SB 17: A Time Bomb That Could Blow Up Future State Budgets

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The Texas Senate may vote as early as Tuesday, March 21 on an alarming bill that would automatically lock in future revenue cuts, without regard to budget needs. SB 17, sponsored by Sen. Jane Nelson, would cut the rate of the franchise tax if the comptroller’s biennial revenue estimate showed that general revenue related funds (available for certifying the budget) would grow by more than five percent in the next biennium. The tax rate would be cut by the amount needed to cut in half any revenue growth above the five percent cutoff.

CPPP opposes SB 17, which would guarantee tight state budgets into the future.

The Legislative Budget Board (LBB) estimates that SB 17 could reduce franchise tax receipts by $1.1 billion for the 2020-21 budget, which lawmakers will write next session.

Along with the “available revenue” limit, the budget is already constrained by a constitutional limit that caps growth in spending from undedicated tax revenue. The limit is linked to the growth in personal income in the state. Since 2001, personal income has grown by more than 11 percent each biennium. SB 17 would choke off state revenue if the Comptroller estimated it would grow less than half as fast.

The rate cut “bomb” would be triggered by the Biennial Revenue Estimate in January, before the LBB presents a proposed budget, before the Appropriations and Finance Committees make any decisions about the need for state spending, and almost one full year before the new rate would take effect. SB 17 would light the fuse on the tax cut before knowing how much damage it would cause.

Unlike similar mechanisms, like the diversion of sales tax revenue to the Highway Fund, SB 17 contains no override mechanism by which the Legislature can defuse the time bomb before it automatically blows up that state budget.

The franchise tax is an important source of funding for our public schools and other state services. There have been complaints about the tax’s structure and compliance costs. But if the Legislature wants to launch a repeal of the tax, it should also replace it with a new business tax that ensures businesses pay their fair share and helps maintain our investments in the future of Texas.

Dick Lavine focuses on state and local revenue issues. Before coming to the Center in 1994, he was a Senior Researcher at the House Research Organization of the Texas House of Representatives for ten years. He is a Chartered Financial Analyst, Chairman of the Board of Directors of the Travis Central Appraisal District, and a member of the Executive Board of AFSCME Texas Retirees, the statewide union local of retired public employees. The Equity Center named him the 2011 Champion for Equity for his work to reform our tax system to ensure it can adequately support public education and other public services. He earned a Bachelor of Arts in Economics, magna cum laude, from Harvard College in 1969, and a Doctor of Jurisprudence, cum laude, from the University of Pennsylvania in 1975.

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