reforms to Texas’ economic stabilization fund (ESF), also known as the state’s rainy day fund. The Foundation’s Director of the Center for Fiscal Policy Talmadge Heflin and Economist Dr. Vance Ginn issued the following statements:
“The ESF is critical in maintaining a conservative budget, free of massive tax hikes or deep spending cuts in times of depressed revenues,” said Mr. Heflin. “However, it’s equally critical that we limit the scope by which the fund can be tapped for non-emergency reasons to ensure that taxpayer dollars aren’t unnecessarily spent.”
“At a time when legislators are already calling for dipping into the rainy day fund because of a potential tight budget session, the ESF must be reformed to reduce the use of severance tax dollars for purposes other than unforeseen budget shortfalls,” said Dr. Ginn. “This is essential to passing conservative budgets that increase by no more than population growth plus inflation while keeping taxes lower than otherwise to support economic opportunity for Texans.”
To read the full publication, please visit: http://txpo.li/leaky-umbrella
The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. In the 78th Session, Heflin served as chairman of the House Committee on Appropriations and navigated a $10 billion state budget shortfall through targeted spending cuts that allowed Texans to avoid a tax increase.
Vance Ginn, Ph.D., is an Economist at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.
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The Conservative Texas Budget sets spending limits on the growth of state funds and all funds for Texas’ 2018-19 budget.
By Dr. Vance Ginn and Melissa Schlosberg
The 2015 Texas Legislative Session was historic as legislators passed a conservative budget that increased by less than the key economic metric of population growth plus inflation and $4 billion in tax and fee relief. The Conservative Texas Budget Coalition congratulated the Legislature for these results since it helped to reduce the growth of government giving Texans a better opportunity to reach their full potential.
Although this was a favorable outcome, there’s work for the Legislature to do in 2017 to correct spending excesses since fiscal year (FY) 2004.
After examining Texas budget data since then, the Foundation published The Real Texas Budget: Why Texas Needs to Ratchet Down Spending Growth that highlights findings in a corresponding spreadsheet which include:
Since the 2004-05 budget, Texas has spent $39 billion more dollars than initially appropriated. Figure 1 illustrates the backfilling over this period, which is especially apparent in the 2012-13 budget cycle when the 2013 Legislature covered the underfunded amounts to Medicaid and K-12 Schools by the 2011
In The Real Texas Budget, the Foundation provides Texans with the ability to understand how their tax dollars are spent. We also highlight the need for increasing budget transparency by the following legislative recommendations:
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.