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.
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
Texas owes $7 billion to the U.S. Treasury’s Unemployment Trust Fund.
Lawmakers here in Texas can pay off that balance entirely, without any interest charges, and without using any state funds. The only catch is that the Texas Legislature and governor would need to do so by Sept. 6, so that’s unlikely—but they can keep the cost low if they take action soon.
Unemployment insurance is a surprisingly complicated, convoluted program.
Few people understand how it works, who pays for it, how benefits are calculated for the unemployed, or who even qualifies for benefits. Congress has added even more complexities and confusion to the program over the last year and a half with bonuses, extensions, and more. There are also substantial differences between states.
While the full details of the entire unemployment insurance program could fill a textbook, here are the basics.
Businesses pay payroll taxes which finance a trust fund for each state held at the U.S. Department of the Treasury. The program is overseen by the U.S. Department of Labor. States then use this trust fund to help pay their unemployment claims. As states’ balances in the trust fund rise and fall, the individual states adjust their business tax rates to try and maintain an adequate volume of funds with the U.S. Treasury.
If a state’s account runs dry, as can happen in a severe recession, the Treasury will loan the necessary funds to that state at a variable interest rate. The state must then repay the borrowed funds, along with the interest charged to its account. Furthermore, the state must also replenish the previous balance with additional funds.
The government-imposed shutdowns over much of the last 18 months, along with other misguided policies, created sky-high unemployment in many states, including Texas. Unemployment claims skyrocketed and this quickly depleted the state’s $2 billion trust fund account. After those savings were expended, Texas had to borrow billions of dollars from the Treasury to continue paying claims.
The Lone Star State has the third largest outstanding balance with the Treasury. New York, despite having fewer people, managed to dig itself an even deeper hole, racking up more than $10 billion of red ink in its ledger with the Treasury at the time of this writing. California is in even worse shape, by a large margin. The Golden State owes a massive $25 billion to the Unemployment Trust Fund.
Fortunately, the Texan economy has improved, and the state has not borrowed additional funds from the Treasury for months. With the bleeding stopped, it is now time to address the $7 billion hole along with replenishing the $2 billion credit that the state had with the Unemployment Trust Fund before the pandemic. That is a grand total of $9 billion which should be allocated to this problem.
In normal times, Texas would have no choice but to drastically increase taxes on businesses to raise the needed revenue to cover this hole. But these are not normal times.
Congress has allocated $41 billion for Texas as part of the American Relief Plan Act (ARPA) and the Treasury Department has issued guidance to the states that the funds can sent to the Unemployment Trust Fund. Texas has the money to fund this problem—state lawmakers only need to appropriate the ARPA funds.
Time is of the essence because the Treasury has temporarily waived all interest on outstanding balances with the Unemployment Trust Fund, but that is set to end Sept. 6. Even a low interest rate will still create millions of dollars in interest charges because the state’s balance is in the billions of dollars.
While the second called Special Session just ended, the upcoming third called Special Session is when the Legislature should immediately allocate the roughly $9 billion out of the almost $16 billion in the flexible ARPA funds available.
Delaying this payment past Sept. 6 will unfortunately cost taxpayers millions of dollars, which could otherwise go to tax cuts, roads, or education.
Texas is one of 14 state accounts with an outstanding Unemployment Trust Fund balance that together total more than $56 billion. West Virginia has repaid its balance with the Treasury and so will not pay any interest. Texas lawmakers can save their constituents millions of dollars in interest charges, but only if they act quickly.
While Sept. 6 will likely come and go without payment (though maybe action at the federal level could delay it further), this bill is coming due and Texas should plan accordingly.
Every dollar the government spends comes from taxpayers. The late economist Milton Friedman said, “The burden of government is not measured by how much it taxes, but by how much it spends.”
Taxes should only fund limited government at the least economic harm, which Texas does well by depending mostly on sales taxes—though local property taxes also impose a hefty toll.
Therefore, to keep state taxes lower than otherwise so Texans can reach their full potential, sound fiscal policy must begin with spending restraint, which the Foundation’s Conservative Texas Budget has helped achieve.
But that fiscal restraint in Texas was limited from at least 2004 to 2015. The average growth of the six two-year budgets then was 12% compared with just 7.3% in population growth plus inflation, which measures the average taxpayer’s ability to pay for government. This excessive spending compounded over time, resulting in even higher taxes and less prosperity than otherwise.
A clear break in the state’s budget happened in 2015. The average biennial growth of the four budgets since then for 2016 to 2023 has been 4.8% (less than half of the prior six) compared with population growth plus inflation of 6.2%. And the 87th Legislature finally passed a stronger spending limit in SB 1336 sponsored by Sen. Kelly Hancock and Rep. Greg Bonnen.
Texas is now leading. How?
One answer is new leadership. After the 2014 election of Gov. Greg Abbott and Lt. Gov. Dan Patrick, the Republican-led Texas Legislature had a mandate for fiscal conservatism. Consider how in 2015 the state passed a budget for 2016-17 below population growth plus inflation along with a historic $4 billion in tax relief. That fiscal restraint continued over much of the next three budgets providing opportunities for $5 billion in property tax relief in 2019 with a 7-cent compression to the school district maintenance and operations property tax rate.
Another answer is that even before the 2014 election, the Foundation had created the Conservative Texas Budget (CTB) as a clear and achievable standard for lawmakers.
The CTB sets a maximum threshold on the total budget based on population growth plus inflation over the last two fiscal years before the regular session. We release it early to provide a limit for state agencies to have available for their legislative appropriation requests and then for legislators to use during the appropriations process. Then there’s keeping it on the minds of legislators and taxpayers through testimonies, commentaries, and more, so that Texans can keep more of their money.
The real reason for Texas’s fiscal success is the internal and external institutional pressures around the Texas Capitol and across the state. That’s why Texas is leading in sound fiscal policy.
The latest 2022-23 CTB set a maximum threshold of $246.8 billion on the state’s budget based on a 5% increase in population growth plus inflation. Surprisingly, because even though they had more revenue to appropriate, both chambers’ introduced budget versions were below the CTB, with the House’s version being exactly $246.8 billion.
Ultimately, the state budget passed by the Legislature and after Gov. Abbott’s vetoes was $4.8 billion below the CTB at $242 billion (a 3% increase above 2020-21 appropriations for an apples-to-apples comparison), excluding the $6.1 billion.
In this total budget, education ($93.5 billion) and health care ($86.7 billion) consume 73%. Compared with 2020-21 appropriations, the combined net increase in these two large areas of the budget were essentially flat. But in general, these are rising at a rapid rate and need structural changes. There was also $1 billion toward SB 321, the result of an effort that made the Employees Retirement System a cash-balance plan for new employees, which is a good step toward a defined-contribution system.
Because the regular session was “incomplete,” Gov. Abbott called a special session. Then Comptroller Glenn Hegar announced that with faster economic growth and tax collections, there is now an expected $7.85 billion surplus for the 2022-23 biennium, with $12 billion expected in the rainy day fund.
This means that whenever the Democrats return to work, the Legislature will likely appropriate some of that surplus. To help lower property tax bills now, which is what Texans want, at least $5 billion should go to property tax relief along with charting a path to eliminating nearly half of the property tax burden. These appropriations, excluding property tax relief, will raise the budget closer to the CTB but will likely remain below it.
If that’s the case, the average growth over the last four budgets would be about 1-percentage point below population growth plus inflation. This extraordinary feat along with the stronger spending limit in Texas will help uphold fiscal responsibility to make up for earlier excesses. Still, there’s room to improve, as less spending can result in less taxing—so we can keep Texas Texan.
It happens on the first Tuesday of every month. Bidders gather at the west entrance steps of the Smith County Courthouse, looking for bargains. At 10 a.m., the sales commence—properties are auctioned off to pay the taxes owed on them. Some are vacant lots and some are homes. All were seized from their owners over delinquent property taxes.
This happens throughout Texas, and it’s big business. What it shows is that with property taxes hanging over them, every property owner in Texas is really just a renter. If they fall behind on taxes, they can lose what they worked so hard for.
But Texas lawmakers now have an opportunity to ease the burden on property owners—our plan would cut property taxes nearly in half over time, by eliminating school district maintenance and operations (M&O) taxes. We get there by holding down spending growth and using surplus taxpayer dollars at the state level to buy down those school district M&O property taxes over time.
Under this buydown approach, every tax dollar not spent by the state will produce a property tax cut for Texans. Following our plan would let the Texas Legislature keep its pledge to taxpayers by actually lowering property tax bills—something missing in most other plans.
School district M&O property tax is estimated to collect about $56 billion in 2020-21, making up nearly half of the hefty property tax burden Texans face. Putting this money back into the pockets of Texas families is the right thing to do.
In the regular session of the 87th Legislature, lawmakers passed another Conservative Texas Budget and put most of our formula into law. This stronger spending limit restricts growth of much of the state’s budget to the rate of population-times-inflation (6.38% biennially since 2012), a formula that helps ensure the budget doesn’t grow faster than the average Texan’s ability to pay for it.
Yet because state revenues have grown at a higher rate (9.02% biennially since 2012), we’re looking at a steady surplus in the state’s coffers. That surplus can be used to eliminate school district M&O property taxes over time. How? By increasing the state’s share of education spending, gradually replacing the M&O property tax burden.
School districts will have to do their part; they’ll need to lower their tax rates each year to match increased state funding, as well as keep their spending in check (they’re already limited to growth of no more than 2.5% per year without the okay of taxpayers).
If these revenue and spending growth rates hold, Texas could eliminate school district M&O property taxes in 20 years. What would that mean to Texas families? Their property tax burden would be cut from today’s high of about 2.3% of their home’s value to about 1.3%.
This buydown process could be started now by using most or all the Texas Comptroller’s expected $7.85 billion in surplus for the 2022-23 biennium and by passing a bill such as HB 122 during a special session, as soon as Democrats who left Austin return. To lower Texans’ property tax bills soon, at least $5 billion of the surplus should go to buy down school district M&O property taxes.
Lower-income families would benefit most from our plan, because a higher percentage of their incomes go to pay property taxes (that’s true even if they’re renters). Property taxes are beyond our control, unlike sales taxes. We can control what we buy, but our tax rates and taxable property values are set by others.
Our “Lower Taxes, Better Texas” plan would let Texans keep more of their own hard-earned money—and in many cases, their homes. The American dream of home ownership shouldn’t end on the courthouse steps.
Lower Taxes, Better Texas: The Bold Agenda to Reduce Property Taxes, Protect Taxpayers, and Grow the Economy
The way we levy and raise property taxes is not just unsustainable, it is unethical. Texans are being forced out of their own homes by insatiable local governments looking to squeeze every dime out of taxpayers. Texans literally can’t afford for the Legislature to wait years to address the issue or make small changes to the system. More than 70% of Texans say property taxes are a “major burden for them and their family” and want relief now. It’s time for bold action.
Lower Taxes, Better Texas* is a two-pronged approach that immediately cuts property taxes nearly in half and redesigns our system to protect taxpayers, provide a fairer tax system, and grow our economy. The plan not only gives taxpayers immediate relief, but it also makes structural changes to our system that prevent year-to-year spikes in tax bills, allow for a more equitable and transparent form of taxation, and rein in irresponsible local government officials.
Texas’s economy is improving after the destruction from the pandemic and forced business shutdowns. The opening of the economy on March 10, 2021, helped bring some normalcy as many return to work, excessive government restrictions cease, and civil society improves. This normalcy is supported by wins regarding fiscal and regulatory policy and paths to opportunity by the 87th Texas Legislature during the recently completed session, and more successes may be realized during the special session called by Governor Greg Abbott. A key initiative will be to promote more pro-growth policies that reduce spending, taxing, and regulating in order to increase prosperity and withstand Washington’s anti-growth policies.
This table provides a comparison of initial appropriations for the 2020-21 budget from the Legislative Budget Board’s (LBB) Fiscal Size-Up and for the 2022-23 budget as noted in the conference committee report for SB 1 General Appropriations Act. We compare the budget with the Foundation’s Conservative Texas Budget (CTB) limits based on on a 5% increase in population growth plus inflation.
We exclude from the 2020-21 budget the $8.3 billion in mostly federal funds for one-time Hurricane Harvey recovery expenses and the $5 billion in general revenue funds for a 7-cent tax rate compression of school district M&O property taxes in HB 3 from the 2019 session. Likewise, we exclude from the 2022-23 budget the $6.1 billion in general revenue funds to maintain last session’s property tax relief—which without this allocation would result in a 7-cent tax rate hike in those property taxes and likely more spending. And we will exclude one-time distributions of federal funds related to the pandemic. Not including these types of one-time funds is necessary for budget transparency and for not inappropriately inflating the baseline budget allowing excessive appropriations later. We also exclude the $410.2 million in all funds for Article X that Gov. Greg Abbott vetoed, and he will likely include in a special session.
The 2022-23 Texas budget is well below the CTB limits in state funds and all funds, and leaves $11.6 billion in the rainy day fund. Excluding the $6.1 billion to stop a massive property tax hike, general revenue funds decline by 3.1% and state funds are up by only 0.7%. Including it, state funds are about $725 million below the CTB. And all funds, which is the full footprint of the taxpayer’s burden to fund state government appropriations, is up 3% to $242 billion, which compared with population growth plus inflation is 2-percentage points lower and $4.8 billion less.
The growth of initial appropriations, on average, has now been well below the average taxpayer’s ability to pay for them over the last four budgets, which was directly after the Foundation created the CTB in 2015.
The Texas Legislature’s practice of fiscal restraint while meeting the needs of the state is good news for Texans. And much of the CTB was passed into statute as the Legislature strengthened the state’s spending limit by expanding the base to all general revenue funds and changed the growth limit to population growth times inflation while increasing the threshold to exceed it to a three-fifths majority in each chamber. After the Foundation has worked toward this statutory change for multiple sessions, this is a huge feat that will have long-lasting benefits to Texans.
We encourage Gov. Greg Abbott to build on these policy wins and more by providing paths for more fiscal gains—such as substantial property tax reductions and improved local revenue limitations—in a special session.
Full article with figures.
Vance Ginn, Ph.D.