Eliminating Property Taxes in Texas Starts With Limiting Government Spending: Let People Prosper Episode 53
In this Let People Prosper episode, let's discuss one of the things that's on most Texans' mind: property taxes. I recently testified before the Texas Commission on Public School Finance's Revenue Workgroup on the problem and solutions to wretched property taxes in Texas. Here's my written testimony and you can watch my oral testimony at time 59:45 here.
Texas’ property tax system has turned property owners into renters, where government is their landlord and Texans who struggle to pay annual tax bills face confiscation of their properties. Additionally, the growth of government is harming taxpayers and the economy through higher taxes and more regulation.
The goal must be to eliminate all property taxes as they violate property rights, destroy economic growth, and disproportionately hurt the poor while being subjectively determined as they support excessive local government spending. A good place to start down that road is by ending nearly half of the property tax burden in Texas through the elimination of the school maintenance and operations (M&O) property tax, which is supported by the 18 groups in the Conservative Texas Budget Coalition. This is relatively easier than other local tax jurisdiction because the state already determines the school finance formulas and has a way to distribute funds to school districts.
First, we must identify the problem.
From 1996 to 2016, total property taxes across the state have increased by 233% while the school portion of the property tax increased by 201%. Personal income has increased by 199%; however, the best metric of the average Texan's ability to pay taxes is measured by the compounded growth of population plus inflation for that period, which was only 123%. This means that the total tax levy increased by 1.9 times more than pop+inf and the school district tax levy increased by 1.6 times more than the average Texan's ability to pay.
It's no wonder that many people are being forced out of their homes and businesses because of skyrocketing property taxes. This is a travesty what government is doing to people who are trying to leave a legacy for their kids and grandkids.
This points to the disease of the symptom of high taxes: excessive government spending. Taxes (and deficits) are always and everywhere a spending problem. To gain control of skyrocketing taxes, we must first get control of the driver of the problem in excessive government spending.
This brings us to a solution: By limiting state and local government spending, Texas can use taxpayer dollars collected at the state level to eliminate the school maintenance and operations (M&O) property tax, which is nearly half of the property tax burden, very soon. While other options have been tried in the past, like raising the homestead exemption and swapping the property tax with a reformed franchise tax ("margins tax"), those didn't permanently reduce property taxes--making those attempts a failure in the eyes of most taxpayers.
Fortunately, there are solutions.
One option is to permanently buy down the school M&O property tax with state surplus dollars until it is eliminated. Here's how:
Another option is to replace the school M&O property tax by broadening the sales tax base and limiting state and local government spending. Here's how that could work:
Clearly there is no silver bullet. This will be a difficult hill to climb whichever option is chosen.
Recently, two economists from Rice University estimated that if the buy down option or the swap option over time was chosen, the Texas economy could expand by about $12.5 billion above expected growth and private sector job creation could increase by 183,000 net jobs above expected growth soon after reform.
The Texas Model is strong, but there's more that must be done. These options would provide a clear path to more prosperity and less of a burden of holding property until you can finally own it when property taxes are eliminated entirely.
Check out the article by economist Stuart Greenfield below.
It's interesting how his progressive views, and CPPP—but I repeat myself, has started appropriately considering growth of government spending at no more than population growth and inflation. They just happen to want to use a measure of price inflation for state-local expenditures that grows at a more rapid rate than the more typically used consumer price index, which matches their desire to increase spending and ultimately taxes.
Of course, the State-Local Implicit Price Deflator supported by Greenfield in the piece below closely measures prices of goods and services purchased by government with little to no voluntary exchange because they are dominated by government intrusion—both the demand and supply. So, those who want spending to rapidly grow can ratchet spending up to increase demand or regulate the supply to get their desired level of spending, which would most often be MORE!
Instead, let’s consider the often recommended measure of population growth plus inflation, which is recommended by the Conservative Texas Budget Coalition for a Conservative Texas Budget.
State population increases may require more government provisions. Inflation measured by the Consumer Price Index is closely tied to wage growth (see figure below). The addition of these two measures allow for some level of economies of scale. Thus, the metric of pop+inf gives a relatively good indicator of Texans’ ability to pay for their government instead of how much government can inflate their spending by controlling demand and supply.
Given it's Halloween, here’s the spooky part: Governments in Texas already spend too much. In fact, the state's budget is up 7.3% more than population growth plus inflation since 2004. This amounts to $15 billion more in taxpayers dollars spent this two-year budget cycle than if the Legislature had increased the budget by no more than pop+inf since 2004. Or, this means that Texas families of four must spend $1,000 more in state taxes, on average, this year alone.
They’ll really go nuts when there is the necessary push for a budget that doesn’t increase at all, or…wait for it…shrinks! Because we all know the government currently spends way too much. Meaning we are taxed way too much!
The best measure of government is their spending of our hard-earned tax dollars. Guess that’s too spooky for some.
Here is the article by Stuart Greenfield at Quorum Report
Greenfield: "How much more can be cut from the Texas budget"
In response to the TPPF-led “conservative budget,” economist Stuart Greenfield argues that “what these proposals don’t recognize is that growth in population varies over space and that using the CPI understates the increase in prices local governments experience. But what’s a methodological error among conservative friends?”
Before beginning my analysis of state spending over this century, I would like to wish both Ursula Parks, director of the LBB and Mike Reissig, Deputy Comptroller the best as they head off into the joys of having a defined benefit plan pension for the rest of their lives. I would also like to thank them for their willingness to assist my less than sterling efforts at providing readers of the QR analysis on various public policy issues.
In Shakespeare’s Most Famous Soliloquy, Hamlet states, “to be or not to be that is the question.” This soliloquy must have been modified by the recently organized Conservative Resolution Underfunding Many Basic Services (CRUMBs), whose motto is “to spend or not to spend, what a stupid question.” Alternatively, the group might have named itself, Conservative Actions Killing Education (CAKE), as in Marie Antoinette’s “let them eat cake.”
My humor aside, the Conservative Texas Budget Coalition has offered another conservative budget proposal that would reduce the growth in state expenditures and impose restrictions on local government property tax increases. Their proposed “solution” would over time increase the state’s proportion of expenditures for public education and reduce the growth rate in local property taxes.
Who could ask for anything more?
From FY00-17, state expenditures grew at an average annual rate of 4.9 percent. In FY18, expenditures grew by 3.5 percent. This rate was less than the rate of increase experienced from FY00-17 in the state’s population (1.8 percent) and the increase in the State-Local Implicit Price Deflator (3.0 percent).
So yes, the state’s expenditures for FY18 were conservative. Is a conservative budget the way to ensure continued growth in the Texas economy? That is a point of contention between those advocating for additional state expenditures for public education, health services, et al., and the Conservative Texas Budget Coalition, which advocates for a budget that increases by population and inflation so that taxes can be reduced.
Like Julius Caesar’s Commentaries on the Gallic Wars, state expenditures can be divided into three parts, Public Assistance Payments (primarily Medicaid), Public Education, and Other Expenditures. Total All Funds (AF) state expenditures over the 18 fiscal years of this century were $1.6 trillion.
Figure 1 shows how these expenditures were divided among the three groups.
Other Expenditures (Transportation, Public Safety, Higher Education, Salaries) comprise the largest percentage of state expenditures this century, the trend in this expenditure category has been in decline.
As shown in Table 1, Other Expenditures accounted for 45.0 percent of All Funds expenditures in FY00. By FY18, this percentage had declined to 36.9 percent.
One should also note that along with a decline in the proportion of All Funds expenditures devoted to other expenditures, the proportion of All Funds expenditures for public education also declined. The proportion of state expenditures devoted to Public Assistance Payments increased from 28.3 percent in FY00 to 40.1 percent in FY18. This increase in proportion was an increase of almost 42 percent.
Almost half (49.0 percent) of the increase in state expenditures between FY00 and FY18 was accounted for by the increase in Public Assistance. Only 20.2 percent of the increase in All Funds expenditures were for Public Education.
Along with reporting the current/nominal dollars of state expenditures, most analyses take into accountthe growth in both the state’s population growth (1.8 percent/year over the century) and the increase in prices.
Unfortunately, most of these analyses use a less precise measure (Consumer Price Index) of how state-local expenditure prices have changed. Over 40 percent of the CPI is comprised of consumer spending for housing. Not even Allen ISD spends 40 percent of its budget on housing its football team.
Had the reports used the appropriate measure of State-Local Government prices, the Government Consumption Expenditures and Gross Investment: State and local (implicit price deflator, they would find that the prices state-local governments pay for goods and services are higher than the CPI. One can view how the CPI and State-Local Implicit Price Deflator (S-L IPD) have varied over time. In 2017 the S-L IPD was 16.1 percent greater than the CPI in 2017.
Figure 2 shows how the population and the differing price indices affect real expenditures. Using the appropriate price deflator has a significant effect determining real expenditures. As shown in Figure 2, between FY00 and FY18 nominal or current dollar AF expenditures increased by 134.5 percent. When adjusted for the state’s increasing population (1.8 percent per year) and the increase in the CPI (2.1 percent per year) since FY00, the CPI-adjusted AF increase was 17.3 percent. Using the more precise S-L IPD (3.0 percent per year) shows a decrease in real AF state expenditures of 0.4 percent since FY00. So the state spent 0.4 percent less in FY18 than it spent in FY00. Talk about being parsimonious!
I would hope that in the future greater concern is shown on using the correct measure for inflation that state and local governments face. According to Fiscal Size-Up 2018-19, 28.5 percent of state All Funds Appropriations for 2018-19 are for purchasing medical services, i.e., Medicaid. In the CPI the relative importance of medical care is 8.7 percent, one-third the importance in the state budget. This difference in importance understates how inflation affects real state-local expenditures over time.
Using the incorrect price index affects two other areas that are being debated during this election season. These areas include state expenditures for public education and local government property tax increases. Analyzing state public education expenditures finds different groups using different student counts (ADA, WADA, Enrollment) and different price indices (US CPI or Texas CPI). Again, using either of these price indices understates the increase in costs faced by local school districts.
Those advocating for reducing the growth rate in local government tax increases would limit this growth to the growth in population and increase in inflation. To exceed their 2.5-4 percent increase in local property taxes would require voter approval. What these proposals don’t recognize is that growth in population varies over space and that using the CPI understates the increase in prices local governments experience. But what’s a methodological error among conservative friends?
Future articles will address these two issues and show how using state population growth, and the CPI will have adverse an impact on the areas of the state that have experienced most of the state’s population growth. The other article will show that using the CPI instead of the S-L IPD understates the “true” decline in the state’s financing of public education. Bet y’all can’t wait for these page-turners.
Dr. Stuart Greenfield holds a Ph.D. in economics from the University of Texas. He worked for three Comptrollers of Public Accounts, and since retiring from the state in 2000, Greenfield teaches economics at ACC and UMUC.
In this Let People Prosper episode, let's discuss Nobel prize-winning economist Paul Krugman's recent concern about the $779 billion budget deficit in FY 2018 under President Trump. Unfortunately, he wasn't worried about the 4 years of more than $1 trillion in deficits under President Obama and he in fact wanted even higher deficit spending. This episode provides a lesson in economics on the aggregate demand-aggregate supply model of how these policies should work in theory but how this mainstream view misses a lot that actually results in my preferred mainstream view of how the economy actually works and the burden higher government spending and resulting deficits put on economic activity and our prosperity.
Last Friday the Bureau of Economic Analysis reported that there was an increase of 3.5% in real GDP growth in the third quarter of 2018, indicated that 2018 may be above 3% growth for the first time in more than a decade. This issue along with the rising deficit gave rise to Krugman's tweet below.
Here's what Krugman tweeted: "Reaction to the GDP numbers: quarterly growth rates don't mean much. For one thing they fluctuate a lot -- e.g. rapid growth in 2014, signifying little. For another, you can always juice the numbers for a few quarters by running big deficits. What about the long term"?
Here was my tweeted response to his tweet that received a lot of attention: "Who is this @paulkrugman who wasn’t worried about budget deficits during #Obama’s 4 years of more than $1 TR deficit but is worried about #Trump’s $779 B? Recall #Krugman was in favor of LARGER deficit spending to “stimulate” the economy under #Obama. Principles matter."
I recommend going to my tweeted response and viewing the comments and discussion. It was a rather lively discussion with some good info in there along the way, but much of it was just noise.
This recent WSJ opinion piece by Nobel prize-winning economist Edmund Phelps explains the fantasy of fiscal stimulus quite well along with the nice figure below that shows stimulus doesn't correlate with faster economic growth.
What we really need for more prosperity is a government that simply sets the rules of the game such that the institutional framework allows for civil society to flourish along with the resulting prosperity for people. Government under presidents of each main party have fallen victim to the "stimulus" argument when in fact it should be about providing the most pro-growth economic environment while running balanced budgets. A good model would be to look at Texas.
This commentary was published at TribTalk.
We’ve set some pretty high goals for Texas’ budget for the upcoming biennium. And to achieve them, Texas need to overhaul its arcane and opaque budget-making process.
On Sept. 25, the Texas Public Policy Foundation, Heartland Institute, and 16 other member-groups of the Conservative Texas Budget Coalition held a press conference to introduce its legislative priorities for Texas’ 2019 legislative session.
These groundbreaking priorities would limit government spending below population growth and inflation and provide enormous tax relief for families across the state.
Every odd-numbered year, state lawmakers craft Texas’ two-year budget through the General Appropriations Act, which typically just increases funding to government agencies above their prior biennial levels. If lawmakers suspect that spending increases are unnecessary, the burden of proof is on lawmakers to prove they should spend less.
It’s not an ideal process. And it’s made worse by the fact that lawmakers and their constituents often have no idea whether government agencies are spending their money efficiently. When Texas funds departments, it uses a largely unaccountable process known as strategy-based budgeting.
As the name suggests, lawmakers designate dollars to agencies to accomplish broad strategies such as providing education, delivering health care, or paving roads. While these objectives are certainly important, the process makes it all but impossible for legislators to know whether government agencies are effectively pursuing these goals, let alone accomplishing them.
In fact, many lawmakers have no clue how much spending is dedicated to each agency’s programs, where the money comes from, or whether the money is spent productively.
This lack of transparency is a major reason why spending in Texas has exploded over the last 14 years. State spending is up nearly $15 billion more in the current budget than it would be if it had matched increases in population growth and inflation since 2004. This costs the average Texas family of four more than $1,000 in higher taxes each year.
And even though many lawmakers wish to tame runaway government spending, they lack the necessary information to determine which programs should be reformed, trimmed or eliminated.
One way lawmakers can attain greater fiscal transparency is by replacing Texas’ current strategy-based budget with a program-based budget.
Under a program-based budget, legislators and their constituents can track every taxpayer dollar they send to Texas’ various agencies and which specific programs and initiatives they are funding. This will allow both lawmakers and taxpayers to identify misspent funds and root out inefficiencies.
Another reform to enhance accountability would be to transition Texas’s finances to a zero-based budgeting process. Under this type of budget process, each agency begins with a budget of zero dollars and must make a clear and compelling case to lawmakers why taxpayers should be spending money on its various programs. They must defend its purpose, its goals and how it spends money to achieve these goals.
This increased transparency will allow lawmakers to more effectively scrutinize each agency’s performance and remove programs that fail to serve the public’s needs.
Zero-based budgeting has a long history of successfully trimming wasteful spending.
In 2003, Texas faced a $10 billion budget shortfall and needed to find a way to balance the budget because of a constitutional balanced budget requirement?. In response, then-Gov. Rick Perry sent every government agency a budget of zero dollars and ordered them to find efficiencies to close the state’s deficit.
Not only did these reforms eliminate Texas’ shortfall, they drove agencies to make long-lasting, needed changes to their programs. They cut unnecessary initiatives, streamlined operations and consolidated duplicative programs. Overall, these reforms helped the state balance the budget by reducing spending for the first time since World War II – and not raising taxes.
Zero-based budgeting has also allowed lawmakers to eliminate wasteful spending in Georgia, Chicago, and Montgomery County, Pennsylvania.
These examples show that proper fiscal transparency and accountability can help Texas’ elected legislators craft a strong conservative Texas budget. Not only would this rein in the excessive size of government, it would help provide an opportunity to deliver substantial tax relief for all Texans.
Achieving the Coalition’s priorities would put the Lone Star State on a path to increased, long-term prosperity.
In this Let People Prosper episode, let's discuss the report released by the U.S. Treasury today that notes the federal budget deficit was $779 billion, an increase of 17%, in fiscal year 2018. Again, the evidence shows that government doesn't have a revenue problem but rather a spending problem.
The largest increase in expenditures was in interest paid on the debt that increased by 23.6% to $325 billion, which is about half of what our taxpayer dollars are used to fund national defense, about one-third of what we pay for Social Security, and about 8% of total federal expenditures. A problem is that interest on the debt will continue to increase at a rapid pace because the national debt looks to continue to grow and the Federal Reserve is expected to raise their targeted federal funds rate, which is currently 2-2.25%.
Each dollar spent by the government is funded by either taxes, debt, or inflation. Each of these drain resources from the productive private sector. In other words, each dollar crowds out our ability to satisfy our desires and prosper. So, we must be able to prove without doubt that each dollar is spent more effectively by politicians than by individuals in the private sector.
Sure, there are roles for government, but, in my view, the federal government should have three main functions: national defense, justice system, and very few public goods. The total of national defense is just above $600 billion per year, so assuming the rest may run $400 billion per year, that $1 trillion federal budget would be only 25% of the $4.1 trillion spent today. Given a $1 trillion federal budget, the budget surplus would be $2.3 trillion, allowing for substantially lower taxes at every level--preferably one flat rate on final consumption.
You'll also notice that tax collections did increase even after the large Trump tax cuts indicating that the robust growth of a dynamic economy supported more revenue, even if it was less than what it could have been otherwise. Moreover, higher tax revenue negates some of the noise by the Congressional Budget Office of a $1.5 trillion deficit over a decade based on a static economic model, but we don't live in a static world and the data today are another revelation of that fact.
When we consider these details, the crowd out effect of government spending and interest on the $21.5 trillion debt, which is greater than our country's entire economic output of $20 trillion, is a huge cost to the prosperity of our nation that we must get control over before it's too late. But the cost is even greater than that because the $20 trillion GDP includes government spending, which is about 20% of GDP. If you exclude government spending, which there is good reason because it's a transfer of funds from the private sector, then the national debt would be $21.5 trillion/$16 trillion, or 134%! That's what we are looking at trying to pay back over time and is currently more than $65,000 per American.
As Reinhart and Rogoff wrote in their book This Time Is Different, there's likely a threshold when the debt-to-GDP ratio gets too high such that it hinders economic growth. I don't think that threshold is very high and that we are far above it, and moving further above it quickly unless things change.
We are seeing the benefits of the tax and regulatory reforms along with the benefits of a long--though relatively weak before recently--expansion, but these benefits will quickly expire if government spending is not restrained, trade barriers continue to be imposed, and the national debt continues to rise.
The best path to let people prosper is by getting rid of government barriers to opportunity, so we must reduce government spending.
In this Let People Prosper episode, I provide today's press conference of the 18-member Conservative Texas Budget Coalition, with special thanks to Senator Donna Campbell for standing with us on these key legislative priorities, along with my explanation of the details of each of these priorities and how they work together to let people prosper.
The Coalition outlined its legislative priorities for Texas' upcoming 2019 session. This includes the Conservative Texas Budget that sets limits for the 2020-21 budget of $156.5 billion in state (non-federal) funds and $234.1 billion in all funds to effectively limit spending so tax relief can be realized by all Texans. Read today's press release with quotes by each of the members of the Coalition.
This is important because spending trends since 2004 outlined in the Real Texas Budget show that Texas families of four are paying $1,000 more, on average, in state taxes than if the budget had just matched population growth and inflation.
Moreover, if the Texas Legislature can hold spending within a 4 percent growth limit this session and thereafter, Texas can eliminate the school maintenance and operations property tax--nearly half of the property tax burden statewide--within about 11 years. Read this for details of this simple property tax relief plan.
As noted on the Coalition's website, other legislative priorities includes strengthening government spending limits, eliminating the business margins tax, creating a tax relief fund, and increasing budget transparency to let people prosper.
In this #LetPeopleProsper episode, I discuss my last two very busy days.
With the proposed U.S.-Mexico trade deal yesterday, I was on multiple radio stations today across the nation talking about the costs and benefits of the deal and the implications for Americans. I'm still waiting to see all of the details and am lukewarm about it at this point because of the trade barriers imposed on the auto sector that will lead to higher auto prices for consumers and higher transportation prices for many businesses. However, I'm optimistic that much of NAFTA remained intact, e-commerce provisions were included to modernize the agreement, and the contract is for 16 years instead of the 5 years the Trump administration suggested. Here's my recent commentary at The Hill on this issue.
I testified today before the Texas Senate Business & Commerce on deregulating occupational licensing, which is the most onerous form of labor market regulation (here's my testimony). I discussed the high costs of these and made recommendations on taking a broad look at eliminating many of them or reducing their requirements along with moving towards having employers complete a registration or certification with the state government or a private association to signal that they are able to do the job, which signaling is about all many of these licenses are good for. I'll have a paper published on this soon with Dr. Ed Timmons of St. Francis University.
I also testified today before the Texas Senate Administration on the benefits of program-based budgeting and the need for zero-based budgeting. I explain this in detail in the episode, but basically our state budget today is organized by strategy that lacks transparency and makes it difficult to find granular data in the budget, especially to weed out unnecessary programs. By moving to a program-based budget that's been used in Texas before, this granular data would be available to add transparency for taxpayers and legislators while making it easier to start each program at zero and make decisions whether it should be included--otherwise known as zero-based budgeting.
Please watch the video for more. Don't forget to subscribe to my YouTube channel at "Vance Ginn Economics" and continue to share this with your friends and family. Thank you!
I gave the following presentation at a policy forum on property tax reform at the Arlington Chamber of Commerce.
Here's an overview of the forum from the Greater Arlington Chamber of Commerce:
Property tax relief and slowing the growth of property taxes proved to be a topic capable of bringing approximately 120 business leaders and elected officials together at the Greater Arlington Chamber of Commerce on Friday, August 3. Four experts on property taxes presented their perspective on the issues and then responded to questions from Tarrant County Property Tax Assessor/Collector Ron Wright. The event was the first ever sponsored by the Coalition of East Tarrant Chambers.
Vance Ginn, Chief Economist with the Texas Public Policy Foundation in Austin, presented TPPF's view of how to completely eliminate school maintenance and operations property tax. Dr. Aaron Reich, President of the Arlington ISD Board of Trustees, talked about the complications of the Texas system for funding property taxes and how it seems to short change districts like Arlington. He made the point the state uses taxes collected as "school" taxes for other state expenses like health care and transportation. County Judge Glen Whitley represented the perspective of cities and counties and made the point that without a state income tax, which he does not favor, Texas has a two-legged stool which is hard to sit on. He took great exception to the idea of eliminating property taxes and replacing them with more sales tax could be made to work. State Representative Matt Krause brought the perspective of the legislature to the discussion. He shared about the state's overall shortage of funds and how growing Medicaid expenses are crowding other important items in the budget.
Follow this link to read a summary of the presentations.
Click here to view the video of the entire Forum.
In this episode, I give an overview of today's report by the U.S. Bureau of Economic Analysis that shows the U.S. economy expanded at a 4.1 percent annualized rate in Q2 2018, which is the fastest pace in four years.
Relief of taxes and regulations has been a big part of that, but making those tax cuts permanent, reducing government spending, and relieving trade uncertainty would help sustain faster economic growth.
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
Vance Ginn, Ph.D.