Tax Relief or Targeted Spending Hikes? Surplus Projections Fuel Debate

The next legislative session is nine months away, but Texas lawmakers, lobbyists and activists are already gearing up for a fight on how to spend an expected multibillion-dollar surplus.

A booming Texas economy is projected to leave lawmakers with more than $2.5 billion left over in unspent funds from the 2013 legislative session, according to the most recent estimate from the comptroller’s office. On top of that, the state’s Rainy Day Fund, fed largely by oil and gas production taxes, is expected to have at least $8 billion by the fall. Some budget analysts say both figures could be higher. While a leading conservative think tank wants to see the next windfall go toward sales tax relief, others are arguing for targeted increases in spending.  

The large pots of cash suggest a dynamic similar to the last legislative session, in which a projected Rainy Day Fund balance of $11.8 billion fueled proposals for large investments in education, infrastructure and tax relief.

“I think money in the next session is going to be even better than what we had last session,” said Dale Craymer, president of the business-backed Texas Taxpayers and Research Association.

Along with a state oil and gas drilling boom, Craymer said, the Texas business climate is benefiting from growth in the national economy. Moreover, lawmakers in the last session had to spend more than $4 billion of surplus funds on unpaid bills from the previous session. This time around, the state's IOU is expected to be significantly smaller.

Last session, lawmakers approved more than $1 billion in tax cuts on the franchise tax paid by businesses. The possibility of providing further tax relief next session is already generating ideas from some fiscal hawks.

On Monday, the Texas Public Policy Foundation, a conservative think tank based in Austin, outlined a proposal to create a State Tax Relief Fund, or STaR Fund, which would funnel unspent tax revenue toward paying for temporary reductions in the state sales tax rate.

“We believe that this would show the men and women of Texas the value of a frugal government,” said Chuck DeVore, the foundation's vice president of policy.

State Sen. Brian Birdwell, R-Granbury, said he and state Rep. Phil King, R-Weatherford, planned to look at the proposal for the next legislative session.

“When we walk into Wal-Mart and put $20 down for $10 worth of stuff, they don’t call that $10 there ‘a surplus.’ That’s my change,” Birdwell said. “So one of the things we’re looking to do is, how do we return dollars coming into the state treasury and turn that into direct tax relief.”

The proposal quickly drew detractors. Craymer said property tax relief would be more meaningful for both taxpayers and businesses. Bill Hammond, president of the Texas Association of Business, said that if tax relief were on the table, his members would prefer that there were further reductions in the franchise tax rate.

Yet Hammond said Texas businesses would rather see the state put excess revenue toward transportation over tax cuts. He described worsening traffic and crumbling roads as a significant hurdle for the state’s future economic growth. Paying off some of the Texas Department of Transportation’s outstanding debt would allow the agency to stretch its budget further, he said.

“If an individual receives a windfall, the best thing they can do is pay down their debt,” Hammond said. “The state should do likewise.”

Others argue that surplus funds should go to boost public education funding. During the 2013 session, lawmakers restored about $3.4 billion of the $5.4 billion in public education cuts made in 2011. The lingering impact of the cuts on public education has been a recurring talking point of the Democratic candidates for governor and lieutenant governor, Sens. Wendy Davis and Leticia Van de Putte.

A school finance lawsuit between the state and more than two-thirds of Texas school districts remains ongoing and could complicate efforts to tackle the issue next session if the case remains unresolved.

Eva DeLuna Castro, senior budget analyst with the Center for Public Policy Priorities, a liberal think tank in Austin, said it’s a misnomer to call excess state revenue a “surplus” if lawmakers aren’t budgeting enough to meet basic needs.

“Right now we’re at a bottom of a list of things that make you competitive to businesses, with education being pretty high up there,” Castro said. “Schools have about 250,000 more students than they did in 2011, and they have less staff than they did back then.”

Disclosure: The Texas Association of Business was a corporate sponsor of The Texas Tribune from 2009 to 2013. A complete list of Texas Tribune donors and sponsors can be viewed here.