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.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.