January 14, 2003
What about the tax cuts?

With all of the blame for the state budget shortfall being assigned to that bad ol' 2001 Legislature, I started wondering what effect the vaunted Bush tax cuts of 1997 and 1999 may have had on the state's revenue stream. Not that these tax cuts are in any danger of being reversed - there's a greater chance that I'll become Carole Keeton Strayhorn's fourth husband than there is of Saint Dubya's tax cuts getting rolled back - but surely they must have had some effect on state revenue.

First we need to determine just what those tax cuts were. The 1997 tax cut mandated a $10,000 increase in the homestead exemption for property taxes. These taxes go to school districts, so this has no effect on the state's revenue, whose recent history can be viewed here. I will note, for what it's worth, that in a July 11, 1999 Chronicle article, one Karen Hughes is quoted as follows:

"Had the state not enacted the two largest tax cuts in Texas history, and had the state not increased funding for public schools by $8.3 billion under Gov. Bush, local property taxes would be going through the roof across the state and driving people from their homes," Hughes said.

Emphasis mine. Obviously, as a Good Liberal, I support spending on schools, so I'm certainly not decrying this. I'm simply pointing out that Bush and Perry are both happy to take credit for spending increases when they consider it good politics to do so, especially when they have capos like Strayhorn to blame the Lege for being profligate.

The 1999 cut directly affected state revenues, as it was a cut in the Corporate Franchise Tax and the creation of state Sales Tax Holidays for the back-to-school shopping period. These things are of course hard to nail down, but we can take a reasonable guess.

From 1992 to 1999, the Franchise Tax brought revenue increases of about $100 million per year - it raked in $1.096 billion in fiscal 1992 and $2.077 billion in fiscal 1999. (There was an 82% increase in Franchise Tax revenue betwen 1991 and 1992, meaning there had to have been an increase in that tax rate at that time.) Had those increases continued, fiscal 2002 would have seen about $2.4 billion in this revenue. Instead, there were three years of modest declines, with fiscal 2002 seeing $1.935 billion from this source. Roughly speaking, this tax cut took about $450 million out of the coffers in 2002.

The sales tax holiday is a three day weekend in which most clothing and footwear which are priced under $100 are exempt from the 8% sales tax. I found precious little in terms of numbers on this, save for the following from a Chron article dated July 31, 2002, just before this year's holiday:

Surrounded by children in a department store, Comptroller Carole Keeton Rylander said Tuesday that the state's annual sales -tax holiday will save consumers $42 million and boost the state economy by drawing visitors to Texas for the tax -free weekend.

This year's tax holiday begins midnight Thursday and runs through Sunday.

Most clothing and footwear priced under $100 is tax -free. For every $100 spent on qualifying items, shoppers save about $8.

Since the tax holiday began in 1999, $334 million in state revenue growth has been attributed to the annual three-day freebie. The state gets an overall bonus from hotel, restaurant and other travel-related receipts, and from the purchase of items not exempt from sales taxes, Rylander said.

So the direct revenue loss due to the tax-free weekend is about $40-$50 million, which is relative chump change. Personally, I don't buy the claim that travel in to Texas for this boosted the economy by $100 million per year. I have a hard time believing that a bargain-hunting family looking for cheaper school clothes would blow all that savings and then some in hotels and restaurants. Clearly, this is a matter of faith, and I don't have it.

Thus, I calculate that Bush's tax cuts cost the state about half a billion dollars, a lot of money but a fairly small dent in the deficit. Looking at that revenue history, other big hits came from the Natural Gas Production Tax, which raised nearly a billion less last year than in 2001, and income from interest and investments, which dropped $400 million. The sales tax, which had increased by $500-$900 million per year over the past few years, dropped by $100 million, presumably due to the sluggish economy. (In fairness, the Franchise Tax may have declined anyway, or at least not grown as fast, because of the weak economy as well.) Put all that together and you've got about $2.5 to $3 billion, which is a pretty good start.

If you're curious where the money goes, by the way, this expenditure history can help. The two biggies are Education (growing from about $12 billion in 1992 to over $20 billion in 2002) and Health and Human Services (from $9.5 billion in 1992 to $20 billion in 2002). One interesting tidbit here is that from Fiscal 1995 to Fiscal 2000, the six budget years that Bush was in the state house, education expenditures rose from $14.5 billion to $19.1 billion, an increase of $4.6 billion and not $8.3 billion as Karen Hughes claimed. Even comparing Ann Richards' last budget ($13.4 billion for education in FY 1994) to Rick Perry's first ($20.1 billion in FY 2001) gives only a $6.7 billion increase. Not that it really matters, I guess.

It's pretty clear that what the state budget really needs is some better economic times. We have a fast-growing population, with a large percentage of people in need. Cutting spending will only accomplish so much because the long term demographic trends will put a great deal of pressure on existing programs. Sooner or later we need to get a handle on our revenue streams as well. Too bad we didn't give this much thought when times were better.

Posted by Charles Kuffner on January 14, 2003 to Budget ballyhoo | TrackBack