Let’s Go Back to the Future

Why talk about the 2020-21 Texas state budget when lawmakers are still deciding the 2018-19 budget?

It’s because the decisions our state leaders make now will have dramatic effects on the ability of the next Legislature to support health care, public education and other key services when they return to write a budget in January 2019.

The biggest obstacles to funding a budget that makes the investments necessary to ensure a healthy, well-educated and financially secure Texas are the bills that would eliminate the franchise tax. Also known as the margins tax, it’s Texas’ main business tax. The franchise tax is the third largest source of tax revenue for the state, producing an expected $7.8 billion to provide public services over the next two years. Importantly, $1.8 billion of this goes to the Foundation School Program to support our public schools.

However, two bills to phase out and eventually eliminate this vital revenue source have made substantial progress through the legislative process. Neither bill affects the budget currently under consideration, but both would ensure that future budgets will be severely constrained.

House Bill 28, sponsored by Rep. Dennis Bonnen, would cut the franchise tax by the amount of any cash balance remaining at the end of each state budget. The Legislative Budget Board (LBB) estimates this could deprive lawmakers writing the 2020-21 budget of up to $3.5 billion, with similar amounts taken out of succeeding budgets. For context, the House proposes using $2.5 billion from the state’s Rainy Day Fund for the 2018-19 state budget.  HB 28 passed the House on April 27 by a vote of 96-39. It is now awaiting action by the Senate Finance Committee.

The Senate equivalent is Senate Bill 17, sponsored by Sen. Jane Nelson, which would cut the franchise tax if the Comptroller forecasted more than five percent growth in General Revenue funds for a biennium. . The LBB projects that this could reduce revenue available to write the 2020-21 budget by $1.1 billion. The Senate passed SB 17 on March 21, with no discussion, by a vote of 23-7. The bill has not yet been referred to a House committee for action.

Another major impediment to providing critical Texas services in 2020-21 will be the implementation of a diversion of motor-vehicle sales taxes from the General Revenue Fund (which supports all aspects of the state budget) to the Highway Fund, where it can be used only for roads or debt repayment. Voters approved a constitutional amendment in 2015 that sends 35 percent of motor-vehicle sale tax revenue over $5 billion to the Highway Fund, starting in 2020. Based on the estimates by the LBB, this provision would reduce the amount available to support general spending in the 2020-21 budget by $900 million.

Don’t forget that all this would come on top of the actions taken by the Legislature in 2013 and 2015 that reduced the amount of General Revenue available to write the 2018-19 budget by $10 billion. All these provisions will continue and affect the 2020-21 budget.

In addition, both the Senate Finance Committee and House Ways and Means Committee are continuing to recommend more bills that would reduce 2020-21 revenue, although all are carefully crafted to not affect the 2018-19 budget.

In 2019, when our state lawmakers inevitably express their woes when drafting a budget proposal for 2020-2021, be sure and remind them of the reason why we don’t have enough money for necessary state services like education and health care. When you continue to cut taxes when you can’t afford to, someone will eventually have to pay.

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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