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2019 State Budget & Taxation Task Force Report

I. The State Budget in Perspective

Boosted by strong oil and gas, sales, and franchise tax collections, total tax collections for FY 2018 significantly exceeded the projections in the Comptroller’s 2018-19 Biennial Revenue Estimate (BRE), as illustrated in the following table:

Tax collections for the last five fiscal years indicate that Texas has rebounded from the slump seen in FYs 2016 and 2017. With its strong performance in FY 2018, Texas has seen its overall growth in tax collections exceed $4.5 billion since FY 2014.

In the 2020-21 BRE, the Comptroller projected four percent growth in the Texas economy during FY 2019. Tax collections deposited to general revenue funds paint a different picture thus far, although there have been only four months of tax collections in FY 2019 to date.iii Sales tax collections from September through December of 2018 were down 6.75 percent compared to the prior year. Franchise tax collections over the same period declined by 13.5 percent compared to the prior year. Oil and natural gas tax collections during that same period, however, were up 50 percent and 35.9 percent year- over-year, respectively. While collections attributable to specific sources of revenue have seen significant fluctuation between September and December of 2018 compared to September and December of 2017, in the aggregate there has been virtually no year-over-year increase or decrease (a 0.05% decline).

Estimated total state revenue from all sources for the 2020-21 biennium is $265.6 billion, which is more than an 18 percent increase over the expected 2018-2019 figure of $224.8 billion. There will be $119.1 billion in general revenue-related funds available for certification for the 2020-2021 biennium, which is a healthy 13.5 percent increase over the corresponding $104.9 billion for the previous biennium. A comparison of key estimates in the 2018-2019 BRE and the 2020-2021 BRE in the table below makes clear how much the State’s revenue picture is projected to have improved.

During a time of healthy state revenue growth, the Legislature should ensure that government remains confined to its proper role and that its spending adheres to an intellectually consistent standard rather than simply expanding to match whatever its available funds are. While the State had a strong FY 2018 and the outlook for the 2020-2021 biennium is encouraging, it is important not to use an unanticipated and perhaps temporary growth in tax revenue as an automatic justification to increase spending. If increased spending is justified on those grounds, then the new, increased level of spending becomes the new baseline by which spending in future years is measured, even if tax revenue in the future declines or plateaus and irrespective of whether future spending is consistent with the optimal role of government.

The budgets from the 2004-05 to the 2012-13 biennia are instructive. The 2004-05 budget appropriated $59.0 billion in general revenueiv – a 1.6 percent decrease from the previous biennium. This led the Legislature to make some necessary and sensible spending reductions. However, in 2006-07 many of these reductions were rolled back as the legislature enacted a $67.2 billion budget,v or a 14 percent increase over the 2004-05 level. Spending again significantly increased with the 2008-09 budget, which appropriated $81.6 billion in general revenue, a 21.4 percent The corresponding appropriation in the 2010-2011 budget increased by only 1 percent to $81.9 billion.vii Finally, the budget for 2012-13 appropriated $86 billion in general revenue.viii That $86 billion caused consternation over alleged fiscal austerityix but actually represented a 45.8 percent increase over the appropriations in general revenue in the 2004-2005 budget (equal to annual growth of 4.8 percent).

The Comptroller’s estimates of funds available for general purpose spending from the 2004-2005 biennium to the 2012-2013 biennium illustrate the same phenomenon. Those estimates for the 2004- 2005, 2006-07, 2008-09, 2010-2011, and 2012-13 biennia were $54.1 billion, $64.7 billion, $82.5 billion, $77.1 billion, and $72.2 billion, respectively.x Numerous articles were written upon the release of the 2012-13 biennial revenue estimate stating that the State faced a fiscal crisis,xi when in reality the estimates of funds available for general purpose spending had increased by 33 percent over that time frame (equivalent to 3.6 percent annual growth). The lesson that all Texas taxpayers should take fromthis is that spending freely during years of strong revenues sows the seeds of the next budgetary “crisis.”

Rather than matching its spending to available funds, the Legislature should first ensure that the State is meeting its obligations. Funds in excess of whatever amount the State needs to fulfill those obligations should be applied towards tax relief. Providing tax relief using revenue below the spending limit must remain a focus for conservatives, since it is one way to permanently restrain the growth of government. That is especially true for a biennium in which strong revenue growth is expected, such as the 2020-21 biennium.

To ensure the ongoing fiscal strength of Texas, the 86th Legislature should strengthen the State’sconstitutional spending limit, continue to phase out the franchise tax, protect the Economic Stabilization (Rainy Day) Fund from being used for ongoing obligations, and provide much-needed property tax relief to homeowners and businesses that is still consistent with the State’s obligation to contribute to thefunding of public education. Taking these steps will ensure that government in Texas operates within its proper scope. Finally, to avoid future budget shortfalls, it is imperative that the 86th Legislature keeps Texas on a sound fiscal footing by keeping general revenue appropriations flat after adjusting for population growth and inflation.

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