Despite the sideshow of recent days, I’ve been around long enough to know that the essential business of State government will ultimately get done. It may take a bit longer than expected and have more than its share of the kind of theatrics that give us character, but the schools will open, roads will get built, and bureaucracy will flourish. The quality and quantity of everything (except bureaucracy) may be less than we desire, but the basics will happen.
Hard as it may seem in these days of “Map-Making Rs” and “Killer Ds,” it is useful to take a step back and examine our budget situation from a long-term perspective. To solve the dilemma and keep it from perpetually recurring, we have to accomplish two things. First, we must grow the economy; second, we have to devise a tax system that will be responsive to the expanding needs of the state. I have written ad infinitum about the road to economic development and sustainable prosperity. Let’s plunge into the thorny thicket of taxes.
What’s wrong with our tax system? The answer is quite simple—it doesn’t match the way we produce and spend! We get a big chunk of our state and local revenues from a sales tax that is levied primarily on goods purchased in stores. That was all well and good when it was enacted in the 1960s, but doesn’t reflect today’s world where we buy a much larger percentage of services and are increasingly acquiring our merchandise from non-traditional sources.
It doesn’t stop there. We tax property to fund local schools and, in large measure, cities and counties. Property values fluctuate for reasons unrelated to overall economic growth, such as real estate cycles and mineral values. This tax also falls disproportionately on manufacturers with expensive physical plants (such as high-tech firms), and hits them even in years when they are struggling financially.
Our principle state tax on business is a franchise tax which is levied either on corporate income or capital stock. This tax again falls on large-scale plants even when they are losing money. Combined with the property tax, it gives us very low marks from site selection professionals as we compete for new activity. Moreover, the franchise tax can be avoided through several loopholes to the point that tax specialists often call it “voluntary.”
Added to this milieu is the fact that the major contribution once made by the severance tax on oil and gas is now only a small source of revenue, with the sheer geology of aging fields pretty much assuring that its relative share will decline further in the future. Simply stated, the entire set of major sources of fiscal revenues is inherently incapable of expanding in line with the economy and puts Texas at a disadvantage with the very sectors we need to attract.
It is a virtual demographic certainty that Texas is going to have a rapidly growing population. The axiomatic result is the need for additional governmental revenue for education (at all levels), roads and other infrastructure, health and safety, environmental quality, and other legitimate public goods. Thus, we need a core tax system that is sufficiently flexible to accommodate these fundamental realities. We can get there a number of ways—a broader sales tax, a business activity (value-added) tax, a gross receipts tax, or even the dreaded income tax (I’m not advocating it, but it is one of many options we should at least talk about).
The desire to eliminate the “Robin Hood” school finance plan gives us a real opportunity to scrap the whole system and build a better one. It is a tough job, as any change brings major winners and losers (and, hence, major lobbyists and money). If we don’t do it, however, we are doomed to decades of budget woes. We can’t grow enough to fix a tax structure that is broken.