Current safety-net programs too often discourage recipients from achieving long-term self-sufficiency, but a new holistic approach called empowerment accounts would help recipients achieve this with existing resources.
Also find at TPPF website.
With extensive economic pressure facing the U.S., progressive lawmakers in Washington believe they have found a new solution: taxing and spending. This failed fiscal framework has become an easy sell for each new progressive administration. But this time the Biden administration has placed America in a high-inflation recession, and looks to do more harm with the “Inflation Reduction Act.”
But there’s an overlooked concern of hundreds of billions of taxpayer funds redistributed by the federal government to state and local governments for supposedly COVID-relief efforts and even more in the recent “infrastructure” bill over the last two years.
These excessive federal funds should be used wisely in order to not hinder Texas’ economic prosperity. That could mean public-private partnerships, which increase transparency and efficiency.
Texas’ nonfarm employment has increased in 25 of the last 26 months, bringing record high employment in eight consecutive months. Compared with a year ago, total employment was up by 778,700 (+6.2%) in June with the private sector adding 761,800 jobs (+7.1%) and the government adding 16,900 jobs (+0.9%).
Texas also ranks fifth best in a Georgia Center for Opportunity study that compares the ratio of employment to an estimated pre-shutdown recession trend in each state. That’s a huge feat given how many jobs were lost during the costly shutdowns. And Texas is now headquarters for more than 10% of all Fortune 500 companies.
Texans and all Americans are struggling with economic uncertainty due to a 40-year high in inflation and a recession from mostly bad policies out of D.C.
Texas has been allocated about $116 billion between COVID 19-related funds and the “Infrastructure Investment and Jobs Act” (IIJA) since March 2020.
This includes $79 billion from several bills from March 2020 to March 2021. A major chunk of that figure was $24.5 billion from the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 that was primarily for COVID 19-related provisions, including for health care, public education, childcare, and worker safety.
The other was $40.3 billion from the American Rescue Plan Act (ARPA) in March 2021 that was for specific projects like broadband, water, and infrastructure along with $15.8 billion of those funds available for various recovery purposes. Fortunately, the state separated the ARPA funds in Article XI of the budget so that there is less comingling of federal with state funds to avoid considering these as an ongoing funding source.
The rest was $36.3 billion from the IIJA to be used primarily for projects related to broadband, transportation, and water.
Ultimately, these funds must be spent responsibly—if at all—and only for one-time items to avoid a fiscal cliff when these funds go away. If not, there will be wasteful spending that will unnecessarily grow the state’s budget, leading to higher taxes and distortions throughout the economy and less prosperity.
Since the massive expansion of federal assistance to states began in the 1960s with President Johnson’s “Great Society,” the burden of federal funding in states has continued to grow. Texas usually has about one-third of its total budget funded by taxpayer dollars collected at the federal level.
We need a new approach. These one-time federal funds must be spent on on-time expenditures.
Next, public-private partnerships (P3) should be considered.
They’re contractual agreements between a government and private entities. The state provides funding with oversight of a new project while a private company does the work. They can transfer risk, bundle projects, and increase efficiency through a design-build approach.
Ultimately, most projects should be left to the private sector, where the best productive projects happen because of profit-loss decisions. But the opportunity to use P3s with these one-time federal funds should be carefully considered to reduce waste and inefficiency on projects.
While there are legitimate concerns about corporate welfare to private businesses through picking winners and losers, the use of these one-time federal funds allocated for projects makes sense—though careful consideration should be made now and later.
Given the poor track record of excessive federal funds and the success of P3s, Texas should look to set a precedent for fiscal responsibility and more market-oriented solutions by employing P3s with the federal funds recently received rather than resorting to the failures of too many government-run projects.
Published at TPPF with Nathan Evenhar
Florida Gov. Ron DeSantis recently responded to questions about California Gov. Gavin Newsom’s ads airing in Florida, “It’s almost hard to drive people out of a place like California given all their natural advantages, and yet they are finding a way to do it.” He noted that California is hemorrhaging its population because of bad progressive economic policies so that they could be more free
Florida ranks third in the nation for economic freedom, according to the Fraser Institute. And California ranks second to last.
Our own study supports the position of DeSantis.
Freer states that were more reluctant to shut down their economies due to COVID-19 are doing much better economically than states with severe shutdowns. Even a state like California is suffering — which was considered an American paradise for nearly a century, with its perfect weather and natural beauty.
This month’s U.S. jobs report showed an increase of 372,000 net nonfarm jobs in June, yet it’s still under the pre-shutdown number by 524,000. The Biden administration trumpeted the good news of job growth, yet the real story is in the details. Labor participation is lagging and inflation-adjusted average hourly earnings are declining, and the bulk of the new jobs added are decisively in lower-tax, pro-growth-oriented states.
Residents are fleeing California, New York, Illinois, and Pennsylvania for places like Georgia, Florida, Tennessee, and Texas. DeSantis noted that it was once unusual to see California license plates in Florida, but it’s now a growing trend.
Of the 14 states that have recovered all their jobs lost due to the shutdowns, 12 are in states with legislatures and governors, championing a better fiscal and regulatory climate. This supports lower costs of living that offer new residents greater purchasing power and better opportunities to weather a looming recession.
Perhaps the most important statistic is how Americans are voting with their feet.
Forty-six million Americans changed zip codes in a 12-month period ending in February 2022. That’s the most moves since 2010. According to the U.S. Census Bureau, in 2021, California, New York, and Illinois had the highest domestic migration losses, and Florida, Texas, and Arizona gained the most.
Pods, a moving and storage company, offers up their own data on where Americans are increasingly headed. Virtually every destination benefitting now is in the Southeast, Texas, or Arizona. Pods continually cites that people say the lower cost of living as a primary reason for relocation.
U-Haul released a report showing essentially the same results. And there are private research organizations as well with more corroborating evidence, such as How Money Walks that uses IRS data.
And it’s not just people that are moving but businesses, too.
In June, Caterpillar Inc., a Fortune 500 company, announced they are moving their headquarters from Deerfield, Illinois, where they have been since the early 1900s, to Irving, Texas. This makes Texas now the headquarters of 54 of the Fortune 500 companies in the world. Remington Firearms, America’s oldest firearms manufacturer, recently announced its relocation from New York to LaGrange, Georgia.
The list goes on and on.
Competition amongst states for residents and businesses is a booming trend that doesn’t look like it will abate soon. Undoubtedly, ad campaigns and recycled political rhetoric will ratchet up the fight on both political sides for new residents and commercial enterprises. Yet the policies of lower spending and taxes, deregulation, and stronger property rights resulting in more freedom are winning.
Prolonged COVID-19-related shutdowns and excessive government mandates proved to be a formula for economic destruction. The evidence in favor of economic opportunity and robust markets is overwhelming.
Fortunately, Americans are now seeing and acting on not only mounting evidence but also their own real-life experiences — which is the true test of which approach is more viable.
Published at Real Clear Policy with Erik Randolph
Texans face an affordability crisis with inflated bills, diminishing savings, and a looming U.S. recession. While this is mostly the result of Washington’s irresponsible policies, Texas governments can help by using massive surpluses to dramatically reduce the sixth most burdensome property tax system in the nation without harming the delivery of core services. The Foundation’s Lower Taxes, Better Texas plan accomplishes this by lowering maintenance and operations (M&O) property tax bills while adequately funding core services.
Published at TPPF with James Quintero.
As most of the country struggles with the effects of stagflation and is either in or will soon be in a recession, Texas has been an economic leader. The Texas Model of economic freedom with the strongest state spending limit in the nation, no personal income tax, sensible regulations, and a relatively low cost of living have helped sustain this leadership.
No wonder 54 of the Fortune 500 companies call Texas home—most of any state. But excessive local spending and taxing must be addressed to improve ways to let people prosper.
Net nonfarm jobs in Texas increased by 74,200 in May, resulting in increases in 24 of the last 25 months and the 7th consecutive month of record-high employment. Compared with a year ago, employment was up by 762,400 (+6.1%) with the private sector adding 733,900 jobs (+6.9%) and the government adding 28,500 jobs (+1.5%). Compared with February 2020 before the pandemic-related shutdown, the state’s labor force participation rate is higher at 63.7%, employment-population ratio is close at 61.1%, and private sector employment is up 410,000 jobs.
States with limited government better support opportunities for people to gain self-sufficiency and flourish. Erik Randolph at the Georgia Center for Opportunity calculates that Texas’ private sector employment is 98.9% of its pre-shutdown trend, which ranks sixth best nationwide. Overall, 22 of the 25 best-performing states are red-leaning states and 12 of the 14 worst performing states lean blue.
These data are insightful because only Republican governors, with the exception of Louisiana, ended the enhanced supplemental unemployment payments that contributed to some people receiving more payments than while working well before the payments expired in September 2021. Texas ended these enhanced payments in June 2021.
Clearly, incentives matter.
In fact, the positive effects of this decision and more well-paid jobs in Texas helped increase personal income by an annualized 4.6% in the first quarter of 2022 even as many federal safety-net payments without work requirements expired.
But Texas faces challenges.
Bad policies primarily out of Washington have contributed to stagflation. Recent data show that Texas’ inflation-adjusted economic output declined by 2.6% on an annualized basis in the first quarter of 2022, more than the 1.6% decline nationally. This was after Texas led the way with 10.1% growth in the fourth quarter of 2021. The decline in the first quarter indicates that elevated inflation, less investment, and other factors are reducing economic activity.
This stagnating economic growth hasn’t hit the labor market yet, which has a 4.2% unemployment rate, but the labor market is a lagging economic indicator. Fortunately, Texas has been doing better than many states as people and businesses move to the Lone Star State.
Texas must do more to combat Washington’s irresponsible policies and remain a leader.
The affordability crisis of a 40-year high inflation, record-high home values, and skyrocketing property taxes are hurting Texans. While Texas can’t directly influence the inflation rate—which is driven by excessive money printing by the Federal Reserve fueled by out-of-control spending by Congress, it can help with the housing affordability issue by reducing local zoning restrictions and reducing property taxes.
Texas is expected to have about $30 billion in extra taxpayer dollars available next session. As Governor Greg Abbott recently tweeted, “We must use a substantial portion of this money to cut property taxes in Texas.” We agree as there is a need to cut school district maintenance and operations (M&O) property taxes, which is about half of most Texan’s property tax bill and part of a renters’ rent.
The Legislature ought to hold spending growth below population growth plus inflation as it has in the last four initial biennial budgets, and even more so now given less spending equals more money in struggling Texans’ pocket. Then use the surplus to dramatically cut school district M&O property taxes while funding core services.
But the Foundation’s recent report shows how many local governments have been spending excessively. They should pass responsible budgets that spend less than this metric to be consistent with the state’s fiscal prudence and help Texas be more affordable statewide. Doing so will give many local governments the opportunity to compress their own M&O property taxes and fund essential provisions.
Texas ought to strengthen its successful model by reducing and ultimately eliminating arcane M&O property taxes that hinder people from keeping or ever actually owning their home. There is a historic opportunity to at least lower property tax bills next session if governments limit spending and rightly make taxpayers the priority.
Published at TPPF with Nathan Evenhar
Nearly every major city and county government in Texas spends well beyond what the average taxpayer can afford, according to a series of new research papers on local government spending by the Texas Public Policy Foundation. As a result, over the last decade the typical family of four has paid thousands of dollars in taxes over what the state considers to be a reasonable increase.
(Individual reports linked below)
“Major cities and counties in Texas are spending huge sums that are wildly out of step with what many taxpayers can afford to pay,” said Dr. Vance Ginn, TPPF’s Chief Economist and co-author of the series. “The data should be a huge red flag that we are heading toward unsustainable spending growth and tax increases that kill jobs, punish families, and drive people and businesses out of the state.”
TPPF defines reasonable spending growth as no more than population growth plus inflation. The state of Texas has followed this spending limit for state budgets for several biennia and officially adopted most of it into state statute in the last legislative session. City and county budgets are currently under no obligation to follow this reasonable spending limit.
“Responsible Local Budgets (RLB) would promote efficiency and prudence with taxpayer money, creating less need for higher taxes and fees, but still provide all the funding needed for critical government functions,” said James Quintero, TPPF’s Policy Director for the Government for the People campaign and co-author of the research. “Taxpayers would love to see local governments voluntarily adopt these spending limits, but, as long as cities and counties continue their spending binge, it may be necessary for state lawmakers to impose strict parameters to protect taxpayers.”
Over the last decade, Dallas has been the worst offender among cities, spending more than 34% above a responsible spending growth limit. In that time, the average family of four in Dallas paid more than $10,000 in excess taxes. The cities of San Antonio and Austin spent over 16% and 14% higher, respectively, than the average taxpayer’s ability to pay.
Spending growth in Texas’ major counties has been eye-popping. Lubbock County’s spending has grown 66% above a responsible limit, Bexar County by 52%, Travis County by 43%, Dallas County by 40%, and Tarrant County by 27%. Only Brownsville spent under the growth limit during the decade.
Harris County takes the prize as the worst of all local governments by exceeding a responsible spending limit by 114%.
“Now it is time to rein in excessive government spending growth at the local level,” Ginn and Quintero write. “We urge local governments to voluntarily adopt these taxpayer protections. Because some may not, we recommend that the Texas Legislature pass a spending limit for all other local governments that includes all spending from any revenue source, restricts expenditure growth to a maximum of state population growth plus inflation from the prior year, and requires a two-thirds supermajority vote by the local governing body to exceed the limit.”
“Limiting the growth of these budgets to population growth plus inflation with the RLBs outlined here will help ensure these localities can be vibrant places for people to prosper.”
High property taxes are not just an urban and suburban problem. In rural Hays County (San Marcos and surrounding), for example, property appraisals are shooting up.
“The overall market value of Hays County’s 2022 preliminary appraisal roll rose to nearly $59 billion, up 53.27% from $38.4 billion in 2021,” the Hays Free Press reports. “Commercial and industrial real property increased in value nearly 41%, up from nearly $3.6 billion in 2021 to $5 billion this year.”
One year. And that burden will have to be shouldered by rural Texans who tend to be older and have less income than their urban counterparts.
Yet opponents of property tax reform will use rural Texans as a prop in their argument. But rural Texans need property tax relief, too. And our plan, which will use state surplus funds to buy down the maintenance and operations (M&O) portion of school taxes (the biggest part of your tax bill), will benefit all property owners in every part of the state. The Foundation’s Lower Taxes, Better Texas plan provides a practical way to achieve this goal while funding critical government provisions.
Some have expressed concern that rural counties won’t be able to pay for their first responders—police and firefighters.
But the fact is, our plan is revenue-neutral and would continue to fund critical government services. It would allow for budgets to grow, but would limit increases in spending to no more than the rate of population growth plus inflation—anything more than that is just growing government. Yet within that framework, both schools and local governments would be fully funded. In fact, if cities, counties and special districts use the same formula (population growth plus inflation) to keep their spending in check, they can use surplus revenues to buy down their own property tax rates.
Sales taxes are also a key part of our longer-term plan.
Some have worried that rural Texas, with its more limited sales tax base, would suffer under our plan to broaden the sales tax to completely eliminate school district M&O property taxes within 10 years. But that’s not the case.
Local governments (i.e. cities, counties, and special purpose districts) would have the option to raise their sales tax rate along with the increased funding from the broader base to eliminate their own M&O property taxes. If they don’t do this because they don’t have a sufficiently large sales tax base, then they have the flexibility to not eliminate their M&O property taxes but rather buy them down over time.
There are also concerns that if the economy takes a hit, the state’s general revenues will decline, forcing higher school district M&O property tax rates in response. But our plan would have the state lower school district M&O property taxes only if there is a sufficient general revenue surplus while making permanent past reductions.
There looks to be at least a $12 billion available in general revenue surplus at the end of the current budget period for this property tax relief. If there is a major recession, then the state could call on state agencies to find savings to soften the blow. That has been done before. And the state could turn to the at least $12 billion in the state’s rainy day fund created to cover unforeseen revenue shortfalls. And school districts are sitting on about $20 billion in excess reserves. That could also help them get through a tough recession.
Property taxes are a major problem for rural Texans, whose budgets are already hurting from high gasoline prices (they drive longer distances), high food prices, and general inflation. Don’t use rural Texans to argue against the relief they need.
Texans are facing a crisis when it comes to paying for their skyrocketing property taxes, inflated bills, and saving for a rainy day. In fact, many Texans are living with the fear that exorbitant taxes could take their home away or keep them from buying their first home. The Foundation has developed a balanced, practical solution to lower property taxes by eliminating the maintenance and operations (M&O) property taxes while also funding the needs for critical services.
Invited Testimony Before the Texas Senate Finance Committee
Texans are facing a crisis when it comes to paying for their skyrocketing property taxes, inflated bills, and saving for a rainy day. In fact, many Texans are living with the fear that exorbitant taxes could take their home away or keep them from buying their first home. The Foundation has developed a balanced, practical solution to lower property taxes by eliminating the maintenance and operations (M&O) property taxes while also funding the needs for critical services.
Invited Testimony Before the Texas House Ways & Means Committee
Texas is a leader in the economic recovery from the severe spring 2020 shutdown recession. Texans have overcome many challenges especially since the state was fully opened in March 2021, without statewide mask, closure, or vaccine mandates since then—as these should be voluntary. The 87th Texas Legislature supported the recovery with the passage of many pro-growth policies like the nation’s strongest state spending limit, but there were missed opportunities like permanent, broad-based property tax relief. Given other states are drastically cutting or eliminating taxes, Texas must make bold reforms so it can remain an economic leader, support more opportunities to prosper, and withstand bad policies from D.C.
We should be able keep what we purchase outright. But that’s not the case with real estate in Texas. Even if a mortgage is paid, many homeowners struggle to afford their yearly local property tax bill. This forces too many Texans to lose their homes. And renters who pay more because of skyrocketing property taxes too often can’t pay their rent.
In the March 1 primary election, 76% of Republican voters supported eliminating property taxes in 10 years—without implementing a state income tax. The Foundation has a plan to achieve this worthy goal.
Some suggest property taxes are a necessary evil because the state (rightfully) prohibits an income tax. But this claim isn’t true for other states. Florida and Tennessee don’t have a state income tax, yet they have a much lower property tax burden.
So we should ask, what are these taxes funding?
Most property taxes (80%) are collected from taxpayers for the maintenance and operations (M&O) of a local government’s day-to-day expenses. Of these M&O taxes, the school district portion is the largest. The other portion of your property tax bill goes to the interest and sinking (I&S) fund, which pays down local debt. Collectively, local governments siphon about $70 billion (and rising) from Texans every year.
That elevated burden is also growing too fast.
In the last 20 years, property taxes have grown by 181%, far exceeding the average taxpayer’s ability to pay for these taxes—as measured by population growth and inflation. This measure has grown by only about 100% over the same period.
And this excessive burden isn’t met with efficient spending.
Unfortunately, some taxpayer dollars are lost to waste, fraud, and abuse by governments. These happen from paying too much to fix a road to building Taj Mahal-like facilities to giving public sector executives massive severance payments.
Nearly half of property taxes paid go to support government schools, which haven’t always been good stewards of that money. The latest total expenditures available for the 2019-20 school year for 5.5 million students was about $14,000 per student. That’s close to the national average ($15,342), but shocking when we realize that only 40% of Texas students are reading and doing math on grade level, and 95% of kids who fall behind don’t catch up
By comparison, private schools in Texas cost parents about $10,000 per student, which is in addition to the property taxes paid to a government school their kids don’t go to.
How are private schools doing better, for less money? Basically, government schools aren’t spending money efficiently. Misspending is often rampant, revealing itself in expensive management posts and perks, redundant administrative positions, and other frills.
But even if local governments spent property tax dollars efficiently, property taxes hurt lower- and fixed-income Texans by forcing people out of their homes through no fault of their own. Individual liberty should allow people to own what they purchase instead of renting from the government.
The Foundation has a plan to eliminate M&O property taxes by 2033.
In 2021, we helped put into law the state’s spending growth limit—now, the strongest in the nation—of general revenue to grow less than population growth and inflation. As a result, this limitation should lead to recurring surpluses that ought to be returned to taxpayers. This spending limitation should be expanded to local governments, too.
The Texas Legislature should return at least 90% of the general revenue surplus back to taxpayers by lowering school district M&O property tax rates, which the state already has much control over with the Robin Hood redistribution scheme. Doing this each session could take at most 30 years, depending on the fiscal restraint lawmakers show.
Given this delay, we suggest that after about 10 years (if not before) of this buy down, the elimination process should be sped up and done immediately by broadening the sales tax base without raising the overall tax rate.
To help eliminate the rest of M&O property taxes, local governments should follow the state’s lead by using surplus revenue to lower their M&O property taxes. Then when the state broadens the sales tax base, they could eliminate their M&O completely.
By limiting spending and cutting property taxes, Texas could eliminate 80% of its property taxes by 2033. This would also provide time for lawmakers to determine what to do with the other 20% in I&S, which is already approved by local voters.
Our approach would provide a fairer tax system and a more robust economy in Texas. A happy side effect of this could be even more people and businesses moving to Texas along with more economic growth, further easing the tax burden for all, and helping Texas families flourish for generations.
Latest on Texas budget.
Texas continues to recover from the shutdown recession of 2020. The state has made strong progress toward a full recovery, especially compared to other states. But it has much room for improvement by many metrics before we’ll see the robust pre-shutdown prosperity.
In February 2020, Texas had low unemployment and relatively high labor force participation. The unemployment rate was just 3.7%, which some economists consider to be full employment. That basically means the state’s labor resources were being used as efficiently as possible and there was no cyclical unemployment, which occurs when the economy is in recession or growing too slowly.
Likewise, a large portion of the population was participating in the labor market. In February 2020, the labor force participation rate was 64% and the employment-to-population ratio was 61.6%.
That then changed drastically with the COVID-19 pandemic and government-imposed shutdowns in March 2020. By April 2020, those numbers had dropped to 60.2% and 52.4%, respectively, the private sector lost 1.4 million jobs (12.8% decline), and the unemployment rate skyrocketed to 12.9%.
Since then, Texas has regained its lost private sector jobs, plus another 105,200 jobs, and the unemployment rate is back down to 5%.
These data tell an important story about the effect this had on Texans. The best path to prosperity is a job, as work brings dignity and hope to people by allowing them to earn a living, gain skills, and build social capital that endures. Public policy that affects the labor market is so important because it affects people’s livelihoods and their sense of dignity.
Last year, the federal government gave extra unemployment payments on top of normal payments. Together, these payments often resulted in recipients receiving more money than they might have made working. This, of course, incentivized them not to work.
About half the states, including Texas and mostly red states, rightly ended this program early and those states have been recovering faster than the states which continued the program. The states that discontinued the program before its nationwide expiration in September 2021 have averaged lower unemployment rates. They have also recovered jobs faster, relative to the number of jobs they had before the shutdown recession.
Of the 10 states with the highest proportion of private sector employment to pre-pandemic levels, nine are in red states, including Texas. Conversely, six of the 10 states and D.C. with the lowest proportion are in blue places. In general, conservative policies have been more conducive to job growth and overall recovery because they tend to get government out of the way so that people can make the decisions that are best for themselves and their families.
Texas is one of just seven states that have recovered all the private sector jobs lost in the shutdown recession. That is an achievement, but the state is still far behind (3% below) the pre-shutdown trend and other measurements of the labor market’s health show that Texas has more work to do.
The labor force participation rate is still 1.3 percentage points below its pre-pandemic level, meaning that some people have left the labor market, such as those who have given up looking for work. The employment-to-population ratio is also down 2 percentage points from its pre-pandemic level. It’s important to get these figures back to normal.
In November, Texas had 884,000 unfilled job openings and just 770,000 unemployed. That is 114,000 more job openings than workers available to fill them. To fill these jobs, Texas needs more of its people to rejoin the labor market. Achieving that goal starts with responsible government policies.
The Texas Model of lower taxes, no personal income tax, less spending, and sensible regulation is necessary to unlock poverty and let people prosper. Texas’ free-market-focused institutions helped the state outpace the national average both in economic growth and income growth in the latest data for the third quarter of 2021.
Because the 87th Legislature followed many of the Foundation’s recommendations, especially by passing the strongest spending limit in the nation, these successes for the state and Texans will hopefully continue. But we can do better.
Texas can build upon its past success in the upcoming 88th Legislature by further limiting government spending, ensuring opportunities to earn a living, eliminating property taxes, and advancing education freedom.
Such efforts will help families flourish, keep Texas Texan, and make Texas the leader for the rest of the nation.
Texans will never have the peace of mind of owning their home until property taxes have been eliminated. Until then, Texans are renting from the government, always living with the fear that exorbitant taxes could take their home away. The Foundation has developed a balanced solution to give Texans the relief they demand while also funding the needs for critical services like public safety and education. Our Lower Taxes, Better Texas plan will eliminate a significant portion of Texans’ property taxes by 2033 and make structural reforms that limit local government over-spending to prevent annual spikes in tax bills.
Texans continue to recover from the shutdown recession. There have been challenges like business closures, skyrocketing local property taxes, and anti-prosperity fiscal and monetary policies out of Washington. Fortunately, the Texas economy was (finally) fully opened on March 10, 2021, and the third wave of COVID-19 is now behind us with better results than after prior waves without statewide mandates of masks, closures, or vaccines—as these should always be voluntary. The 87th Texas Legislature mostly helped support the recovery with passage of many sound policies like a Conservative Texas Budget, a stronger state spending limit, and independent efficiency audits. However, there were missed opportunities like permanent, broad-based property tax relief. Given other states are drastically cutting or even eliminating taxes, Texas must remove government barriers so it can support more opportunities to prosper, remain an economic leader, and withstand bad policies out of Washington.
The Texas Model of relatively less spending, no personal income tax, and sensible regulation continues to support improved economic freedom with more opportunities to flourish. But there’s room for improvement for the state recently ranked as the fourth most free nationwide.
Canada’s Fraser Institute recently released the Economic Freedom of North America 2021 report that scores states for economic freedom based on government spending, taxation, and labor market regulation. Economic freedom essentially is the freedom for people to use their property with minimal government interference. These scores are based on the latest available data for all jurisdictions in 2019, so they don’t include the effects of the shutdowns yet.
Based on these scores, they separate states into four quartiles. In the most-free quartile, the average per-capita income was 7.5% above the national average while the least-free quartile was 1% below it. Additionally, people tend to be richer when economic freedom is greater.
Economic freedom is essential to human flourishing.
Texas was the most economically free state in 1981 when the first score was reported. This was when the state had more conservative Democrats before party realignment with a political trifecta—control of the governor, house, and senate. But that ranking fell as they started to impose big-government policies that lowered it to seventh in 1991. The Lone Star State then dropped further and bottomed out at ninth in 1993. Through the late 90s and early 2000s, the more progressive Democrat-controlled House continued to restrict economic freedom which kept our ranking stubbornly low.
The first Republican trifecta was in 2003. The new leadership helped weather the storm of a fiscal crisis during a severe recession by overcoming a $10 billion shortfall through spending restraint. This new direction for limited government helped improve the ranking to fourth in 2006, rising to as high as second in 2008, while falling to no lower than fifth since then. This is quite impressive given these rankings can move depending on the relative ranking of states, and other states attempted to follow what worked in Texas.
The stronger commitment to the more successful Texas Model in recent years with a more conservative Republican trifecta especially since 2015 has helped support more economic freedom and prosperity.
Comparatively, Texas’ economic freedom ranks considerably better than other large states like California’s 49th, which has ranked in the bottom five states since 2002, and New York’s 50th, which has been in the bottom three states since 1981. Texas trails New Hampshire, Tennessee, and Florida, but the state’s score of 7.75 is near the leaders. It is only 0.08 points behind the top-ranked New Hampshire and 0.03 behind third-ranked Florida.
This comparison indicates the difference in governing philosophy.
For example, more conservative Texas and Florida rank 13th and 6th best, respectively, in state and local spending per capita compared with progressive California and New York ranking 48th and last, respectively. Of course, lower spending means less taxation, as Texas and Florida rank fourth and eighth best, respectively, in state and local tax burden per capita, while California and New York rank 43rd and last, respectively.
And Texas and Florida are right-to-work states while California and New York are not. Texas continues to reduce barriers to work by removing unnecessary and harmful regulations, especially relating to occupational licensing—though there’s still too many. And Texas keeps its minimum wage at the federal mandate of $7.25 per hour, though the real minimum wage is always $0.
These measures matter for human flourishing when you consider Texas has a lower cost of living (ranks 15th lowest in the state compared with Florida ranking 32nd, California 49th, and New York 48th) and better labor market outcomes, including lower income inequality and poverty.
Less economic freedom contributes to people fleeing California and New York for greener pastures. Over the last decade, the populations have grown more than two times faster in Texas and Florida compared with California and New York, and Texas’ population has grown 9.3% faster than Florida’s.
But Texas needs improvement.
One area is excessive local property taxes from too much government spending. The Texas Legislature provided limited relief this year, but much more is needed.
The state should build on its recent success of passing the strongest state spending limit in the nation this year by using use surplus funds to cut school district property taxes. And lawmakers should use the same approach for other local governments. These actions, along with redesigning the tax system, can result in eliminating property taxes by 2033.
By continuing to build on past successes and remove government barriers, Texas can be the most economically free state to best let Texans prosper.
The economic success of the Texas Model’s limited government framework demonstrates that institutions matter for prosperity. But Texas must improve to remain competitive and support greater flourishing.
There’s a saying, “The road to hell is paved with good intentions.” If that’s true, the recent passage of the Biden administration’s “infrastructure” package just added an express lane.
The massive $1.2 trillion bill, called the Infrastructure Investment and Jobs Act (“Jobs Act”), balloons the $29 trillion national debt on what’s largely a green energy boondoggle while sending states like Texas more money when they’re already flush with cash.
The share in the Jobs Act allotted to roads and bridges and other items typically considered infrastructure could be at best 20% while the details indicate it could be as low as 10%. Talk about a waste of taxpayers’ money that could be better used in their pocket.
Collectively, the Jobs Act may have had some good intentions, but it will leave Americans and Texans hurting.
And this doesn’t include the Democrat’s next reckless spending bill called the “Build Back Better Act” that recently passed in the U.S. House on a partisan vote. This $5 trillion big government bill would substantially increase dependence on government, thereby reducing families’ opportunity for self-sufficiency and threatening state sovereignty.
In short, Congress could soon spend about $12 trillion since the costly shutdowns by governments in response to the COVID-19 pandemic, sending us down the road to serfdom that Americans don’t want and can’t afford.
In Texas, the threat of government dependency may grow as the Jobs Act could allocate $35 billion over five years in federal funds for infrastructure-related projects.
According to a White House state fact sheet for Texas, $26.9 billion will be allocated for federally aided highway apportioned programs, with $537 million for bridges. And $3.3 billion will be used to improve and provide public transportation, despite only 8.6% of the U.S. population lacking access to a personal vehicle and the wasteful projects as fewer and fewer people using public transit because of its location and more remote work.
The electric vehicle producing company Tesla and its principal owner Elon Musk now call Texas home with an ever-expanding portfolio of products soon to come off the assembly line in Austin. The Jobs Act includes $408 million for the expansion of EV charging stations in Texas with possibly up to an additional $2.5 billion. Despite Washington’s effort to “electrify” Texas, state legislators declined to advance an EV infrastructure bill in 2021, indicating voter displeasure with subsidizing unreliable energy sources, while Musk recently admonished federal subsidies.
The Jobs Act would also send at least $100 million for broadband, though state legislators already approved $500 million for it from the American Rescue Plan Act (ARPA) funds, potentially making the added funds duplicative and wasteful.
To limit rising dependence on the federal government and given the state already has the potential for a combined $24 billion in state surplus and the rainy day fund, how can Texas use this money responsibly?
First, lawmakers must reject unneeded funds, given the state has a massive surplus.
Second, they must prioritize transparency like the state did for the $16 billion appropriated from Congress’ ARPA funds. This includes posting funds on the Legislative Budget Board’s website, using funds for only one-time expenditures, and keeping them separate to avoid misuse and a fiscal cliff. And strict oversight of contracts is essential given the potential for abuse.
Second, legislators should swap out any Jobs Act funds with general revenue funds already for infrastructure. The state currently appropriates $26.5 billion in the current budget cycle for infrastructure projects, though some of that could be what was expected from typical formula funding from the federal government as passed in the Jobs Act.
Finally, if it’s possible to make more general revenue funds available, lawmakers must provide much-needed substantial, broad-based property tax relief. Specifically, the state should return surplus taxpayer dollars by reducing school district maintenance and operations property taxes like HB 90 during the third special session of 2021. With tens of billions of dollars available, Texas should seize the opportunity of the Foundation’s bold strategy to eliminate property taxes.
The state’s infrastructure needs a tune up. Any Texan who spends time on Interstate 35 believes they are already on the road to hell.
The real question is whether in tuning up our infrastructure, Texans wish to take the route filled with more strings and less flexibility or the route with more certainty and accountability.
The choice is important.
It’s playoff baseball time here in Texas—go ‘Stros! But baseball fans know everything depends on the umpires—as the great Bill Klem said, when asked whether a ball was fair or foul, “It ain’t nothing until I call it.”
It’s time for us to call fair and foul on the Texas Legislature; there were some homeruns, some wild pitches and even some unforced errors. And ultimately, it’s the taxpayers who either win or lose.
To begin with, lawmakers did well in remembering the taxpayer by maintaining a Conservative Texas Budget (CTB), which sets a maximum appropriations threshold based on the average taxpayer’s ability to pay for it (as measured by population growth plus inflation), and passing a stronger spending limit.
There was concern with Congress sending Texas $16.3 billion in mostly discretionary funding through the American Rescue Plan (ARPA). During the recently ended third special session, the Legislature appropriated $13.3 billion of it, with a positive of leaving $3 billion for possible tax relief later.
Another winning play is that the Legislature followed most of the Foundation’s recommendations for ARPA funds.
It sustained the CTB and used the funds for only one-time expenditures which will help avoid any fiscal cliffs like some claimed Texas had after Obama’s one-time “stimulus” funds in 2009. Legislators appropriately used $7.2 billion—about half of ARPA funds—for debt payment and replenishment of the state’s depleted unemployment trust fund after the shutdown recession to avoid a massive payroll tax hike on employers. And they ensured transparency and accountability by requiring that the uses of these funds be posted on a government website and put in a separate account, respectively.
While those actions benefited taxpayers, a botched play was in not providing substantial, broad-based property tax relief.
This could have been done, as there were surplus funds of $6 billion in general revenue and $3 billion in ARPA funds. All legislators needed to do was use surplus funds to reduce school district maintenance and operations property taxes, thereby continuing the path toward eliminating property taxes by 2033.
Instead, lawmakers raised the homestead exemption for school district property taxes by $15,000 to $40,000, funded by about $450 million in general revenue annually. And even this won’t happen unless voters approve this constitutional amendment in May 2022. If passed, more than 5 million homeowners would benefit from average savings of $176—excluding other higher local property taxes. So, no relief for business owners, landlords, apartment owners, renters, and those with secondary properties.
This compromise followed proposals in the Senate that would have provided at least $2 billion in general revenue to lower school district property taxes for everyone and in the House that would have provided $3 billion in ARPA funds for checks to only those with a homestead.
Clearly, the Senate’s version would have been broad-based, even though more could have been added to it. Combining it with HB 90 in the House that would have provided structural reform to eliminate property taxes over time, which died in House calendars, could have provided extraordinary relief. Instead, it appears that lobbyists for the public ed establishment pushed against this pro-taxpayer effort, resulting in little-to-no relief through the increase in the homestead exemption.
A huge unforced error was the wasteful spending of ARPA funds.
The decision to allocate $325 million in ARPA funds to support $3.3 billion in tuition revenue bonds for construction at higher education institutions is at the top of the fouls list. While tuition and student debt continue to rise, the quality of education is declining, and universities are already receiving billions of dollars, this provision is ill-advised.
It’s unfortunate that instead of providing tax relief these funds went to projects like student housing enhancements for the Marine Science Institute at the University of Texas at Austin and $100 million to two state university systems for institutional enhancements.
However, not all state legislators sought to rubber stamp additional funds to a declining higher education system. Rep. Matt Schaefer (R-Tyler) proposed an amendment that sought to connect the amount of money institutions can receive based on the rate of tuition increase. Unfortunately, the amendment didn’t pass, ending an opportunity to curb the fiscal bloat that plagues Texas universities, students, and taxpayers.
Putting this year’s legislative game in perspective there were many hits but also some strikeouts, especially on major property tax relief. But taxpayers did get relief from less government spending than what was available.
The Legislature left about $20 billion in total revenue, including $6 billion in general revenue, and $12 billion in the rainy day fund and $3 billion in ARPA funds on the table. Texas should return much if not all of these surplus funds to struggling taxpayers so they can recover from the shutdown recession, withstand the stagflation by the Biden administration, and actually own their property.
But as with baseball, there’s always next season.
Governments’ forced business closures and mandates in response to COVID-19 resulted in much economic destruction during what I am calling the “shutdown recession.” Returns to normal, to work, and to pro-growth polices are essential for the economic recovery and people’s flourishing. However, more government intervention in response to the Delta variant and reckless fiscal and monetary policies out of D.C. are hindering the recovery. The labor market has been improving more slowly than expected even though Congress has authorized $6 trillion since the pandemic started and may soon authorize another $6.2 trillion, while the Federal Reserve has more than doubled its balance sheet to $8.4 trillion. The federal government has been paying people not to work thereby supporting labor market shortages and a near record high of 2.1 million more job openings than total unemployed. In August, there was a record high of 2.9% of job holders who quit their job, possibly due in part to the vaccine mandates. Congress should stop paying people not to work, reject the reckless Build Back Better agenda, and return to the pro-growth policies supporting vast opportunities to let people prosper.
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I don’t know the story behind the clean two-story home on Goldfinch Lane in Montgomery County. But I know enough. Soon, attorneys will sell the property on the fourth floor of the Commissioners Court Building in Conroe. In this white-hot real estate market, it will likely to go investors.
What it means is that at some point, a family couldn’t keep up with the property taxes. And now the foreclosed home, valued at $171,180, will go to the highest bidder in the county’s monthly tax sale. Did it involve an illness? A death? It doesn’t matter now.
This is a threat that hangs over every homeowner in Texas—and every business owner who holds the title to the property they do business on. Texans will never experience the peace of mind that comes with owning their homes until property taxes are eliminated. Until then, Texans are simply renting their homes from the government, always with the fear that taxes could become so exorbitant they can no longer afford to stay.
But we have a plan. Our “Lower Taxes, Better Texas” plan will eliminate property taxes for every Texan by 2033 (or sooner), while also making structural changes to our system that prevent year-to-year spikes in tax bills. At the same time, we’ll rein in irresponsible local government spending.
Texans need and want real property tax reform. In recent polls, 82% of Texans said property taxes are a serious issue and 7 out of 10 said they would be upset if the current legislative session ended with nothing done to lower their property tax bill.
Even the media agrees.
“Older Texans on fixed incomes, even those with senior exemptions and freezes, too often end up being priced out of their homes,” a recent Dallas Morning News editorial noted. “Young first-time homebuyers are priced out of homeownership and stay in apartments where monthly rents are rivaling monthly mortgages.”
How does our Lower Taxes, Better Texas plan work? It’s a three-pronged approach.
It begins with controlling the driving force behind tax hikes—increased spending. The Legislature has already enacted a new spending limit based on a formula using population growth and inflation, and any surplus general revenue must first be used to reduce property taxes. This surplus can be used to buy down school district maintenance and operations (M&O) taxes.
And that’s the second prong: Lawmakers now must pass Senate Bill 1 and House Bill 90, which will ensure that those surpluses are used to buy down property taxes now, and in the future. SB 1 would spend the current surplus on property taxes, and with this precedent, HB 90 would require that future Legislatures allocate at least 90% of any future surplus to the same cause.
Finally, legislators should pass House Bill 91 (with a few key amendments). We must redesign the state’s tax code so that local governments are funded primarily by sales taxes. This redesign would broaden the base of goods and services covered by the sales tax while lowering the rate. The result would be to finally eliminate school M&O taxes after years of cutting them.
Critics say lower-income Texas families would be hurt by reliance on sales taxes, but they fail to consider that we all pay property taxes—even if we’re renters. Higher property taxes get passed along—property owners aren’t in the rental business to lose money. And a slight broadening of the sales tax base will allow us to keep the exemptions—such as food and medicines—that make sense for Texas families.
Besides, once property taxes are eliminated, that surplus can then used to buy down sales taxes.
In September, Texas Gov. Greg Abbott added property tax reform to the third Special Session agenda. Legislators can act now to ensure Texans can keep their homes for generations to come.
I’ll probably never know why that Montgomery County home sits empty. But by itself, it tells a story—one we must work to ensure doesn’t get repeated again and again. Let’s stop taxing Texans out of their homes.
Texans’ livelihood is improving after much destruction from forced business shutdowns by governments in response to COVID-19. Recently, some normalcy returned as the Texas economy was fully opened on March 10, 2021, contributing to less unemployment and an improved civil society. The regular and second special sessions of the 87th Texas Legislature supported this normalcy, with wins of sound fiscal and regulatory legislation, more paths to opportunity, and another Conservative Texas Budget. More successes may be realized during the third special session called by Gov. Greg Abbott by advancing more pro-growth policies to spend responsibly and eliminate property taxes thereby supporting the recovery and withstanding Washington’s anti-growth policies.
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At least in baseball, you’re out after the third strike. Baseball is merciful. The Texas Legislature, not so much. At least the fourth legislative session—the third special—gives lawmakers a chance to appropriate money sent to the state by Congress through the $1.9 trillion American Rescue Plan Act (ARPA) of 2021.
The Legislature has kept spending in check so far this year, but these funds present a new temptation. Lawmakers must resist—and spend the ARPA money wisely.
They’re off to a good start.
The Legislature passed the 2022-23 state budget well below TPPF’s Conservative Texas Budget (CTB), which sets a maximum threshold on the budget based on the average taxpayer’s ability to pay for it (as measured by population growth plus inflation). And lawmakers left $12 billion in the state’s rainy day fund.
Staying fiscally conservative while meeting the needs of taxpayers is nothing new for Texas. The last four budgets since 2015 passed by lawmakers have averaged growth under the CTB limit, helping keep more money in taxpayers’ pocket.
Let’s keep that going with the ARPA money. Here are some priorities Texas legislators should consider.
ARPA funds by Congress to state and local governments in Texas totaled $41 billion, with $25.2 billion either already released or allocated for specific purposes. Nearly $16 billion in more flexible funding will head to the state in one payment because Texas’s unemployment rate is more than 2 percentage points above the pre-pandemic rate. This part is 13% of the state’s annual budget for legislators to determine what’s best for Texans.
Remember, this is a one-time payment. It’s not an excuse to irresponsibly add nearly $16 billion in additional appropriations in the next biennium. Given that this is allocated wisely, we will exclude this amount from the CTB limit so that the budget is not inflated for excess spending later while catching ongoing spending in the next budget cycle if necessary.
We should use the majority of this to pay off our outstanding balance with the U.S. Treasury’s Unemployment Trust Fund. Texas holds the third largest balance, behind only New York and California. We’re $6 billion in the hole and we need to replenish $2 billion in credit the state had prior to the pandemic. The outstanding balance continues to accrue interest, costing Texans millions of dollars that could otherwise be used elsewhere.
Depending on the amount needed, we should use about $5 billion in ARPA funds directly or those swapped out with state general revenue to complete the border wall—providing relief to Texas taxpayers who have been paying for the rising cost of the crisis along the border for the rest of the nation.
And with burdensome local property taxes continuing to climb, we should be finding ways to eliminate them as quickly as possible. A good way would be to add what was done in 2019 and maintained in the 2021 regular session by using the remaining amount to compress school district M&O property taxes in the 2022-23 school year for additional tax relief.
Adding what could be billions more in surplus funds after appropriations in the second special session, including $100 million in property tax relief to some Texans, there’s an opportunity to provide even more compression so that Texans receive a lower property tax bill.
Since property taxes are technically local taxes, this could be a way to navigate around the unwise restrictions imposed by Washington.
To ensure accountability and transparency within the Legislature, the flexible ARPA funds should be separated from the base budget to avoid it being buried within future appropriations.
This would limit any possibility of a repeat from Democrats who argued there were “cuts” to education following Obama’s one-time “stimulus” funds. Regardless of whether these measures are taken, all related ARPA spending should be posted on the Comptroller’s or Legislative Budget Board’s website.
There are other good ideas on how to use ARPA funds, but they may be restricted due to federal regulations—which is why there should be more clarity from the Treasury.
This fourth session gives lawmakers the opportunity to allocate the ARPA funds; they should be spent wisely.
These data provide overwhelming evidence that the Texas Model of inclusive institutions with a relatively low tax-and-spend burden, no individual income tax, and sensible regulation provides an institutional framework supporting more job growth, higher wages, lower income inequality, and less poverty than in comparable states and the U.S., in most cases. Other states and D.C. would be wise to consider adopting Texas’s inclusive economic and political institutions that champion individual liberty, free enterprise, and personal responsibility. This is a path to providing an economic environment that allows entrepreneurs the greatest opportunity to thrive and for prosperity to be generated for the greatest number of people, especially the neediest among us.
Despite this success, improvements are needed to keep the Texas Model competitive and create even more opportunities for all to flourish. These improvements to Texas’s institutional framework include limiting the growth in government spending at all levels, eliminating the state’s onerous burdens of property and franchise taxes, reducing barriers to international trade, relieving people from burdensome occupational licenses, and reforming safety nets.
Even with these needed improvements, the historical data overwhelmingly show it has not been a miracle in Texas, but rather abundant prosperity generated by Texans from a proven institutional framework called the Texas Model.
Vance Ginn, Ph.D.