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Do we or do we not have a structural deficit?

In this corner, State Rep. Mike Villarreal:

In a kerfuffle involving two House members who really like to engage in detailed discussions of Texas’ tax system, Rep. Mike Villarreal, D-San Antonio, sent reporters a letter in which he told Rep. John Otto, R-Dayton, that he couldn’t sign a special money panel’s interim report because it perpetrates “denial of the state’s structural revenue shortfall.” Some people like to call that the structural deficit, and point to how Texas four years ago gave away more local school property tax cuts — financed with state money — than it raised in higher state taxes on businesses, smokers and used car sellers.

At issue is the final report of a group Speaker Joe Straus convened in January, the Select Committee on Fiscal Stability. While the report isn’t out, it’s well known that Otto, who’s also vice chairman of the tax-writing Ways and Means panel, thinks Texas went on a spending spree from mid-decade until the Great Recession slowed the state’s economy about two years ago. Otto likes to talk about how there was double-digit growth in state revenues in 2006 and 2007, at the same time double-digit growth in property values allowed the state to slough off more of education’s price tag to local school districts. He’s proposing a constitutional amendment to make the state hoard more tax dollars during flush times — in the existing “rainy day fund,” or perhaps a new one.

Villarreal, a former vice chairman of Ways and Means, said it’s wrong to fixate on spending.

“According to the Legislative Budget Board, our state government already spends less per capita than every other state in the nation,” he said. “Creating a second rainy day fund may reduce the volatility of available revenue but will cause us to lose further ground on providing adequate funding for the educational, health care and infrastructure needs of our rapidly growing state.” Villarreal said even if Texas’ economy were firing on all cylinders, “state revenue would fall short of covering existing services by $9.5 billion.” Some budget experts are forecasting a deficit of nearly $24 billion for the next two year cycle.

Would that be another rainy day fund that we would never actually use? Let’s just say I’m dubious. In any event, Rep. Villarreal’s contention, with which I agree, is simply that the state has failed to take in enough money to cover the property tax cuts of 2006, and as a result would be in a deficit situation even in a good economic climate.

And in this corner, State Rep. John Otto:

Otto believes the committee in August heard a good rebuttal of those, such as Villarreal, who would heap scorn and blame on a 2006 Texas tax swap. It was from Dale Craymer, president of the business-backed Texas Taxpayers and Research Association.

“Did the 2006 Property Tax Relief Cause Our Problems?” was the headline for part of Craymer’s presentation to the House Select Committee on Fiscal Stability. Craymer, a former top budget aide to two governors, said it’s “untrue” to say the cuts to school property taxes four years ago caused the structural deficit.

Sure, a revised business tax has yielded less money than expected, Craymer argued. But growth of sales tax receipts and other revenues more than offset a business-franchise tax “gap,” he said. And that higher-than-expected cost of the tax swap “has been built into the budget base,” he said.

Craymer conceded that lawmakers last session used up $3 billion stashed away in a Property Tax Relief Fund. But he said that’s the only part of the package that swells the structural deficit — by $1.5 billion a year, you could say, not the $4 billion to $4.5 billion a year by which the cost of property tax cuts exceeds revenue from higher business and tobacco taxes. And he says a much heftier part of the state’s structural shortfall for next session was caused by one-time spending of federal stimulus money.

By affirming Craymer’s testimony, Otto apparently is saying that the 2006-induced piece of the structural deficit is only about one-third as bad as critics contend.

Okay, so to accept Craymer’s argument that there is no structural deficit, you have to first ignore the billions of dollars that were set aside during the flush session of 2007, which paid for the cuts beyond what the business margins and other new taxes were expected to bring in for the 07-08 and 09-10 biennia. You then have to accept that sales tax revenues, which have been at rock bottom for the past two years and which were not included in the tax swap calculus by the authors of that legislation in 2006, have covered the gap that the margins tax has left. Finally, if you accept all that, you still have to wave your hands at the $1.5 billion shortfall that remains, since it’s only a third of what all those negative nellies have been claiming. I don’t know about you, but I’m thinking Villarreal wins on a TKO. You can see Villarreal’s letter to Otto here, and an earlier letter after the draft version of the committee’s report came out here.

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