Analysis: State Government is Expensive, No Matter How You Pay

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Cutting prices can be expensive. The Texas Department of Transportation offered up the most recent example of that, answering the Legislature’s question about what it would take to make the state’s toll roads free.

Turns out it would be pretty damned pricey. The state borrowed $21.1 billion to build those roads (some construction is still underway) and expects to spend a total of $38.8 billion paying off that debt. James Bass, executive director of TxDOT, told state lawmakers it would cost about $30 billion — that’s his educated guess, mind you — to cash out this year.

The upside? Free highways. But who has $30 billion sitting idle?

This sort of fantasy finance is not new.

Lawmakers wanted to kill the state’s unpopular business franchise tax last session, but they would have had to give up $4.7 billion in state revenue every year. That would mean, in turn, either coming up with money from somewhere else or cutting the same amount from current state programs.

Both of those things, it turned out, were less palatable than the franchise tax. They settled for a significant cut of 25 percent, but most of the tax — along with the government programs it supports — remains in place. State officials expect it to still bring in about $3.5 billion annually.

And they were able to make that cut last year, in large measure, because state government was flush with a vibrant economy boosting sales taxes and an oil and gas boom boosting others. Lawmakers had the ingredients for a popular concoction: cutting taxes without cutting programs.

They’ve promised to return to that idea, and took testimony this week from business groups that want the franchise tax completely rubbed out.

Property taxes are generally the biggest target, and for good reason: They’re the biggest non-federal taxes most Texans pay. The state itself doesn’t levy a property tax, but allows it as a source of revenue for school systems and other local government entities.

Wiping out property taxes and replacing them with higher sales taxes is an attractive conservative talking point: Wouldn’t you like to get rid of property taxes in Texas, along with the built-in increases that come with rising property values? And what if the replacement revenue came from sales and other consumption taxes over which taxpayers can exercise some personal control?

Here’s the counterpoint: Property taxes bring in a total of about $49.1 billion per year, according to the Texas Comptroller of Public Accounts. (The number is inexact because not all local governments are required to report their property tax revenue to the state.)

The state portion of the sales taxes — at a rate of 6.25 percent — brought in $28.9 billion over the year that ended Aug. 31, 2015. That’s 55.9 percent of the state’s total revenue. Sales taxes on motor vehicle sales and rentals bring in another $4.5 billion, or 8.7 percent of the state’s revenue; $4.0 billion of that is from vehicle sales and use, where the rate is also 6.25 percent.

To bring in the $49.1 billion it would take to replace current property tax revenue, the sales tax rate would have to be raised to 16.87 percent. If the tax on motor vehicles was included, the new rate for the two sales taxes would be in the vicinity of 14.82 percent.

The folks at local town hall meetings across the state would love to be off the hook on property taxes, but they might not be too crazy about the bump in sales taxes.

That kind of increase would add $2,142.50 to the taxes on a $25,000 car. It would mean $1 in taxes for every $6.84 in taxable purchases.

There is, of course, another way to do it: The state could end property taxes altogether if lawmakers wanted to cut roughly a quarter of the state budget. If they could figure out how to cut that much without alarming and arousing voters, they would probably have done it already.

The same general arithmetic plagues other “simple” proposals — like the one to turn the state’s tollways into freeways.

The impulse to get rid of toll roads is relatively new, too. The toll boom in Texas was an answer to another math problem in state government. Texans wanted to ease congestion, but really, really hated proposals to raise gasoline taxes to pay for those roads. Political leaders settled on a more popular idea — that the people using a particular state benefit ought to be paying for it. User fees are one example.

Toll roads are another. They were popular, until the bills came due.