This commentary originally appeared in The Austin American-Statesman on July 6, 2016.
In 2015, the 84th Texas Legislature faced an unusual problem: The state’s coffers were overflowing with tax revenues from a robust economy.
Rather than following the standard approach of discussing ways to spend every dollar, legislators focused on cutting taxes. This “novel” approach provided the means to pass a conservative budget and should be the template legislators use to pass a historic second consecutive conservative budget in 2017.
All told, the 2016-17 budget increased total appropriations to $209.1 billion, an increase of 4.3 percent from the initial appropriations in the previous budget. By holding down the budget’s growth rate, legislators were able to provide Texans with $4 billion in tax and fee relief and left billions of dollars unspent.
The Conservative Texas Budget Coalition deemed this a conservative budget because the increase in appropriations fell below the 6.5 percent growth in the key economic metric of population growth plus inflation during the previous two fiscal years. This metric is critical because it accounts for growth in the state’s economy by considering changes in the population and the general cost of providing goods and services, such as health care and education.
While last session resulted in a favorable outcome, there’s no guarantee that next year’s Legislature will pass a conservative budget if the past is a good predictor of the future.
After all, legislators practiced fiscal constraint in 2003 and 2011, however, subsequent legislative sessions in 2005 and 2013 saw vast increases in spending, wiping out all of the previous gains at the expense of the taxpayer.
Collectively, the state’s fiscal irresponsibility has increased spending 11.8 percent above increases in compounded population growth plus inflation since the 2004-05 budget. In other words, this failure to practice consistent budget discipline has led to $22 billion in higher taxes during the current budget period, at a cost of $1,600 to the average family of four this year.
To prevent further unrestrained increases in state spending that lead to even higher taxes, the Coalition proposes the 2018-19 Conservative Texas Budget.
Under this budget, the total 2018-19 budget would be limited to an increase of no more than the growth rate of population growth plus inflation of 4.5 percent during fiscal years 2015 and 2016. This growth rate above current appropriations leads to a maximum appropriations level of $218.5 billion for the 85th Legislature to pass and be considered conservative.
Accomplishing this would help keep taxes relatively low, encouraging job creation while supporting relatively modest government spending. Although this conservative budget could allow for an increase in spending of $9.4 billion among multiple programs, legislators could also choose to spend less and cut more taxes.
Restraining spending growth to prioritize the funding of basic government-provided goods and services helps keep taxes low and avoids the need to ever pass a costly personal income tax.
From 2004 to 2014, data for the nine states without a personal income tax and the nine states with the highest personal income tax rates show that those without an individual income tax are overwhelmingly more prosperous.
In the nine states without an income tax, nonfarm payroll job creation increased 9.7 percent and gross state product rose 51.4 percent. Contrast this with increases in job creation of only 4.7 percent and gross state product of 40.1 percent in the nine states with the highest income tax rates. Furthermore, higher taxes failed to generate more tax revenue. State and local tax revenue increased by 90.4 percent in those states without an income tax compared with an increase of only 58.4 percent in those states with the highest rates.
The evidence is clear: Texas must not only sustain a relatively low tax burden but must also reduce the out-of-control spending trend in Austin.
Given the current economic climate of slower economic growth and job creation, less tax revenue will probably be available this session than the last, reducing the ability of the 85th Legislature to enact massive spending hikes. However, there will be pressures to spend every available dollar, thereby increasing the budget by more than 4.5 percent.
It is essential that the Legislature make history by adopting a second consecutive conservative budget. As a result, the state will continue to lead the way as one of the last free market bastions nationwide and empower its citizens to attain true economic freedom.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.