Texas Budget Source

Public policy gurus led the members of the Texas House Select Committee on Fiscal Stability through the bowels of the state budget shortfall yesterday, but not easily.

It became clear committee members wanted to approach the shortfall with utmost vigilance and make no assumptions. While members politely nodded along with philosophy-based suggestions, they pressed for hard numbers, examples of implementation successes or failures from other states, and realistic measures that could fit nicely into legislation.

The public hearing was designed specifically to address the state’s budget obligations, and whether the shortfall is due to the current recession -an outside force- or more structural problems with the tax structure and budget such as overspending or a lack of sufficient revenue.

Such a broad agenda permitted two fiscal experts to dangle their carrots from very different ideological backgrounds. While both admitted there was no “silver bullet” for conquering a budget shortfall that has been projected as high as $18 billion, one urged legislators to restructure the tax system to include a new state income tax, while the other recommended extensive spending reductions.

Dick Lavine of the liberal Center for Public Policy Priorities was of the notion that it’s time “again to start looking into real fundamental change,” just as Texas did in the late 80s and early 90s after revenue from oil prices collapsed. He pointed to that era as the last time the state faced the kind of structural problems it faces now.

“We completely restructured our tax system from reliance on oil tax to reliance on consumption taxes,” Lavine said. Doing so, in his view, gave Texas a better school finance system, economy, and tax system that that worked for at least 15 years with few problems.

For that long-term fundamental change, Lavine maintained that we must look at what funds state services, getting at the need to come off of consumption-based taxes to more equitable means, notably a state income tax.

He also suggested increasing revenue by eliminating exemptions in the tax code for certain people.

“By raising taxes if you use the revenue correctly, you can end up better and build the basis for ongoing prosperity,” Lavine said. Besides spending cuts, the state can get revenue by changing who is taxed and how much they have to pay in taxes, creating new taxes, and spending from the state’s reserve fund, known casually as the Rainy Day Fund.

Increased reliance on federal funding was another option, calling these “dollars we deserve” which he illustrated as lying on the table just waiting for the state to claim. He admitted that a lot of these required the expenditure of state dollars.

“You know how it works; a lot of them will give you three or five dollars for every state dollar you spend.”

Talmadge Heflin of the conservative Texas Public Policy Foundation took the opposite approach. (Texas Budget Source is a project of the Texas Public Policy Foundation.)

“You have a choice of cutting spending or raising more revenue, or some combination like we just heard. I think you should look at cutting spending,” he said. “When you take more money out of the private sector, you curtail the creation of jobs.”

Heflin wants the legislature to adopt a zero-based budgeting process, similar to the one he used as chairman of the budget writing House Appropriations Committee in 2003 to close a $10 billion shortfall.

Addressing the budget shortfall, according to Heflin, can be handled just as a family would address the same problem within their household. He said using some of the Rainy Day Fund be proper, but spending the entire balance would be irresponsible because it “isn’t prudent to spend all of your savings when the amount of time it will be needed is undetermined.” Instead, he said a careful balance of spending cuts and Rainy Day Fund use needs to be made.

The committee’s vice chairman Sylvester Turner (D-Houston) expressed concern that cutting agencies and eliminating unnecessary programs might only save around the edges.

“That is a long way to make up a $15 billion shortfall,” said Turner, asking for direction on other aspects of the budget that would bring in a much larger sum.

Heflin said if they use a building block approach starting with zero and building the budget based on needs for agencies up from there, they have the birds-eye view needed to eliminate and consolidate programs, and to resist the temptation to raise taxes. He maintained that making small cuts across the board will lead to bigger savings.

“We don’t believe any amount of saving is too small. Any dollar you resist spending is a dollar saved, and you only get to billions if you add small amounts together.”

Heflin suggested legislators cut spending by examining programs on a priority basis. This starts with funding what the constitution requires, then funding required by statute. He said this process allows legislators to see the state’s priorities very clearly, and make any changes to statute needed to cut unnecessary spending.

Rep. Tan Parker (R-Flower Mound) asked Heflin about the key elements that led to the 2003 success.

“We enlisted the support of agencies to partner with us to make reductions with us,” Heflin said. The agencies were eager to readdress their mission to see if they were truly serving the taxpayer or not, and eliminate the places where they had drifted away from their core responsibilities as outlined in the constitution.

During the questioning of Lavine, committee members were quick to tiptoe around any mention of a state income tax, which could restructure Texas’ economy entirely.

Rep. Michael Villarreal (D-San Antonio) acknowledged Lavine’s suggestion for a state income tax, but asked if he had any other recommendations that would allow Texas to evolve the current structure in a direction that is not as different.

“We need to maximize the effectiveness of the current tax structure,” Lavine said. “Since we are so reliant on the sales tax, we have to make it the best sales tax that covers the broadest range of economic activity so as the economy grows state tax revenue will grow.”

Villarreal asked if other states have increased tax rates in concert with public referendums or other means of public permission. Lavine said he did not know.

Rep. Angie Chen Button (R-Richardson) called the mere mention of a state income tax during a time where job creation was so vitally important “a very, very scary thought.”

The committee’s chairman, John Otto (R-Dayton) got straight to the point by asking a question he said he had the opportunity to ask Federal Reserve Chairman Ben Bernanke:

“Are you recommending that the legislature in the upcoming session look at raising taxes in the current economic times?”

Lavine said, “I’m saying we need a balanced approach at balancing the budget and can’t do it with cuts alone. Look at the Rainy Day Fund, look at the accounting measures, and look at new revenue. The details we’ll get to.”

Heflin expressed opposition to the idea of any tax increase- especially the creation of an income tax, citing research findings that states with a lower tax burden have better economic results than those with higher taxes.

The committee members were eager to learn more about what other states were doing to cope with the recession and attract business, and Rep. Jim Keffer (R-Eastland) requested benchmarking data that would pinpoint exactly where Texas stands among them. Button magnified that request by requesting a look at where Texas stands on a global basis as well, taking into consideration that in this day and age when the state competes, it has the potential to attract businesses from all over the world.