Castro: Start by Casting Aside Wishful Thinking

Budget hearings have been under way for only a few days, but it’s already clear that $72 billion in general revenue won’t be nearly enough to meet the needs of Texas. Instead of cutting down to the revenue estimate, the 82nd Legislature must take a balanced approach that uses our reserves and adds revenue. And we have to start by casting aside wishful thinking; we are writing the 2012-13 budget, with higher costs and increased enrollment in education and health care services — not some past budget. (In fact, the 2006-07 budget is the most recent one that could be covered with $72 billion in general revenue. That’s also the last budget before $14 billion in local property tax reductions were added to the state appropriations act; more on this later.)

Future needs — what’s called “current services” levels — require at least $99 billion in general revenue. With only $72 billion available, the revenue shortfall endangering state services is $27 billion. That $99 billion does not include any “wish list” items. Agencies requested almost $107 billion in general revenue to expand or improve state services, but only current services costs for education, health care and prisons are included the $27 billion shortfall calculation.

So what’s the right way to close a 27 percent gap in one of the lowest-spending, lowest-taxing states in the nation? What options do we have that won’t send the Texas economy into a tailspin?

Use the Rainy Day Fund: all $9.4 billion. It’s officially called the Economic Stabilization Fund for a reason. State budget cuts could easily lead to layoffs of more than 100,000 school district employees, costing another 140,000 private-sector jobs. Can the Texas economy afford to lose a quarter of a million jobs? Legislators overwhelmingly agreed that tapping the fund was the right thing to do in 2005 (HB 10, Pitts), 2003 (HB 7, Heflin) and earlier sessions when it was raining nowhere near as hard as it is now.

Smoke and mirrors: $5 billion. Delaying July-August 2013 payments to school districts could push $3.5 billion in costs into fiscal 2014 and buy much-needed time to see if state revenue recovers faster than is currently forecast. Yes, this could cause a few school districts some cash-flow problems, but not as much as the almost $10 billion cut to the Foundation School Program proposed in the House budget draft. Where possible, postpone one month of payments to Medicaid and other providers, along with other large payments to non-general revenue accounts and pension systems, or speed up collections of general revenue so they happen in 2013. Anything that buys time and can be undone in the future is preferable to cuts today. (Note: This does not include cutting low-income utility assistance and other services funded by dedicated general revenue to help certify the budget; those go in the category of “cuts today”).

New revenue options: $12.5 billion. Enforce existing tax laws ($500 million). Enact a hospital quality assurance fee ($350 million) to help match federal Medicaid dollars. Eliminate or reduce outdated tax breaks — for example, the high-cost natural gas exemption ($2.3 billion a biennium) and the sales tax timely filer/prepayment discounts ($150 million). Enact a Healthy Texas Tax Bill that boosts the cigarette tax by $1 a pack ($1.5 billion biennially), taxes sugar-loaded drinks ($2.5 billion biennially) and raises taxes on beer ($100 million) and other alcoholic beverages. Expand the sales tax to cover certain business and professional services ($5 billion). 

What should we do beyond the session? Part of the revenue shortfall is due to the Great Recession. The recession will be temporary, so the revenue losses it caused can be replaced with the Rainy Day Fund or “smoke and mirrors.” But the Legislature must also plug the hole caused by 2006’s school property tax cuts. The structural deficit caused by the failure of franchise tax changes to generate anywhere near the local tax revenue lost by school districts has created a $10 billion biennial hole in the state budget. Permanent structural changes (such as closing the high-cost gas tax loophole or expanding the sales tax base) will be needed to fix this structural deficit. If we don’t take a balanced approach now, our longer-term problems will be that much harder to solve.

Eva DeLuna Castro has been a budget analyst at the Center for Public Policy Priorities since 1998. She worked as a researcher and writer at the comptroller’s office for six years.