Senate Leaders: Fix State Revenue Now or Pay Later

Texas needs to address its structural deficit during the current session, or it will face even deeper financial problems in two years than it faces today, Senate leaders said Tuesday afternoon.

"When you have a system where you have statute after statute that forces you to spend more and more money and then you enact statutes that require you to collect less and less in taxes, you've got a system that's fundamentally unstable and sooner or later you're gonna have to fix it. I would suggest we start soon," said state Sen. Steve Ogden, R-Bryan, chairman of the Senate Finance Committee.

Ogden said business taxes will definitely be part of the conversation. If the House does not take action to address that, Ogden suggested the possibility of a constitutional amendment before voters that may authorize the state to go back to the old way it used to collect the franchise tax, sometimes called a "margin" tax. 

"The biggest component is the failure of the business tax to perform as some predicted," he said after Tuesday's Senate session. "I think businesses pay most of the taxes in Texas now, and the issue is not to single out businesses as some sort of villain. ... The issue is having at tax system that — in my opinion — is uniform, and equitable and as low as possible, and a lot of my criticism isn't particularly directed at any one business. But as we continue to carve out exceptions over this policy that taxes should be equal and uniform, we're basically subsidizing one group at the expense of everybody else. As a matter of philosophy, I don't like it."

Ogden's committee is preparing to review and revise House Bill 1, the state budget for the next biennium, which proposes $23 billion in cuts. He said his committee is still looking for extra revenue to close some of that gap. Even so, he says there is only so much the Senate can do because revenue bills have to originate in the House.

"There's a lot in motion right now, but one of the fundamental underlying issues in the budget approach that both the Senate and the House is taking is, 'What are you going to do about the structural deficit?' Basically, neither house is answering that question satisfactorily right now," he said, adding that without a change in statute, the state will owe public schools $7.8 billion more than the House budgeted.

The "structural deficit" he's talking about started in 2006, when lawmakers approved a package of tax increases — including a major revision of the state's primary business tax — and allowed local school districts to cut property taxes. But the property tax cuts cost more than the taxes raised. The state comptroller's experts have told lawmakers that the difference amounts to about $10 billion every two years. 

Standing alongside Ogden, Lt. Gov. David Dewhurst commended the House for moving the budget process along. He also seemed to take a measured and cautious approach on the business tax, which he warned back in 2006 would be unreliable. 

"I think ultimately, that tax ought to be changed. Whether it should be increased or not is a different subject," he said. 

In an interview with the Tribune on Monday, House Appropriations Chairman Jim Pitts, R-Waxahachie, said he does not anticipate dealing with the business tax issue this session. Many members of the House continue to advocate for more cuts and no tax increases. 

"I think we need to study it during the interim," he said. 

Unlike the House budget bill, the Senate Finance Committee has already adopted a subcommittee's report that would put $6 billion back into the public education budget. Another subcommittee has identified about $4 billion that could be returned to Medicaid funding. Meanwhile, a subcommittee charged with finding $5 billion in non-tax revenue is expected to release its findings any day. 

"We're not kicking the can down the road," Dewhurst repeatedly said. Those words seemed in stark contrast with Ogden, who plans to get the budget bill through the finance committee by Easter, and to the floor shortly after. Ogden said senators are still trying to figure out exactly how they're going to pay for the budget, especially since the state is statutorily required to pay money owed to public schools through set formulas, regardless of whether it has enough money to pay for it. 

"All we've done is we've postponed and delayed and deferred our obligations into the next biennium," he said. "You think we've got a problem? Just keep doing that with the current budget and look at the car wreck you're going to have in 2013."