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From Governing’s
And yet there is plenty of evidence to support his concerns. The state’s comptroller, Carole Keeton Strayhorn, long maintained that Texas would come up short about $5 billion over the next biennium. But just before Christmas, she conceded that the number “could grow significantly larger.” With burgeoning caseloads in Medicaid and Children’s Health insurance — and the highest percentage of low-income uninsured children in the country — Texas may be short by as much as $10 billion to $12 billion. Texas has no personal income tax, and its sales tax sits uncomfortably near the top of the U.S. charts. As a result, its structure is extremely regressive. A loophole in the business franchise tax allows corporations to evade it with relative ease by restructuring into limited partnerships. The combined result is a state fiscal system whose problems stretch far beyond any current ones caused by the national economic slump. “We’re starting to hemorrhage,” Ratliff warns.
As if all this weren’t enough, another tax problem looms at the local level. Many of the state’s school districts have run into a mandated cap on property taxes — and yet they need more money to pay for teachers and books. One school district in Galveston County, for example, has been forced to cut its budget for supplies by 30 percent and lay off 60 employees over the past eight years. The state might be expected to help, but it doesn’t have any money to spare. “The idea of simply raising the cap may seem appealing,” state Senator Teel Bivins told the Houston Chronicle recently. “But that would take us in the wrong direction. We already have too much reliance on property taxes.” There are some relatively simple solutions to the problem — it’s just that they aren’t simple politically. Texas could enact an income tax; it is one of only seven states that doesn’t have one. Or it could broaden the base of its sales tax, which currently brings in relatively little revenue from services and is laced with special-interest exemptions, some of them so old that it’s hard to remember why they exist — such as the exemption for ice on shrimp boats. But either of these changes would run up against a fundamental political reality. Republicans have taken control of the legislature for the first time in more than a century, and they do not want to mark their arrival in power by raising taxes — on anything. “I am a Republican and you’re talking about my party,” Ratliff says. “The idea that they’ll pass a tax bill doesn’t compute.” Of course, it would be possible to do something constructive without creating or even broadening any major source of revenue. The state could close the “limited partnership” loophole in the franchise tax. But even this seems unlikely. “Even though changing that would really be closing a loophole, constitutionally it would constitute a tax bill,” Ratliff explains. As recently as early December, state Representative Tom Craddick, the incoming House Speaker, insisted that new taxes aren’t needed. He said his intuition as a longtime businessman told him that the economy was bouncing back and the shortfall would soon shrink. Leaders throughout the state continue to argue that much, if not all, of the problem could be solved on the spending side. “We’re not convinced that spending less money per student, per prisoner, per driver’s license, necessarily means less service,” says Bill Allaway, president of the Texas Taxpayers and Research Association. “There’s still a lot of room to improve service, without costing as much money.” Of course, he said that when the accepted figure for the shortfall was $5 billion. Even then, veteran legislators didn’t believe efficiency could balance the books. “When people say we haven’t scrubbed the budget, they haven’t been there,” one of them says. “Texas is now very low in the amount of state spending per capita. That, in itself, says we’ve scrubbed the budget pretty hard.” Generally speaking, tax administration in Texas is good. The state is one of only three to produce a “tax incidence report,” which shows legislators precisely how any given tax affects various components of the population. There is a tax ombudsman who handles many questions that might otherwise wind up falling between the cracks. Sales tax returns can be filed electronically, and many rulings on revenue questions are available on the Internet. Technology has helped in the audit area, too. Data warehousing has been employed to look for areas where puzzling discrepancies exist within an industry. “That has raised well over $100 million over the last three or four years,” says Deputy Controller Billy Hamilton, who heads up the effort. “It’s one of those self-funding deals that legislators like.” The most serious enforcement problem lies with the tax on business personal property. The state requires that businesses report the location and estimated market value of their equipment, furnishings and similar assets. But there’s no penalty for not bothering. As a result, says Dick Lavine, of the Center for Public Policy Priorities, “many smaller businesses don’t report that information, and the only way to go after them is to put an artificially high level on the property, force the company to protest, and then, when they appeal, you get the truth out of them.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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think we’re heading for a train wreck in Texas,” Bill Ratliff says. A state senator and former lieutenant governor, Ratliff is known for his candor. But even so, it is a startling thing for a powerful official to say.