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Dale Craymer

Another look at the case for HISD recapture

Dale Craymer taps the brakes on the vote-NO-on-recapture train.

BagOfMoney

Houston Independent School District voters face an unhappy choice this November – vote “YES” or “FOR” on Proposition 1 to authorize the state to recapture roughly $160 million of the school district’s property taxes or just vote “NO” or “AGAINST.”

It seems like a no-brainer. School board members, several other local officials and the Houston Chronicle editorial board are urging a “NO” vote, as a way to protest a state school finance system commonly referred to as “Robin Hood.”

What folks aren’t being told, though, is that a “NO” vote is a “YES” vote for higher taxes.

[…]

Folks advocating for a “NO” vote contend taxpayers have nothing to fear. The vote will “blow up” the school finance system and force the Legislature to “fix” it.

That may be a bad bet.

The Legislature has no good options. They could raise spending so that all districts get as much money as Houston. But lawmakers have no money and would have to raise $8 billion in new taxes – clearly a fantasy given a fiscally conservative Legislature, and an option most Houston and other voters statewide wouldn’t like.

Lawmakers could make a special provision and allow Houston to keep the money while all other districts go wanting. That would be a bad vote for those five out of every six lawmakers who don’t represent Houston, and could threaten the constitutionality of the current system.

Craymer calculates the tax increase, due to having a smaller base on which to repay bond debt, as $50 annually for a house with a $300K appraisal. Gotta say, that doesn’t sound too terrifying to me, though that value will increase over time and could impinge on future bond issues. Mostly, I agree with his assessment that it’s an extreme longshot to believe that the Lege will take meaningful action.

Even with all that, Craymer does not really endorse a Yes vote on recapture, he just wants to make sure everyone is informed about what it means before they vote. Daniel Williams pushes back on some of Craymer’s assertions, and goes deeper into the weeds.

If the proposition passes the money paid to the state goes to the general fund. In theory the lege is supposed to then move those funds over to finance under-financed schools – but there’s no guarantee that will happen and the lege has a long history of playing shell games with money in the general fund. If the prop does not match the reassigned property taxes go directly to other school districts, not through the general fund. The reassigned properties would be subject to the tax rates of the reassigned districts so those properties would likely wind up paying higher property taxes.

This, to my mind, is the very best argument for “no.” Even under the worst case scenario a “no” vote means more money for schools – maybe not Houston schools – but schools all the same.

Also, while it very likely that the lege is going to rework the system HISD may have a different course of action under the new process. If they are locked into buying attendance credits by a ballot initiative it may be difficult for them to legally get out of it.

Some have argued that a “no” vote is a dangerous game of chicken. That the legislature just doesn’t have any options to increase funding. Let’s dispose of this fiction: they could close the excise tax loophole, they could index the gas tax, they could stop letting WalMart keep a portion of the sales tax, they could tap the rainy day fund (that’s why it’s there), they could repeal the tax break for yachts they recently created, the list goes on.

Now, you might say that these options are not politically viable – and you’d be right. The current mess is what we keep voting for. The three biggest expenses in the state budget are education, public health and transportation. This is what we vote for when we elect people who say they’re going to “cut taxes” – cuts to education, public health and transportation. If we’re going to change that it has to start at the ballot box. So, vote “no” on the HISD question, but only if you’ll also stop voting for Austin-bound candidates who say they’ll cut taxes.

Daniel agrees there’s no good answer, but a No vote keeps some options open. I agree with that, and I strongly agree that if you’re going to vote No, you also need to vote No to politicians who refuse to address the underlying problems with the system. If you want a fix, do what is needed to get one.

UPDATE: Leah Binkovitz of the Kinder Institute weighs in, including some words of wisdom from former Rep. Scott Hochberg, one of the very few people in the state who actually understands the school finance system. Hochberg does not agree with a No vote on the recapture issue, which should give anyone pause.

Lawsuits and low oil prices

Both are threatening the next Texas budget.

BagOfMoney

Last week, lawyers for the state of Texas got the latest in a string of bad legal news.

A lawsuit challenging the state’s foster care system as inhumane appeared to gain steam when an appeals court rejected the state’s request to stop the appointment of two “special masters” to recommend reforms.

The overhauls that have been discussed so far would be pricey to implement — as much as $100 million per year, according to rough estimates from the state comptroller’s office. But they actually are on the lower end of all the extraordinary legal expenses the state is facing at a time when stubbornly low oil prices are simultaneously threatening to blunt its coffers.

Three other lawsuits against the state — two of them pending before the Texas Supreme Court, with rulings expected soon — could cost the state billions if it ends up on the losing side. Experts say the state may have the cash to cover one of them in a single budget cycle, but probably not any more than that — especially if low oil prices persist, dampening the state’s stream of tax revenue. That could mean budget cuts when lawmakers meet for the 2017 session, at least if the Republican-dominated Legislature remains steadfast in its refusal to tap the state’s nearly $10 billion Rainy Day Fund.

Two of those three lawsuits, both tax cases, could cost the state a combined $10.4 billion in tax refunds and up to $2 billion in collections per year beyond that, according to the comptroller’s office, which is closely monitoring them.

Potential cost estimates do not exist for the last case — a high-profile challenge to the state’s public education funding system — but past school finance rulings have cost the state billions.

Such sums would handily eclipse the state’s $4.2 billion projected surplus, which could itself dwindle if oil prices remain low and further blunt tax collections. (Comptroller Glenn Hegar has already lowered projections once.)

“Any of those by themselves are a huge hit,” said Dale Craymer, president of the business-backed Texas Taxpayers and Research Association. “But if you start losing two or three of those issues then, yeah, it’s much more questionable that the state’s general revenue reserves are sufficient to cover that.”

See here and here for some background. There’s not much that can be done about the price of oil, though after years of living it up, and of politicians claiming credit for all that robustness, I doubt there’s much sympathy out there for us. The rest are the result of policy and/or legislative decisions, some of which may well bite us in the bottom line. I’m rooting for the Supreme Court to stick it hard to the Lege on school finance, but the other cases I’d rather see the state win. As much political hay as there is to be made in a chaotic situation, there’s nothing good from a public policy perspective on those cases, and I have little faith the Lege would do a good job cleaning up the mess. But on school finance, all bets ought to be off. We’ll see how it goes.

We have a messed up tax system in this state

The latest exhibit:

BagOfMoney

The volatile oil and gas industry already has prompted Texas Comptroller Glenn Hegar to reduce his state revenue estimate, but that may not be the last of the bad budget news.

A court decision potentially could cost Texas around $1.1 billion a year in franchise tax revenue, plus require four years’ worth of refunds totaling another $6 billion, according to the comptroller’s office.

“It could be enormous. Enormous,” Hegar said in an interview about the possible effect of the lawsuit brought by American Multi-Cinema, which so far has won its court battle for a bigger deduction from its franchise tax payments.

If the 3rd Court of Appeals ruling in the case stands, the two-year refund due AMC is calculated at nearly $1.2 million.

But Hegar is predicting a potentially much bigger hit for the state based on the assumption that a wide range of businesses would be quick to take advantage of the deduction awarded Missouri-based AMC. The state is asking the court for a rehearing.

The AMC lawsuit centers on the franchise-tax deduction for “cost of goods sold,” which includes such things as the raw material used to make an item.

The 3rd Court of Appeals ruled in the lawsuit in April that exhibiting a movie amounts to a “good” because it’s “perceptible to the senses,” fitting the definition of tangible personal property. Therefore, the court said, AMC can include its auditorium expenses as production costs when figuring its franchise-tax deduction.

“As a practical matter, the court’s holding could potentially treat a business exhibiting a movie as producing TPP (tangible personal property) in much the same way that a carpenter produces a chair or desk” and allow many other service providers to claim deductions, Hegar wrote to state leaders in June.

“It could be lawyers, accountants, people that mow yards. It’s just unbelievable how broad it was,” he said. It opens the door to deductions for their computers or other equipment. “You can even argue that now when somebody comes and mows your yard, you sit in the back yard and you smell that grass, and it’s real pretty. It’s perception to your senses.

“The list just doesn’t stop,” Hegar said. “It would kind of be like the kids’ Christmas list in a Santa Claus movie. It’s a real long list. It just keeps on rolling out the door.”

In a similar fashion, this ruling could also affect the state sales tax, and that could wind up offsetting some of the franchise tax loss. Or maybe not – estimates of the possible total cost of this ruling are in the $6 billion per year range. That’s getting into some real money, at a time when the state could wind up also being on the hook for a lot more money to public education. Like the public ed issue, this will ultimately be decided by the Supreme Court, but the ultimate responsibility lies with the Lege, which could clarify what the franchise tax covers or – since abolishing the franchise tax is the current fetish – replace it with something else. I wouldn’t hold out much hope.

Hegar’s first revenue estimate is in

We’ll see how it holds up.

BagOfMoney

Amid concerns that tumbling oil prices could push the Texas economy into a recession, Comptroller Glenn Hegar offered a cautiously optimistic tone on the future of the Texas economy Monday, announcing that lawmakers will have $113 billion to haggle over in crafting its next two-year budget.

“Our projections are based on expectations of a moderate expansion in the Texas economy and reflect uncertainties in oil prices and the possibilities of a slowing global economy,” Hegar said.

The biennial revenue estimate sets a limit on the state’s general fund, the portion of the budget that lawmakers have the most control over. The general fund typically makes up nearly half of the state’s total budget.

Hegar predicted that Texas will take in $110.4 billion in revenue from taxes, fees and other income during the 2015-16 biennium. Hegar’s $113 billion projection also includes money expected to come from leftover funds in the current biennium. With the addition of federal funds and other revenue sources, lawmakers should have a total of $220.9 billion for the 2016-17 budget.

The state’s Rainy Day Fund is also projected to grow to $11.1 billion by the end of the next biennium if lawmakers choose not to use any money in the fund.

The state will end the current biennium, which ends Aug. 31, with $7.5 billion in leftover funds, Hegar said. That surplus will be split three ways between general revenue, the Rainy Day Fund and the state highway fund.

Two years ago, Comptroller Susan Combs estimated that the Legislature would have $208 billion for its budget, including $101.4 billion in general revenue and $11.8 billion in the Rainy Day Fund. Lawmakers ultimately passed a $200 billion budget.

[…]

The liberal Center for Public Policy Priorities has estimated that lawmakers will need to increase general spending from the current $95 billion to $101 billion to maintain the state’s current level of services. More than half of that $6 billion spike comes from Health and Human Services, where an increase in medical costs and Medicaid cases in particular has grown.

Don’t expect that to happen. Indeed, if Dan Patrick has his way, it will never happen. The good news is that this is a reasonably sunny estimate, meaning The Lege will be able to do at least some of the things it wants to do without too much voodoo, assuming it doesn’t impose some ridiculously lowball artificial limits on itself, which it must be noted is always a possibility. But just because there’s revenue available doesn’t mean it isn’t spoken for, or at least in demand. The Observer explains.

On one hand, it’s not a crisis budget, and it’s not one that will require legislators to make cuts (though they might anyway.) The office of Lt. Gov.-elect Dan Patrick released a brief statement that characterized the comptroller’s estimate as a green light for his agenda, which has included the promise of significant tax cuts: It provided “adequate revenue to secure our border, provide property and business tax relief while focusing on education and infrastructure. I intend to accomplish these goals.”

On the other, the “surplus” is a lot less than it looks at first glance, in part because the amount of budget trickery the Legislature has employed over the years. Gov.-elect Greg Abbott and Patrick have called for ending road funding diversions and making the Texas Department of Transportation whole again. But about $3 billion in additional revenue is needed to end diversions, and TxDOT says it needs an additional $5 billion just to keep the system at the current level of congestion—that is, without making any forward progress.

In education, the state has not yet gotten back to the level of funding that preceded 2011’s gargantuan cuts to public ed—a portion was restored in 2013, but a significant amount of money is needed even beyond what was the case in 2011, thanks to population growth. And it’s unclear how proposed voucher programs would affect the system’s overall cost.

And then there’s tax cuts. The truly sweeping tax overhauls that were talked about during the election, like substituting property taxes for increased sales taxes, seem to have fallen off the radar for now. In the past, GOP lawmakers of all stripes have passed minor tax bills and sold them to the voters as massive ones. That may be Patrick’s play, but even modest tax reductions will shave the “surplus” down in a hurry.

The question as always is what gets prioritized, and what gets left out. I believe this is an accurate summary:

Budget expert Dale Craymer, president of the business-based Texas Taxpayers and Research Association, pointed out that lawmakers in writing the next budget will have the cushion of unspent cash and “a pretty solid non-oil-and-gas base to our economy.”

Still, he said, the “three great wants” of tax relief, transportation and public education are big-ticket items.

“The state is still in a good position to deal with maybe one of these,” Craymer said, “but certainly not all three.”

I’d say that’s the priority order for the Republicans. What happens if the Supreme Court forces them to deal with public education, especially if they don’t leave themselves any room to do so? Your guess is as good as mine.

Turner seeks a way to get around Public Integrity Unit de-funding

Rep. Sylvester Turner takes aim at one of Perry’s vetoes.

State Rep. Sylvester Turner

State Rep. Sylvester Turner

Rep. Sylvester Turner, D-Houston, said he would propose a House Concurrent Resolution advocating restoration of funding for the Public Integrity Unit of the Travis County district attorney’s office, which was vetoed by Gov. Rick Perry last week.

[…]

This morning on the floor of the Texas House, Turner raised what options lawmakers have in responding to the veto. Afterwards he told reporters he would seek the resolution for restoring the funding.

“Over the last 10 years, there have been attempts to eliminate, weaken, move the public integrity unit from Travis County to the AG’s (attorney general’s) office and over the last 10 years the Legislature has said no,” Turner noted. “We are entitled to know where the funding will come from or what the plan is. Is it the intent of the state to say no to the Public Integrity Unit, to significantly weaken it?”

Turner questioned Perry’s use of his veto power to influence who holds a particular office.

“I am just not comfortable with vetoing funding because some people here have problems with one person,” he said

A concurrent resolution is basically just a “sense of the chamber” vote, so even if such a thing passed (which I doubt) it wouldn’t compel anyone to do anything. This is about sending a message. The politics of this situation are increasingly complex, but there’s a good case to be made that whatever you think of Rosemary Lehmberg and her sins, it’s not up to Rick Perry to force the issue. There’s a process in place that is already in motion, and Perry’s involvement is a conflict of interest.

More on this in the Statesman:

From the back microphone of the Texas House, Turner asked Speaker Joe Straus if any options exist to fund the unit.

Straus said after Monday’s meeting of the House that his office would do some research for Turner.

“With the questions from Mr. Turner and others, it’s certainly something that we should explore with the governor and with the Public Integrity Unit personnel. I’m assuming that the governor’s office has considered this,” Straus said in an interview. “We just have to assess where we are, and what the implications are as we go forward.”

[…]

Also Monday, state Rep. Steve Toth, R-The Woodlands, asked from the House floor if funding could be revived if Lehmberg resigns.

House leaders didn’t have an immediate response.

But Dale Craymer, president of Texas Taxpayers and Research Association, had a thought. The former top budget official for Govs. Ann Richards and George W. Bush said it is possible to restore funding through budget execution action, which involves the governor and the Legislative Budget Board agreeing on moving money from other parts of the budget.

I can’t claim to be optimistic about anything happening to counter Perry’s veto, but clearly we are in uncharted territory. Rep. Turner in particular got a lot done in the budget deal, so I would not discount his efforts.

On a related note, Travis County Commissioners Court is exploring its options as well.

Travis County commissioners will discuss the legislation and the governor’s actions on their agenda around 11 a.m. Tuesday.

“We likely will not take action tomorrow, rather just discuss this issue,” County Judge Sam Biscoe told KVUE. “There are a lot of unanswered questions. I have sent a list of questions to the county attorney to understand our authority and limitations on this matter. I also want to know whether the governor’s decision can be reversed by himself or the Legislature before September 1, 2013.”

Biscoe says the commissioners will address the item and then go into executive session. They will likely take action on June 25.

“From my understanding, the revenue from that unit goes to residents of Texas as well as the state and federal government. I personally don’t see the benefit of fully funding the unit if the money goes to outside agencies. We will explore the issue,” said Biscoe.

The main thing I’d be concerned about is that if Commissioners Court picks up the slack, what incentive does the Lege have to fund the PIU in a future session, post-Lehmberg? This is the same dilemma school districts that had room to raise their tax rates faced after the massive cuts to public education in 2011. A one-time fix can quickly be seen as the new normal.

Time once again to talk about expanded gambling

There’s a legislative session coming up, right? That can only mean one thing: A new effort to expand gambling in Texas.

Track and gaming interests say voters should be allowed to decide whether to give Texas a shot at the benefits of $2.5 billion they say is wagered in surrounding states annually by Texans.

“They are taking our money to fund their programs, and I think they frankly have just been smarter than we have. My hat’s off to ’em,” said John Montford, a former state Senate Finance Committee chairman. He carried the legislation that established Texas’ lottery and now is involved in the casino battle.

Critics doubt the figures and call expanded gaming a losing proposition for Texas, saying gaming would take money from the pockets of people who can ill afford it.

Montford has been hired by the partnership of Penn National Gaming and Sam Houston Race Park to push the gambling expansion under the name of Let Texans Decide.

Among supporters listed on the group’s website are Valley Race Park, the Texas Association of Business, the Greater San Antonio Chamber of Commerce, Greater Houston Women’s chamber, Houston Hispanic chamber and Houston Northwest.

Remember the name Let Texans Decide, whose Facebook page is here. Whatever arguments or talking points you hear for expanding gambling in Texas will have come from them.

The Legislature has repeatedly turned down the chance to amend the state constitution to expand gambling, which would require a two-thirds vote of lawmakers before going on a state ballot.

The battle doesn’t look to be any easier this time.

State lawmakers who faced a huge revenue shortfall in their last regular session in 2011 now are seeing a recovering economy, and the House and Senate are no less conservative. Several incoming senators are viewed as further right than their predecessors.

“Before this session, there was probably a shot at passing something like that through the Senate. I think with the new members that we have in the Senate, it’s probably less likely than it was before. And I think it is very unlikely that either one of those proposals would get through the House,” said Senate Finance Committee Chairman Tommy Williams, R-The Woodlands, when asked about slots at tracks or casinos. Williams said he has never voted to expand gaming in Texas, adding that revenue figures presented in years past by supporters of the idea appeared unrealistic.

“I don’t have a big, huge moral objection to it, but I’m not sure it’s for the benefit of the state,” Williams said.

Dale Craymer, president of the business-based Texas Taxpayers and Research Association, said, “One of the considerations for casino gambling is the fact that it raises revenue, and that’s a big issue during a session when they are looking for revenue. This is not going to be a session where they are looking for revenue.”

Yes, God forbid we should seek out any new revenue sources any time outside of a severe crisis, not that we do then either. I’m not saying that more gambling is the way we should go to raise more revenue for the state, I’m just saying we’re a million miles from being at a point where we can say that we don’t need any more revenue sources. Between water, transportation, Medicaid, mental health services, education, and a whole host of other needs, there are plenty of issues in need of more funding.

Texans for Public Justice, which tracks money in politics, found that gambling interests donated $1.6 million to Texas political action committees and candidates going into the 2010 elections.

TPJ, in a check of reports available for this year, found top gambling PACs from 2010 donated more than $904,000 this cycle. The total included only reports covering up until eight days before the election, so the total is sure to be higher.

According to Let Texans Decide, the Chickasaws and Choctaws, which have Oklahoma casino operations, have given Texas candidates five times as much as they gave Oklahoma candidates since 2008 — more than $807,000 in Texas compared to nearly $152,000 in Oklahoma. The Chickasaws also have invested in a Grand Prairie track.

There may not be money for the things Texans need, but there’s always money for the campaigns. As always, keep an eye on that as the debate progresses. There’s a scandal lurking out there somewhere.

When is a surplus not a surplus?

When any extra money you might have is already accounted for, due to unaddressed needs, accounting shenanigans, and shortsighted cuts.

Some lawmakers and budget experts expect to have as much as $8 billion to $9 billion more in general revenue in this fiscal period, which ends Aug. 31. Some are guessing lower. Combs will give her new revenue estimate on the eve of the legislative session.

The unanticipated tax revenue is on top of some $8.1 billion projected to be in the rainy day fund at the end of this fiscal cycle, plus any revenue growth in the next two-year cycle.

House Speaker Joe Straus, R-San Antonio, said that due to disappointing news from the comptroller in past sessions, “I’m not counting on anything until we get the official update.”

Dale Craymer, president of the business-based Texas Taxpayers and Research Association, said, “The state is heading towards a near-record surplus, but there are claims against that.”

Claims include an estimated $4.7 billion in Medicaid expenses due this year that aren’t accounted for in the budget. In addition, some leaders want to quickly undo an accounting maneuver used to balance the current budget, in which they delayed a $2 billion payment to schools.

Looking ahead, it’s estimated Medicaid will take $7.8 billion more in 2014-15 than was allocated last year.

At the same time, the push to restore education cuts is fierce in light of the improving economic picture. Public education got $5.4 billion less in state money than it would have received under previous funding formulas.

“We’re going to need to fund enrollment growth” in public schools in the next two-year period, at about $2 billion, Straus said. But any additional investment may be complicated by a lawsuit over school funding, since lawmakers who have faced repeated litigation like to wait for cases to work their way up to a Texas Supreme Court ruling, so they can see what they are required to do.

That’s all on top of the need to do something about the state’s long-term water usage, and the fact that we currently have no way to pay for any new transportation projects, not to mention the fact that our tax system is antiquated and inadequate and in need of serious overhaul lest we run into these same problems every two years forever. Even if we figure all this out, we’re still going to wind up spending less than we would have to in order to provide the same level of services before the 2011 budget cuts. So yeah, let’s not talk about having a “surplus”. If we’re very lucky, we’ll have enough to do a not-completely-inadequate job of meeting the most pressing needs, while hoping like hell that the economy continues to improve and that the idiotic politics of Rick Perry don’t sabotage everything.

Once more with the margins tax and the Supreme Court

Here we go again.

The Texas Supreme Court could blow a hole in the state’s budget if it finds the business tax unconstitutional, as pressed Tuesday in a lawsuit led by food giant Nestlé USA.

“The Legislature can’t violate the constitution to promote even a legitimate interest,” said attorney Peter A. Nolan, arguing on Nestlé’s behalf that the tax violates a state constitutional requirement that taxes be equal and uniform.

If the Supreme Court throws out the law, the scope of the court’s decision will determine whether the state needs to quickly find another way to come up with some $4.5 billion annually or more.

“Should they rule for the plaintiff, they could throw out the tax in its entirety. They could require the state to provide four years of refunds, which is the statute of limitations period,” said Dale Craymer, president of the business-based Texas Taxpayers and Research Association. The business tax “is about 10 percent of all the taxes the state collects. It’s a sizable part of the budget,” Craymer said.

The court could, however, give the state some leeway to come up with a remedy, he said. It must rule in the case by Oct. 23, according to court staff.

See here, here, and here for some background. The Statesman gives November 9 as a rule-by date. Regardless, there will be a decision this year. The Lege was likely to tweak the margins tax anyway; they may wind up having to do a lot more than that. The Trib explains the legalities involved.

Dale Craymer, president of Texas Taxpayers and Research Association, says the suit boils down to questions over equal treatment.

Craymer explains the franchise tax charges one-half of 1 percent to wholesalers but a full 1 percent to businesses engaged in manufacturing. Nestle, a national manufacturer and wholesaler, does not manufacture anything in Texas, but is still subject to the 1 percent rate.

The company claims the distinction violates equal protection provision in the Texas and U.S. constitutions.

Texas designates Nestle and the other companies in the suit as “unitary entities,” or companies that have various components but operate as one organization. Unitary entities are subject to the 1 percent tax rate under current franchise tax rules that were revised in 2006.

Texas has had a version of the franchise tax since the 19th century. Sometimes called the margins tax, it’s a tax on doing business in Texas. Craymer says the dollars it brings in “generally pale in comparison to property and sales tax” on businesses.

Lawyers for the Texas Attorney General’s Office wrote in a brief to the court that Nestle’s equal-protection challenges hinge on an erroneous premise that the franchise tax was solely meant to cover the value of doing business in Texas and that the value should be assessed as if it were property. But, they wrote, the Legislature has wide latitude to create tax classifications.

My first impression when I read that was that Nestle’s argument sounds a lot like the one Amazon had made to argue that they weren’t subject to the sales tax in Texas because they didn’t have a “physical presence” in the state, just a distribution center. They eventually lost that fight as we know, but I couldn’t say what might happen here. Between this and the school finance lawsuits, the Supreme Court will have a big say over what Texas’ budget looks like in the coming years.

State revenues inching up

A little bit of good news.

State coffers will be bit plumper than previously expected, Comptroller Susan Combs announced Monday, but her outlook for the Texas economy is less optimistic.

Texas is estimated to collect $1.6 billion more than was budgeted for 2012-13, the two-year budget that started Sept. 1. The comptroller’s report provides the first official state revenue update since January.

[…]

The driving force behind the additional state dollars is improved sales tax collections, particularly in the oil and gas industry, according to the report.

Sales tax revenue from the mining industry, which includes oil and gas, was up 72 percent in the previous fiscal year. The industry also created 17.3 percent more jobs, while the rest of Texas’ industries combined had job growth of 1.9 percent .

But Combs cautioned against expecting that kind of robust growth going forward. Industry job losses in 2013 are expected to wipe out any gains in 2012, she said.

“The Texas unemployment rate — as low as 4.3 percent in early 2007 — is now at 8.4 percent and giving no indication of receding rapidly,” Combs said.

You can see Combs’ letter to state leaders about her revenue update here. This is better than the alternative, but it’s not going to do much to mitigate the cuts we experienced this spring. Mainly, if things continue on this pace, it means that at least the next Lege won’t have to start out by closing a deficit left over from the prior biennium, as this one did. Make sure you understand that when you read stories like this.

After a long run of tough times brought on by a sour economy, Texas lawmakers got some good news Monday as the state’s chief fiscal officer projected a $1.6 billion surplus that could provide a much-needed financial cushion for the next session of the Legislature.

The windfall available for the fiscal biennium that started Sept. 1 was generated by better-than-expected state revenue. It could enable lawmakers to partly offset a $4.8 billion shortfall in Medicaid and soften some other cuts enacted during the 2011 Legislature, analysts said.

The new projections by Comptroller Susan Combs will make things easier for budget-writers at the outset of the next legislative session in 2013, although lawmakers will still face a host of financial challenges.

Combs projected available revenue of $82.7 billion by the time the biennium ends on Aug. 31, 2013, which would give the state a $1.6 billion balance over the $81.1 billion in the two-year budget approved by this year’s Legislature.

Lawmakers entered the 2011 session facing one of the biggest shortfalls in years.

They ultimately enacted an austere budget that cut spending by $15.2 billion over the previous biennium and reduced state aid to public education by $4 billion.

[…]

Dale Craymer, president of the business-supported Texas Taxpayers and Research Association, said Combs’ report offers good news for lawmakers. In passing the $172.3 billion budget, lawmakers left Medicaid underfunded by $4.8 billion and expected to tamp down the shortfall by drawing from the state rainy-day fund in 2013. Craymer said lawmakers can use the surplus to partly meet the Medicaid obligation.

Combs projected that the rainy-day fund will reach $7.3 billion by the end of 2013.

Eva DeLuna Castro, an analyst for the Center for Public Policy Priorities, which advocates for programs for low-income Texans, said the surplus means that lawmakers “will have a little left over” to deal with Medicaid and restore $250 million in general revenue cuts. But she said the amount is not big enough to deal with broader financial issues, including state policies that critics say have created a permanent “structural” deficit. She called Combs’ projection “mediocre at best.”

This report has to do with this biennium. Other than ensuring that there should be enough in the Rainy Day Fund to handle the massive Medicaid short-changing and not requiring a second dip into the RDF to close the books on this chapter, it doesn’t really tell us anything about what conditions to expect for the next biennium and the budget that legislators will have to write for it. I fully expect there will still be a large deficit, quite likely another eight-digit shotrfall, because the underlying structural deficit of the business margins tax not paying for the 2006 property tax cuts is still there. Some healthier sales tax numbers aren’t going to make a dent in that. We also have no idea what may result from the various school finance lawsuits, but since they will be arguing (among other things) that the state is not adequtely funding public education, you can expect that to put some pressure on lawmakers to find more revenue. And of course the kind of lawmakers we have in place for when that comes up will have a huge effect on the kind of solutions, or “solutions”, that are found. We’ve got a long way to go before things change.

Supreme Court upholds margins tax

The days of the much-unloved business margins tax may be numbered, but it won’t be the Supreme Court that is responsible for its demise.

The Texas Supreme Court turned back a challenge to the state’s primary business tax, saying it doesn’t violate a constitutional ban on personal income taxes.

The Constitution allows personal income taxes only when if voters approve. Lawmakers didn’t seek voter approval when they revised the franchise tax in 2006, and Allcat Claims Service LLP and a limited partner there, John Weakly, sued for a refund from the state, calling it an illegal personal income tax and saying that it wasn’t applied in an equal and uniform way. In the majority opinion, written by Justice Phil Johnson, the court answered one of those questions:

“We hold that: (1) the tax is not a tax imposed on the net incomes of the individual partners, thus it does not facially violate Article VIII, Section 24; and (2) we do not have jurisdiction to consider the equal and uniform challenge.”

More from the Statesman:

The case focused on whether the franchise tax constituted an income tax for certain business partnerships, including many medical practices and law firms.

Allcat Claims Service LP, a Boerne insurance adjustment firm that filed the case last summer, argued that the franchise tax levied against the partnership reduced the income of Allcat’s partners, making it an income tax.

But a majority of the court maintained that the tax applied to Allcat, not the business partners, so it did not run afoul of a state constitutional provision that prohibits a personal income tax unless voters give their approval.

“In effect, the court said a business is a business, and restrictions against taxing persons do not apply. That gives the Legislature a broader range of options in revising the tax,” said Dale Craymer , president of the Texas Taxpayers and Research Association, a business-backed think tank.

[…]

Monday’s decision will not, however, affect a separate challenge to the margins tax that was filed by food behemoth Nestle USA Inc. and two other companies this fall.

But Craymer said the court decision implies that that case will be sent to a trial court because it deals with specific rather than broad issues.

I was surprised we got a decision so quickly, but apparently the legislation that created the margins tax had a provision that said a challenge to it would go straight to the Supreme Court and that it must render a judgment within 120 days. I fully expect the 2013 Lege to address the margins tax in some fashion, but at least they won’t be under the gun of having to make it constitutional. We’ll see if they actually try to fix the budget’s structural deficit by making it bring in more revenue.

Going through the couch cushions

“Taxes” may be a dirty word, but the Lege is busy looking for revenue in other places.

“Right now, there is a tremendous amount of effort being invested in identifying new revenues that avoid being called a tax bill,” said Dale Craymer of the business-based Texas Taxpayers and Research Association.

“Politically, a lot of members have pledged not to raise taxes,” he said. “Obviously, members are seeing the impact of the budget proposal, and there’s a desire to try and raise new revenue to protect the budget without violating the no-new-taxes pledge.”

Some revenue measures already have been filed. Details are lacking on others as lawmakers work to get them in shape in advance of Friday’s bill-filing deadline.

House Ways and Means Committee Chairman Harvey Hilderbran, R-Kerrville, is having hearings through the next several weeks on measures including his House Bill 257, which would yield $72 million by having unclaimed property revert more quickly to the state.

Hilderbran said he also has legislation to boost Comptroller Susan Combs’ enforcement and that his panel will look at efforts to strengthen audits, hike tax penalties and close loopholes.

Here’s HB257, which has been referred to committee. One revenue-enhancer that has made it out of committee is Rep. Villarreal’s HB658, which is aimed at closing a corporate tax loophole. By themselves, none of these bills adds up to much, but all together they’ll have some effect. Assuming they all pass and get signed, of course, which is far from a guarantee.

In addition to these revenue enhancers, there are the usual accounting tricks that delay payments till the next biennium, of which we saw plenty in 2003. They can save substantial amounts for this budget, but since they do have to be paid, they put that much more pressure on the next budget. The big ticket items are still the Rainy Day Fund – HB275, the bill filed by Rep. Jim Pitts to use RDF funds to balance the prior biennium’s budget, may come to the floor for a vote next week – and fixing the structural deficit. Unfortunately, that and anything else that would have a more significant effect are off the table for the session.

[Rep. Harvey HIlderbran, chair of the Ways and Means Committee,] said he sees opportunity in some of the recommendations made by the Legislative Budget Board that could generate $500 million or more by better enforcing existing law, closing some loopholes and tinkering with some tax exemptions.

One proposal, for instance, would allow the state to claim forgotten bank accounts, uncashed checks and security deposits if they are left dormant for three years rather than the current five years. That change would generate $72 million.

Hilderbran would not, however, follow the path of his predecessor , state Rep. Rene Oliveira, a Brownsville Democrat who last year identified as much as $1.5 billion in sales tax exemptions he said were ripe for elimination.

“That’s a tax hike, and that’s not what we’re going to be working on this session,” Hilderbran said. “We’re not changing the code substantially or significantly. We’re just basically making it more effective.”

That narrow approach will probably produce a relatively small amount of the $27 billion needed if the state were to maintain the current level of services in the 2012-13 budget.

Fixing the big problems, such as the revamped and underperforming business tax, will have to wait until the next legislative session in 2013.

Ideology trumps need. It’s not just Hilderbran – if it were, it might be possible to generate some leverage on him, but he has plenty of company in his stance. The Republicans may tinker, but they’re comfortable with not fixing what’s broken.

More on Combs v. Perry over Amazon

The Trib has a good story that explains the background of the Perry-Combs smackdown over Amazon. There’s another player in this fight, and they’re on the Comptroller’s side:

Retailers who charge sales taxes employ thousands of Texans, and some of those sellers are in tough financial straits. Giving a price advantage to their out-of-state rivals doesn’t seem fair, they argue. Amazon didn’t answer requests for comment.

The legislative and political fight has all sides lobbying and lawyering up. Amazon has focused on the tax fight, leaving the legislative battles to Luis Saenz, a former campaign manager for Rick Perry who is the company’s lone lobbyist in Austin. He’s outnumbered by lobbyists for various trade groups and big stores. For example, Mike Toomey, the governor’s former chief of staff, is working for parity between the different types of sellers. So is Eric Bearse, a former Perry speechwriter and spokesman.

The comptroller argues that the physical presence is the trigger — not whether the company operates a cash register in the state.

The difference isn’t over the taxes owed, but over who should be sending them to the state. You might not know this, but if you buy something that’s taxable in Texas, you owe the taxes whether the seller collects them from you or not. That’s true for over-the-counter sales, mail-order sales or online sales. It’s called the use tax, and it’s the state’s levy on purchases from companies that don’t have a physical presence, or “nexus,” in Texas.

If a company does have operations here — and nexus exists — it is supposed to collect sales taxes from customers and remit them to the state. The state pays retailers for their trouble giving them 0.5 percent of the sales taxes they collect to cover their costs.

[…]

“Our official position is that if you have a physical presence in the state, and employees in the state, you have nexus,” says Dale Craymer, president of the Texas Taxpayers and Research Association, a business trade group that does research and lobbying on fiscal and tax issues. “The comptroller is basically taking the heat for doing what the law requires her to do.”

Combs did an audit of the company and followed with a demand that Amazon pay $269 million in uncollected sales taxes for the four years from December 2005 to December 2009. The amount came to light in regulatory filings by the company late last year, and the fight has now gone to the lawyers. Amazon wants the state to share its audit of the company, and has started its challenge in the State Office of Administrative Hearings, a precursor to a full court fight.

Along those lines, a few Democratic legislators have asked Combs to show her work.

Three state lawmakers are calling on Texas Comptroller Susan Combs to explain how her office arrived at the assessment it levied last year against Amazon.com for uncollected sales taxes.

The letter — sent Tuesday by state Reps. Pete Gallego, D-Alpine, Joaquin Castro, D-San Antonio, and Jessica Farrar, D-Houston — asks for a meeting this week with Combs.

Last year, Combs sent Amazon a notice that it is responsible for $269 million in sales tax. Amazon has disputed that assessment.

In their letter, Gallego, Castro and Farrar say it is “fundamentally unfair” to tell Amazon it owes millions in uncollected sales taxes without explaining how the state arrived at that figure. “Texans have never accepted ‘taxation without representation,’ not should they accept ‘taxation without explanation’…” the letter says.

Comptroller’s spokesman Allen Spelce, however, disputed the contention that Amazon wasn’t told how the assessment was made.

“It’s inaccurate to say that we did not release the details of (Amazon’s) tax bill. We did explain to them how the tax bill was calculated,” Spelce said.

Spelce said Combs or someone from her staff would be available to meet with Gallego, Castro and Farrar.

Here’s a copy of that letter yet, which seems eminently reasonable to me. In the meantime, State Rep. Elliott Naishtat has filed a bill that would settle the matter.

House Bill 1317 defines a taxable retailer as one that brings in at least $10,000 a year in Texas or has an agreement with a Texas resident “for directly or indirectly referring potential customers to the retailer.”

The bill “is modeled after laws that have been passed in other states to make it a clear connection between companies doing business in those states and having to collect sales tax,” Naishtat said. “This bill will generate hundreds of millions of dollars for Texas. I would be surprised if Gov. Perry has a problem with this.”

Let’s just say that my capacity for being surprised by the Governor is not as large as that. Perhaps some of those high-powered lobbyists that the retailers have on their side can help grease the skids a bit. I most certainly support this bill, but color me dubious as to its odds of getting passed. Patricia Kilday Hart has more.

UPDATE: Combs responds to the letter, and pushed back against Perry.

You can cut services, but you can’t reduce the demand for them

Another look at what we’ll be facing next year.

With state leaders saying the November election sent a no-new-taxes, lean-government message, no program is expected to escape the knife – including education and health and human services, which take up the bulk of state dollars.

For some programs, the budget crunch will mean spending cuts. Others will not get increases that state agencies say are needed to keep services at the current level given population growth and rising costs in some areas.

College financial aid could be cut; class-size limits could be eased in public schools; universities are reducing faculty; reimbursement rates for those who provide care for Medicaid patients have been slashed; a medley of grant programs could be put on hiatus; state payroll could be cut; and some leaders have raised the specter of employee furloughs and shutting some state agencies.

“There’s no way I can tell people that families aren’t going to get hurt,” said Sen. Leticia Van de Putte, D-San Antonio.

GOP Lt. Gov. David Dewhurst said Texans have tightened their belts and expect government to do the same.

“The people of Texas want us to live within our means and figure out a way to maintain all of our essential services, and that’s what I’m committed to doing,” he said.

You could start by being clear about just what you think “essential services” are, and how much money they require to do an adequate job. You could admit that much of what the state will do will be to deny help to those who need it, and push as much of the rest of the costs as possible onto local government. You could, in short, be honest about what it is that you’re actually committed to doing.

One more thing:

“This is a budget that, ultimately, will impact all Texans, whether it’s providing less health care services than what we did two years ago. It’s also going to likely be higher parks fees. It’s going to be bigger classrooms. It’s going to be roads that aren’t as good as what some might want them to be,” said Dale Craymer, president of the business-based Texas Taxpayers and Research Association. “Balancing this budget is going to require some sacrifice on the part of all Texans.”

I strongly dispute that last assertion, at least as far as what will happen is concerned. What will happen is that some Texans will be hit very hard, many more will be hit somewhat less hard, and a lucky few will not notice anything different. If you doubt this, ask yourself what sacrifice Dan Patrick will have to make over the next two years. He’s got a nice, generous health care plan provided by the state, and thanks to those ginormous, unaffordable yet completely untouchable property tax cuts from 2006, he’s done quite nicely for himself lately, and will continue to do so for the foreseeable future. I guarantee you, whatever else may happen in Austin in the next six to eight months, the Dan Patricks of the world will not be asked to make any meaningful sacrifice. They never are, not here and not elsewhere.

Do we or do we not have a structural deficit?

In this corner, State Rep. Mike Villarreal:

In a kerfuffle involving two House members who really like to engage in detailed discussions of Texas’ tax system, Rep. Mike Villarreal, D-San Antonio, sent reporters a letter in which he told Rep. John Otto, R-Dayton, that he couldn’t sign a special money panel’s interim report because it perpetrates “denial of the state’s structural revenue shortfall.” Some people like to call that the structural deficit, and point to how Texas four years ago gave away more local school property tax cuts — financed with state money — than it raised in higher state taxes on businesses, smokers and used car sellers.

At issue is the final report of a group Speaker Joe Straus convened in January, the Select Committee on Fiscal Stability. While the report isn’t out, it’s well known that Otto, who’s also vice chairman of the tax-writing Ways and Means panel, thinks Texas went on a spending spree from mid-decade until the Great Recession slowed the state’s economy about two years ago. Otto likes to talk about how there was double-digit growth in state revenues in 2006 and 2007, at the same time double-digit growth in property values allowed the state to slough off more of education’s price tag to local school districts. He’s proposing a constitutional amendment to make the state hoard more tax dollars during flush times — in the existing “rainy day fund,” or perhaps a new one.

Villarreal, a former vice chairman of Ways and Means, said it’s wrong to fixate on spending.

“According to the Legislative Budget Board, our state government already spends less per capita than every other state in the nation,” he said. “Creating a second rainy day fund may reduce the volatility of available revenue but will cause us to lose further ground on providing adequate funding for the educational, health care and infrastructure needs of our rapidly growing state.” Villarreal said even if Texas’ economy were firing on all cylinders, “state revenue would fall short of covering existing services by $9.5 billion.” Some budget experts are forecasting a deficit of nearly $24 billion for the next two year cycle.

Would that be another rainy day fund that we would never actually use? Let’s just say I’m dubious. In any event, Rep. Villarreal’s contention, with which I agree, is simply that the state has failed to take in enough money to cover the property tax cuts of 2006, and as a result would be in a deficit situation even in a good economic climate.

And in this corner, State Rep. John Otto:

Otto believes the committee in August heard a good rebuttal of those, such as Villarreal, who would heap scorn and blame on a 2006 Texas tax swap. It was from Dale Craymer, president of the business-backed Texas Taxpayers and Research Association.

“Did the 2006 Property Tax Relief Cause Our Problems?” was the headline for part of Craymer’s presentation to the House Select Committee on Fiscal Stability. Craymer, a former top budget aide to two governors, said it’s “untrue” to say the cuts to school property taxes four years ago caused the structural deficit.

Sure, a revised business tax has yielded less money than expected, Craymer argued. But growth of sales tax receipts and other revenues more than offset a business-franchise tax “gap,” he said. And that higher-than-expected cost of the tax swap “has been built into the budget base,” he said.

Craymer conceded that lawmakers last session used up $3 billion stashed away in a Property Tax Relief Fund. But he said that’s the only part of the package that swells the structural deficit — by $1.5 billion a year, you could say, not the $4 billion to $4.5 billion a year by which the cost of property tax cuts exceeds revenue from higher business and tobacco taxes. And he says a much heftier part of the state’s structural shortfall for next session was caused by one-time spending of federal stimulus money.

By affirming Craymer’s testimony, Otto apparently is saying that the 2006-induced piece of the structural deficit is only about one-third as bad as critics contend.

Okay, so to accept Craymer’s argument that there is no structural deficit, you have to first ignore the billions of dollars that were set aside during the flush session of 2007, which paid for the cuts beyond what the business margins and other new taxes were expected to bring in for the 07-08 and 09-10 biennia. You then have to accept that sales tax revenues, which have been at rock bottom for the past two years and which were not included in the tax swap calculus by the authors of that legislation in 2006, have covered the gap that the margins tax has left. Finally, if you accept all that, you still have to wave your hands at the $1.5 billion shortfall that remains, since it’s only a third of what all those negative nellies have been claiming. I don’t know about you, but I’m thinking Villarreal wins on a TKO. You can see Villarreal’s letter to Otto here, and an earlier letter after the draft version of the committee’s report came out here.

Prison health care

Just another dimension to the complex budget picture.

An early casualty of impending state budget cuts could be the health care contract that serves most of Texas’ 154,000 prison convicts.

Top officials at the University of Texas System, whose Galveston medical branch provides the health services, are threatening to cancel the contract because legislative budget-writers will not fully cover a projected $82 million shortfall.

[…]

Squeezing out enough additional money to make a significant difference in an $18 billion budget gap will mean that very little will be completely spared the knife, said Dale Craymer, president of the Texas Taxpayers and Research Association , a business-backed research group.

That includes public education, which makes up nearly half of the state’s $81 billion general fund, even though many lawmakers consistently declare education is top priority.

“The magnitude of the budget problem is so great that it is difficult to get from here to there when you take half the budget off the table,” Craymer said.

But cutting school funding and prison funding comes with legal land mines because any changes will need to abide by past court orders, Craymer said.

If your initial reaction to this story is one of indifference – “Who cares if these guys get health care or not? They’re in prison!” – I can understand where you’re coming from. I could remind you that there’s a higher authority that speaks to that question, but I’ll simply note that this is one of those places in which the state’s hands will be tied by federal law and litigation. Dropping this simply isn’t an option, and I suspect there aren’t any cheaper solutions. Which means that other budget items will be targeted instead. It doesn’t take long from there to get into stuff you really don’t want to cut, like public education. To paraphrase Dale Craymer, the magnitude of the budget problem is so great that it is difficult to get from here to there when you take half your options for how to deal with it off the table. Grits has more.

Feel the fees

The Trib reviews the bidding from the 2003 legislative session as a preview for what’s to come next year.

The 2003 session most closely mirrors the current scenario — a national recession, a previous budget balanced with the use of one-time funds — and remains fresh in political minds. Then, the Legislature turned to deep budget cuts. Talmadge Heflin, the House appropriations chair in 2003 and the current director of the Texas Public Policy Foundation’s Center for Fiscal Policy, says that when projected revenues and expenditures are out of sync, “The task is not to get revenue up. It is to get expenditures down.” Social services like education, public safety, and health and human services took the brunt of the blow. Money from the Rainy Day Fund and relief from the feds (both chipped in more than $1 billion) helped. But that’s not all.

“They certainly didn’t do it on budget cuts alone,” says Dick Lavine, a senior fiscal analyst at the nonpartisan Center for Public Policy Priorities, which released a review of the 2003 budgeting process this week. Balancing the budget, he says, also required “new revenue, creating the appearance of new revenue, and cost-shifting.”

The “appearance” of new revenue comes from so-called smoke-and-mirrors provisions that, for example, shifted an $800 million payment to the Foundation School Program into the next biennium and deferred payments to the Employees Retirement System and Teacher Retirement System.

Cost-shifting refers to transferring the burden of paying for a service from the state government to its beneficiaries. The best-known example from 2003 was the deregulation of tuition at public universities. Those with state-subsidized health insurance also had to shoulder higher costs — including $790 million in new co-pays, premiums and other costs.

Measures that actually raised new revenue included entering a multi-state lottery (projected to bring in $102 million), establishing a quality-assurance fee for facilities for the developmentally disabled ($54 million) and hiring more auditors to get the most out of the existing taxes ($122 million). Other additional fees included a $1,000-a-year charge for three years for motorists’ first driving-while-intoxicated conviction.

“The bottom line,” says Dale Craymer, president of Texas Taxpayers and Research Association, “is that there’s lots of ways to raise revenues without raising taxes.” Craymer acknowledges that a tax increase — generally a political loser — might be the best way to raise revenue but says it’s untenable in this economy.

Let’s pause for a moment to give thanks that Talmadge Heflin is no longer in the Lege. Perhaps he’s forgotten that some of those budget cuts he helped push through led to a number of his fellow Republicans subsequently losing elections; just ask Arlene Wohlgemuth, for one. Bad public policy isn’t always bad politics, but thankfully it was in this case.

The simple reason why fees are more popular with the Lege than taxes is that fees hit fewer people, and in most cases they hit the people who have the least influence. Tuition deregulation is probably the biggest exception to that, and it’s why many candidates and officeholders have campaigned on re-regulating tuition ever since. And of course some fees, like the Driver Responsibility Program, were utter failures in their goals, revenue and otherwise. Not that any of this will matter, since “tax” has become a four-letter word. And don’t be surprised if we’re in a similar position in 2013, since nothing that is likely to be adopted will be anything more than a band-aid. EoW reaches back to 2006 for more.

How are you going to balance the budget?

If you’re thinking that the candidates for Governor are being a bit vague about how they’re going to deal with the looming budget shortfall, you’re not alone.

Texas expects a shortfall of at least $12 billion when lawmakers meet to write the next budget, but major candidates for governor have few specifics on how they would exert their leadership to close the gap.

“The silence is deafening,” said House Ways and Means Committee Chairman Rene Oliveira, D-Brownsville. “None of the candidates are really coming out with a plan or even an awareness of how bad the situation is.”

Asked how they would close the budget gap, the five major candidates suggest largely unspecified spending reductions.

[…]

The five’s suggestions leave more blanks than specifics as lawmakers prepare for a projected minimum budget gap of $12 billion to $13 billion, before accounting for expected population growth.

“You can’t just get there with a simple brush stroke. It’s going to require a fair amount of spending cuts, and probably they’re going to have to look at other things they can do to raise revenue as well,” said Dale Craymer, of the Texas Taxpayers and Research Association.

Yes, raising revenue has to be part of the solution, despite what the know-nothing types would like to make you believe. I’ll defend the lack of specificness to some degree, in that I’m sure everyone is hoping that the picture will improve a bit in the next few months, and no one wants to come across as too alarmist. In addition, it’s really the Legislature’s problem more than it is the Governor’s, since it’s the Lege that writes the budget. The Governor can effect some cost savings via the line-item veto, but he or she would be doing so to a budget that’s already been certified as being balanced. Mainly, the Governor can provide big picture guidance, plus the threat of vetoing a solution he or she deems unacceptable. As far as that goes, we really don’t know what’s truly off the table – Rick Perry, for example, has waffled quite a bit on the subject of the gas tax – which leaves us with this largely theoretical conversation.

Let’s also talk about casinos for a minute, since they were mentioned in the story. I’m at best ambivalent about an expansion of gambling in Texas, whether that means casinos or slot machines at racetracks or whatever. I probably would vote against any constitutional amendment authorizing an expansion of gambling, but I probably wouldn’t crusade against it, though I do reserve the right to change my mind about either of these. My point here is simply that whatever the merits of casinos – and as you know, I am skeptical that they will do much to benefit Texas’ bottom line – they will not be a part of the solution for the 2011-12 biennium. If the Lege manages to pass the joint resolutions to put an amendment on the November, 2011 ballot, and if that manages to get ratified by the voters, then casinos – if that’s what gets authorized – still have to be built. Slot machines at racetracks can happen more quickly, but it still won’t be instantaneous. I could imagine there being some revenue from expanded gambling for the 2013-14 budget, but that won’t help any next year. Again, gambling is not a fix for the next budget. Beyond that, maybe, but we still have to make it through the next two years.

One more thing:

Senate Finance Committee Chairman Steve Ogden, a Bryan Republican facing a primary challenge, said he was not too worried about whether the candidates have budget ideas. Although he said governors have significant powers, including the line-item veto, and their suggestions are welcome, he noted that lawmakers craft the budget.

“At the end of the day, governors don’t write the budget,” Ogden said. “If they can’t think of anything, it’s not essential.”

I note that mostly as a reason to link to this Trib story about Ogden’s primary race, in which he faces a challenge from the right from someone who doesn’t really have a firm grasp on what’s in the budget. This pretty much said it all to me:

In an apparent attempt to solidify his more-conservative-than-Ogden bona fides, Bius has made the elimination of “generational welfare” a centerpiece of his campaign. “If we begin requiring drug testing for those trying to get cash payments for welfare and require them to be citizens of the United States and Texas, it’ll go along way toward solving our social problems,” Bius says. “My momma told me, you get what you pay for. If you want drug addicts, give them money. If you want illegal immigrants, give them money.”

Ogden brushes off the idea as cynical stereotyping of the poor — and wholly unnecessary in a conservative state that already has among the nation’s stingiest public doles. “It bothers me, because it’s kind of a code word,” he says. “I’m not sure exactly what he means by it, but Texas is the least-generous state when it comes to welfare. The majority of people on it are children. Another large category is people in nursing homes. Neither of these groups fit into the category of ‘generational welfare.’ … We have not incentivized anti-social behavior, but when you’re dealing with unemployed mothers with children, you have to do something. You can’t just say, ‘It’s not our problem – good luck.’”

Yes, it is a code word, and not a particularly subtle one. It’s weird being put in the position of defending Steve Ogden, who’s far too conservative to be the guy I want writing the budget, but that’s the state of the GOP these days. The alternative to Steve Ogden is someone who lives in a fantasy world. The sad thing is that Ogden’s experience and understanding of reality won’t be an asset for him in his race.

Sales tax collections keep going down

That sound you hear is the budget writers gnashing their teeth.

In more grim news for Texas’ budget, state Comptroller Susan Combs said Friday that monthly sales tax collections are down again, the eighth straight month of double-digit declines.

Collections for January — the period that reflects December holiday shopping — were down by 14.2 percent compared with a year ago.

[…]

“Eight consecutive months of double-digit declines — there is no parallel for what we’re seeing with the sales tax,” said budget expert Dale Craymer, president of the Texas Taxpayers and Research Association.

You wonder what effect all this will have on the Governor’s race. Is Governor Perry going to keep running ads that proclaim what great fiscal shape Texas is in? How are any attacks he’s going to make on Houston’s fiscal shape going to play when contrasted with this?

Speaking of Houston’s fiscal shape, I forget where I saw this, but Houston’s sales tax collections were equally crappy in January, and we got back a smaller amount from the state than last year. Expect the next communication from Controller Ronald Green to be a glum one.

Combs has predicted the state will collect $21.2 billion in revenue from the sales tax in the fiscal year that began Sept. 1, slightly more than the $21 billion collected in fiscal 2009.

So far, however, collections are about $1.2 billion below the amount that had been collected by this time in the last fiscal year.

For the sales tax to bring in as much this year as originally projected, Craymer said, it “would have to grow by 11 percent for the rest of the fiscal year, and clearly that’s not going to happen.”

Sales tax collections represent more than 56 percent of the state’s tax revenue and more than 24 percent of overall revenue.

Lawmakers already expect to face a funding gap of at least $12 billion to $13 billion when they meet in regular session in 2011 to write the next two-year state budget. That figure does not account for new spending to meet the demands of a growing population.

It’s gonna be ugly. And all this is without taking into account the long-term structural deficit that was created by the irresponsible, unaffordable property tax cut of 2006, for which the business margins tax is a completely inadequate replacement. Somebody needs to be talking about this, because it is not sustainable.

One small glimmer of hope:

Craymer said Texas could be eligible for some additional stimulus money if federal legislation passes.

The irony of that just kills ya, doesn’t it?

The Speaker knows what we’re up against

I’m sure House Speaker Joe Straus is looking ahead to the 2011 session and stockpiling the Maalox and Excedrin.

Among the “interim charges” to 31 committees handed out by Speaker Joe Straus, R-San Antonio – issues for lawmakers to study and consider – are examinations of tax changes that could boost state revenue and reinvigorate Texas’ flagging economy.

The speaker’s study list includes seeing if some state tax breaks have outlived their usefulness, though he didn’t specify which ones. He also asked whether incentives – presumably tax breaks – would stimulate manufacturing, energy production, and the film and music industries.

On the spending side, while Straus sounded a note of compassion for the needy, he also appeared clearly alarmed at possible overspending and waste, especially in health care. He ordered budget-writing and social services committees to look at chronic delays at state eligibility offices that have frustrated many Texans applying for food stamps.

[…]

Dick Lavine, senior fiscal analyst for the Center for Public Policy Priorities, which advocates for low-income Texans, welcomed Straus’ scrutiny of big tax giveaways.

Lavine, a former House tax policy researcher, said the exemptions study could be “a way to start plugging the holes” in Texas’ revenue base.

“We have a tax system that is filled with exemptions that may at one time have made sense, but nobody has gone back to look at them to see if they’re still accomplishing their objectives and are still the most cost-efficient way of getting to those objectives,” he said.

You know what my preference is, but there’s merit to this approach as well, even if it’s unlikely to be able to fill the gap. But maybe it’s more likely to happen than rolling back the property tax cut, even a little bit. It’s a good idea regardless, as long as we keep it in perspective. I just hope the will exists to follow through.

Did I mention that we’re facing a revenue shortfall?

In case I haven’t beaten this horse beyond recognition yet, the stimulus money really saved our budgetary bacon this year, and without something equally dramatic, we are so screwed in 2011.

“It was a deficit budget as written,” said Scott Hochberg (D-Houston), who chaired the Appropriations subcommittee on Education.

As soon as legislators knew how much money the state would have to spend, they realized the state was about $4 billion short of covering the proposed costs.

The federal stimulus money came to the rescue. In addition to the one-time expenditures typically associated with stimulus — roads, buildings, etc. — the Legislature also used the money to cover ongoing costs, particularly for education and health and human services.

But in order to avoid cutting education money next session, legislators will have to find a way to make up for this year’s missing education money as well as the money for growth.

“We sort of had a $5 billion hole that we covered with $8 billion of stimulus money,” said Dale Craymer, president of the Texas Taxpayers and Research Association.

[…]

“Primarily the stimulus in Texas was used to just move dollars around and you didn’t have the level of benefit that the stimulus was designed to create,” says Rep. Jim Dunnam (D-Waco), chair of the Select Committee on the Federal Economic Stabilization Funding, the formal name for the stimulus money.

Dunnam argues that the Legislature created a deficit in education when it was actually spread throughout the budget.

If he’s right, that may prove to be a problem for educators. Next session, legislators will have to find a way to balance the budget, and this time, they’ll probably be without a stimulus package. Basic costs in education will be even higher as more kids join the ranks of students.

I’ll say it again, because I never get tired of saying it. The simplest solution to this problem is to roll back the unaffordable, irresponsible property tax cuts of 2006 that guaranteed we’d have a structural deficit in the budget for years to come. Given the creation of the business margins tax, we can probably get away with rolling back only a part of the property tax cut, so that there would still be a net reduction in rate. But that fifty-cent reduction was and is a complete budget-buster, and it has to be tamed. There’s no other truly viable option.

But wait! I hear you cry. What about the rainy day fund? That could cover the shortfall for 2011, and if we’re lucky we’ll have grown our way out of the problem by 2013. Putting aside the need for a supermajority to tap into the RDF, there’s a teensy weensy problem with this: The rainy day fund is smaller than you think.

[Texas Comptroller Susan] Combs revised her estimate for the so-called rainy day fund to $8.2 billion, down from her January projection of $9.1 billion.

The primary culprit is falling natural gas prices, which will lead to less production and thus less tax revenue.

Guess we better start hoping harder. Phillip has more.

The budget mess that awaits the next Governor

We already know that the next Legislative session will be a whole lot of no fun thanks to declining revenue estimates and our structural deficits. Here’s a further illustration of the problem.

The current state budget is financed with $12 billion of one-time money (add to the stimulus money several billion the Legislature wisely socked away two years earlier). Some refer to this as our “structural gap.” That gap will have to be filled. On top of that, add several billion for Medicaid growth (and perhaps much more depending on what happens with national health care reform), a couple hundred million for prisons, and a few hundred million more for employee health insurance and retirement. Higher education won’t be left empty handed, either, so throw in another half billion dollars.

Add another billion to public education to pay for the promises in last session’s education bill, and maybe even more. Since the state bought into a system of equalized funding, state aid rises and falls as local property values change. With the economy now suffering, property values will likely stagnate or fall (although your local chief appraiser may disagree). School districts won’t be as wealthy. The demands on state aid may actually increase, driving up the state’s public school budget even more.

Granted, there should be some revenue growth, but with most economists projecting a slow, jobless recovery, it may be muted. If so, revenue growth at best may cover spending growth. That leaves the nagging problem of how to deal with that “structural gap.”

Tax hikes? Not likely.

A simple rollback of the budget-busting property tax cuts from the 2006 special session would suffice. Heck, you probably wouldn’t have to roll it all the way back – the business margins tax does take in some money, just not nearly enough. That’s not likely, either, but it is the simplest and most straightforward solution. Remember, the billions that the Lege “wisely socked away” earlier was general revenue surplus whose sole purpose was paying for those tax cuts. No surplus, no money to pay for those tax cuts. Seems to me anyone who wants to call themselves “fiscally responsible” would demand deficit neutrality from the actions taken in 2006 by the Lege. The alternatives are unacceptable. I sure hope we have a nice, long debate about this as part of the gubernatorial campaign. As of right this minute, we have just barely enough revenue to cover all our expenditures. It’s time to start talking about what the plan is for if and when that is no longer the case.

The biennial budget shuffle

In addition to billions of stimulus dollars, the budget this year relied on some old tricks to get certified as balanced.

Nearly $3.7 billion in levies collected for everything from fighting air pollution to helping low-income people with their electric bills to funding trauma care will instead help balance the state’s upcoming two-year budget.

The money, for the most part, is collected through fees and fines that legally are dedicated for a particular purpose. If lawmakers do not spend the money on the dedicated purposes, however, the balances become available to spend on other programs.

“It’s kind of like having your (household) budget laid out and spending part of your food money on entertainment, or vice versa,” said Dale Craymer, chief economist of the Texas Taxpayers and Research Association, who has worked for a state comptroller, two governors and as the Texas House fiscal analyst. “It’s a backdoor way to undedicate the money.”

It’s pretty much the same thing every two years. We have a bunch of dedicated funds, which levy fees on certain things that are supposed to pay for certain specific items, then for a variety of reasons we decide to use some of that money for other things. It would be more honest to dedicate the money to general revenue, and it would be fairer to admit that we do this sort of thing because we refuse to adequately fund the things we want to pay for via the taxes we already collect and to deal with that, but we don’t. And so the shell game keeps getting played.

In some cases, unspent balances in dedicated accounts have grown to hundreds of millions of dollars over years.

For example, the System Benefit Fund has accrued more than $670 million. The program imposes a fee on electricity customers in competitive retail markets, including Houston, Dallas-Fort Worth and most of the Rio Grande Valley, to provide a May-September discount for low-income customers.

[…]

“We’re generating funds for a good purpose. We’re diverting the funds, without telling people, for general purposes. And then we say we’re not taxing. Well, government is lying,” said Rep. Sylvester Turner, D-Houston, who called such levies amount to “a tax by misrepresentation.”

Turner is a big advocate of the System Benefit Fund, which he tried but failed to restore full funding to in 2007. Especially in a summer like this one, it would have been nice for there to be help available for folks who can’t afford their utility bills, but as has often been the case, it wasn’t a priority.

Senate Finance Committee Chairman Steve Ogden, R-Bryan, said he understands the argument, but “if you are going to criticize that, then go tell me what other parts of the budget I’m supposed to cut. … The choice to complain about it is just hot air.”

Alternatives, he said, would be raising general taxes or dipping into the state savings account known as the rainy day fund, which budget-writers expect to need in the future.

“The long and short of it is, we have to do this in order to balance the budget,” Ogden said. “I guess this was the least objectionable of the four alternatives.”

The situation points up a major public policy issue, he said.

“Our tax and revenue system is pretty messed up, and a case can certainly be made for a major overhaul of our tax structure,” Ogden said.

I would have argued that the rainy day fund was the right way to go, as I was arguing for the budget in general before the stimulus funds saved the day. But Sen. Ogden is correct that our system is broken and needs fixing. He’s not the guy I want fixing it, mind you, but he’s right about the problem. As with many other things, that isn’t going to happen until we get a change not just in leadership but in our philosophy of governing. I can’t say I see that happening any time soon.