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Here come the furloughs

We said this was gonna be bad, right?

Mayor Sylvester Turner

Houston Mayor Sylvester Turner, facing an economy hammered by the coronavirus pandemic and collapsing oil prices, on Tuesday proposed to close an upcoming budget gap by furloughing about 3,000 municipal workers, deferring all police cadet classes and exhausting the city’s entire $20 million “rainy day” fund.

The proposals are in response to an estimated $169 million revenue shortfall for the fiscal year that begins July 1.

Emptying the rainy day fund “leaves the city in a precarious state for the upcoming hurricane season,” the mayor acknowledged in a message to city council members that accompanied his budget plan. The account holds money in reserve for emergency situations, such as cash flow shortages and major disasters.

The city had just recently replenished the fund after using all $20 million in the wake of Hurricane Harvey. It will not have that option if a storm hits Houston this year.

“The dollars from the economic stabilization fund are gone,” Turner said. “There is no rainy day fund.”

Under Turner’s plan, the city also would draw $83 million from its cash reserves to balance the budget.

The city’s tax- and fee-supported general fund, which covers most basic city operations, would spend $2.53 billion under Turner’s plan, a decrease of about 1 percent from the current budget. Despite the narrow spending cut, the city would be left with a general fund balance that dips below the amount required by city ordinance.

[…]

The proposed spending plan, which is subject to approval by city council, only says that the city would furlough “thousands of municipal employees.” At a news conference Tuesday, Turner said the number would be around 3,000 of the city’s nearly 21,000 employees. The workers would forego 10 days of pay, saving the city roughly $7 million.

Turner did not specify which departments would be required to send workers home without pay, though he said the city would not place anyone on furlough from the police, fire and solid waste management departments.

The city will not implement any cuts until the new fiscal year begins July 1, Turner said.

See here and here for some background. The story mentions the $404 million Houston received in the first cornavirus stimulus package, which it can’t spend on previously budgeted expenses. Maybe the city will be allowed some leeway in that, and maybe the next relief package, which in its current form includes money for cities and states, will arrive in a timely fashion. Mayor Turner says he’d reinstate the police cadet class and un-furlough the other employees as his first priorities if the funding becomes available. In the meantime, this is our reality. All we can do is hang on and hope for the best.

Down go the sales tax receipts

It’s bad. Expected, but bad.

Texas collected $2.58 billion in state sales tax revenue in April — a roughly 9% drop from what the state collected the same month last year, Comptroller Glenn Hegar announced Friday. That drop, from $2.8 to $2.58 billion, marked the steepest decline since January 2010, Hegar said.

April’s revenue, which the state collected from purchases made in March, is among the first official glimpses at the dramatic blows state and local budgets will take from widespread social distancing measures first taken last month to stop the spread of the new coronavirus. And Hegar warned that the state’s largest single source of funding will continue to “show steeper declines” in the coming months compared with a year ago as the economy continues what will likely be a slow crawl out of a weekslong virtual shutdown due to the pandemic.

“The steepest declines in tax remittances were from businesses most quickly and dramatically affected by social distancing,” Hegar said in a statement. “However, those losses were, to a degree, offset by increases from big-box retailers, grocery stores and online vendors. Remittances from oil and gas-related sectors also fell significantly as oil and gas exploration and production companies slashed capital spending in response to the crash in oil price.”

Hegar’s been sounding the alarm for awhile, it was just a matter of what the exact number was. If we’re lucky, April will be no worse. Whether things get better in May and beyond, which is the intent of the reopening scheme, won’t be known for a couple of months. How the population as a whole acts, and whether or not the virus comes roaring back, will be the keys to that.

Metro will get some stimulus money

Good.

Transit agencies in southeastern Texas are set to receive more than $300 million to stem revenue losses linked to COVID-19, federal officials announced Thursday, most of it coming to Houston.

As part of the first round of Congress-approved stimulus funding, $25 billion will go to transit agencies nationwide, doled out by the Federal Transit Administration. The money “will ensure our nation’s public transportation systems can continue to provide services to the millions of Americans who depend on them,” U.S. Transportation Secretary Elaine L. Chao said in a release.

Money will be distributed by urban areas, with most of Houston’s $258.6 million going to the Metropolitan Transit Authority, which has seen ridership to drop to less than half its normal workday use. Bus and rail ridership Wednesday was 129,000, a 55 percent decline from the same day last year, Metro spokesman Jerome Gray said.

[…]

Fewer riders means less money coming in from fares, but that pales in comparison to the expected drop in sales tax collections Metro relies on for most of its funding. With various businesses closed and most of the Houston area hunkered down, collections from Metro’s 1 percent sales tax are expected to nosedive.

We’ve talked about the effect of the sales tax revenue decline before. This should help a bit, and there may be more coming. Having a fully functional transit system for when everyone gets to go back to work is going to be a big deal, so this is very encouraging.

Cities and counties are going to need their own bailout

This story is about the rough financial future that the city of Houston faces as we go through the coronavirus shutdown, but it’s not just Houston that is in this position.

Mayor Sylvester Turner

As Mayor Sylvester Turner’s administration continues efforts to slow the spread of COVID-19 in Houston, another dire challenge looms for City Hall: its budget.

The economic downturn caused by the pandemic and plummeting oil prices has thrown an already cash-strapped spending plan into more arduous territory, raising the specter of the first furloughs or layoffs of city employees since 2011.

Controller Chris Brown, who recently finished a recession stress test for the city’s coffers, has said he thinks the situation is likely to rival the recession that began in 2008, approaching the test’s worst-case scenario: a budget deficit in excess of $300 million.

He told council members Tuesday they should begin dusting off the recession playbook.

“Unfortunately, they had to do some furloughs and cut some expenses and things like that, because you can’t control the revenue right now,” said Brown, the city’s independently-elected financial watchdog. “These are tough decisions that are going to have to be made, I think.”

Turner said budgeting is always difficult under a revenue cap, but the city in the past has forged its way through challenging deficits and will do so again.

The mayor would not say whether he thinks layoffs will be necessary, but he sees other actions that can help cut the deficit. Turner plans to use some of the city’s current fund balance, which is projected between $187 and $203 million. The rainy day fund, he pointed out, will also have $15 million when it comes time to adopt the budget.

Some job vacancies have already gone unfilled, he said.

“We always assume there is going to be a budget shortfall with the revenue cap,” Turner said, referring to Houston’s voter-imposed ceiling on increased property tax revenue. “There’s always some elephant in the room. The elephant here now is the coronavirus and the impact on your sales taxes.”

The city’s two largest streams of money are property and sales taxes. All eyes are on the latter, which are expected to take an unprecedented hit as most businesses have been ordered to close and the region’s residents have been told to stay home in a bid to slow the virus’ spread.

It’s not just sales tax revenue, which will hammer the state budget as well. No one’s flying into or out of the airports, no one is staying in hotels or renting cars or booking conventions. All of those things affect the enterprise fund, which is a part of the city’s budget that is largely not subject to the revenue cap. And as noted, it’s not just Houston. Every city, in Texas and elsewhere, will be facing this. Part of the solution here, very simply, needs to be a federal relief package for local and state governments, all of which would otherwise have to lay people off and drastically cut back on services, all of which would just further exacerbate the recessionary effects we are now feeling. Just as we expect business activity to more or less return to normal once everyone can leave their homes again, we should expect local tax revenues to more or less return to normal. All of that assumes that the business are still there to return to, which is why we needed the first stimulus bill, to prevent them all from suffocating in the meantime. We all want to return to normal, but we have to do everything we can to preserve what was normal until we can get back to it. That’s what the federal government can do, and what it needs to do.

But we should also recognize that forcing cities and counties and states to observe “balanced budget” requirements at a time like this is not only ridiculous, it’s self-mutilating. Mandating an artificial deadline for when one number must be shown to equal or exceed another is beyond stupid and pointless, and that’s even more so if we not-unreasonably assume that the feds will eventually come in with a check to make up for the sales taxes that did not happen. The single best thing Greg Abbott could do with his emergency powers once we’re at or near a point where we can begin to think about easing up on the stay-at-home rules is to declare that all “balanced budget” requirements are suspended for the next two budget cycles, along with the revenue cap that was passed in the last Lege. That won’t be carte blanche for cities and counties to start spending like crazy – they’ll still have to get their budgets to “balance” later on – it will just be a recognition that this was something entirely beyond their control, and they deserve a chance to recover from it. It won’t happen, of course – I’m sure Greg Abbott and the entire army of financial ghouls he has behind him are salivating at the prospect of forcing their local nemeses to slash their budgets – but it should. I will never stop beating this drum.

Coronavirus and the state budget

Ain’t gonna be great. How bad, we don’t yet know.

Comptroller Glenn Hegar briefed Texas House members on the state’s economy and budget Sunday night, saying that while it was too soon for specific forecasts, both are expected to take potentially massive hits in the wake of the new coronavirus pandemic, according to multiple people who were on the conference call.

The members-only call, led by House Speaker Dennis Bonnen, R-Angleton, was one of state lawmakers’ first glimpses of the impact the virus is expected to have on multiple industries, state finances and Texas’ largely oil-fed savings account, known as the Economic Stabilization Fund or the rainy day fund.

Hegar, who referred to the state of the economy as “the current recession,” according to multiple people on the roughly hourlong call, predicted both the general revenue for the state budget and the savings account balance will be drastically lower — possibly by billions of dollars — when he makes a revised fiscal forecast. He said that update could happen in July.

Later Sunday, the comptroller’s office said that unless the Legislature spent money out of the savings account before July, the balance for the fund would be revised down, but not by more than $1 billion.

In October 2019, Hegar estimated that the state budget would have a nearly $3 billion balance for the fiscal 2020-21 biennium. The balance of the Economic Stabilization Fund, Hegar announced at the time, would be around $9.3 billion by the end of the 2021 fiscal year in August of that year.

[…]

Abbott, for his part, noted last week that he and the Legislature can tap into the state’s disaster relief fund immediately to help respond to the virus. He also said that the Economic Stabilization Fund could be used “at the appropriate time,” which he said would happen when state leaders “know the full extent of the challenge we’re dealing with.”

Before the stabilization fund could be used, Abbott would need to summon state lawmakers back to Austin for a special session before the Legislature reconvenes in January 2021. When asked at a town hall about the possibility for calling such a session, Abbott said “every option remains on the table,” while noting that there would not be any need for such an action if every Texan followed guidance to help curb the virus.

Obviously, the crash in oil prices doesn’t help the state’s financial picture, either. It’s sales tax collection that will really suffer, and that pain will be spread to the cities and counties as well. As always, the big picture here is “how long will this take” and “how many businesses and jobs will be lost in the interim”, and right now we don’t know.

I will say, situations like this are among the reasons why balanced budget requirements are such a bad idea. Let the state – and the cities – run a deficit for a year or two, rather than cut a bunch of programs and lay off a bunch of employees, both of which will exacerbate the effect of the overall downturn. I assure you, society will not crumble around us if we do that. We will see plenty of shenanigans pulled by legislators to worm their way around the balanced budget requirement, as we have always done. So why not be honest about it and just admit that the whole thing is a sham and we should just not worry about it, at least for this cycle? We can always get back to it next time. Much easier said than done of course – constitutions and charters can’t be so easily cast aside, which again goes to my point about why these things are stupid – but in a world where everything has been thrown into chaos, this just makes sense. Same for revenue caps as well – if the revenue for the state, or the city of Houston, falls ten percent this year, it will take three years under the existing 3.5% revenue cap just to get revenue back to existing levels, while forcing needless cuts in the meantime. It’s all a sham, we should seize the moment to recognize it for the sham that it is, and free ourselves once and for all from its ridiculous shackles. Won’t happen happen, but I’ll never stop pointing it out.

Worrying about the restaurants

Alison Cook laments the potential fate for her favorite part of Houston.

Depending on local or state strictures, to help stem the spread of Covid-19 restaurants in most major markets would be able to provide takeout, drive-thru or delivery rations only. Dine-in was done, for the present and — according to some epidemiologists and public health experts — very possibly in rolling closures for the next 18 months. That’s the time it will take for a vaccine to be tested, manufactured and made available.

If we’re lucky.

Even though I’ve suspected this was coming since the calamitous February business drop experienced by restaurants in Bellaire Boulevard’s Asiatown — a preview of what lay ahead for the whole market as Covid-19 spread, I feared — the reality of the closures has hit me hard.

I gasped when I saw an Open Table graph that showed restaurant bookings, already down 45 to 65% last week, plunging off the cliff to zero on Tuesday in Boston, L.A., New York, San Francisco, Seattle, Toronto and Washington, D.C. It looked like the highway to hell.

I’m in mourning daily as I read the anguished tweets from Houston chefs and restaurant owners I admire. I’m sick with worry for the servers and bartenders and bussers and line cooks whose livelihoods are in peril.

[…]

My greatest sorrow is that I see a great winnowing ahead. On the other side of this public health crisis, it seems likely that Houston’s dining landscape will be substantially altered. Restaurant profit margins are slim in the best of times, and without serious public investment at the state or federal level, we are likely to see many bankruptcies.

It’s not the big chain restaurants I’m worried about — it’s the mom-and-pops and the small independent operators who help to define the city. Those are a cultural legacy well worth saving.

Ian Froeb, the restaurant critic at the St. Louis Post-Dispatch, told a radio interviewer the following: “I have a top 100 restaurant list and somebody that’s in the industry said, ‘You could be looking at 80 of the 100 might not come back.’ I didn’t push back. That seems like a real possibility.”

I’m not quite that pessimistic, yet, but the fallout is going to be bad.

Obviously, we can all do more ordering takeout in the interim, in the hope that these places we love can weather the storm, which we also hope will be measured in weeks and not months. But let’s be clear, the state of Texas could also help.

Up against a Friday deadline, the broad base of workers in the Texas restaurant industry have asked Gov. Greg Abbott and other officials to waive monthly sales taxes due by the end of the day.

Bobby Heugel, owner of several popular bars and restaurants in Houston, said many businesses could ride out the new coronavirus’ social slowdown for months if the state waived, delayed or deferred the monthly taxes.

“We have been crushing the governor’s office for requests of deferrals,” Heugel said Thursday. “Their voicemail actually stopped working late last night.”

Comptroller Glenn Hegar said the state won’t push back Friday’s deadline, though it has done so after hurricanes and other disasters. Hegar and aides cited a couple of reasons: Hurricanes and similar disasters, unlike pandemics, can knock out the infrastructure used to calculate and pay taxes. More importantly, the state and local governments that depend on those taxes to keep hospitals and emergency services going need the money as they prepare for the number of Texans testing positive for the new coronavirus to skyrocket within weeks.

“It would be irresponsible, but more popular, to delay collections,” said Karey Barton, associate deputy comptroller for tax. “The people who paid those taxes need that money to be available to keep operating hospitals and other services.”

I understand the concern, but the state has a rainy day fund it can tap into to bridge the gap in the interim. Maybe Greg Abbott needs to use his emergency powers to make that happen, maybe he needs to call a special session to enable it, or maybe he just needs to order it and let someone file a lawsuit to stop him, I don’t know. But the effect of losing a significant portion of the hospitality industry will last a lot longer than this crisis. We need to think outside the box here, and take action as needed before it’s too late.

Back to the no-fares question

I remain skeptical, but we’ll see.

As it stands right now, most of METRO’s operating funds don’t come from the fares. The transit agency gets most of its money from a one-cent sales tax, which caught the attention of Harris County Precinct 3 Commissioner Steve Radack.

Radack recently spoke before the METRO board on why the agency should consider free or reduced fares. He said that people are already paying for the transit service through the sales tax and a financial incentive for riding could get more people on board.

“And so if we just keep going the way we’re going, we’re going to build more freeways, we’re going to continue to do other forms of transportation, but at the end, it makes no sense to have buses only partially full running around,” said Radack.

[…]

METRO Chairman Carrin Patman said while fares aren’t a huge part of their budget, they’d have to figure out a way to make up that money if they stopped charging riders.

“I think what people don’t realize is there are unanticipated consequences of a free fare policy that we just need to fully consider before we went to it,” Patman told News 88.7.

And those consequences are what concern Oni Blair. She heads the transportation advocacy group LINK Houston. Blair said to get more riders, METRO needs to put its focus on other issues.

“It’s the little things we take for granted,” said Blair. “Does the bus come on time? Because if I’m trying to schedule my day I need to get there on time and know what to predict. Does the bus come frequently, so people don’t have to wait half an hour to an hour for the bus to come? Can I wait in dignity at a shelter that is accessible and safe for me?”

And Blair said that all those things cost money.

“The loss of revenue from the fares METRO currently has would undermine their other access to improving operations, improving customer service, improving all of those things,” said Blair. “If they don’t have that revenue they can’t address the things that people want.”

See here for my previously-stated concerns. Metro may not get much money from fares, but it does get some money from them, and that would have to be made up elsewhere, which is where I fear that political pressure, or interference from the state, could undermine this whole rationale. I’m of a similar mind as Oni Blair – the top priority needs to be making transit more accessible to more people. We also need to recognize that there’s a limit to how much we can grow transit ridership in this region as long as driving cars is the vastly-catered-to default. That’s a much bigger question, one that will take more than Metro to work out. For now, let’s try to make Metro the best it can be. Maybe that involves reducing or eliminating fares, but I think there are other options to work on first.

Bus service in new places

This is a good first step, which I hope begets a second step.

Harris County has extended bus service to Channelview, Cloverleaf and Sheldon, using $3.8 million in Hurricane Harvey disaster recovery money to jump-start the new routes.

Service started Dec. 2, quickly getting about 500 riders in the second week along roughly 65 miles of new service.

“When you have that freedom to ride a bus, that opens up so many more services to you,” said Daphne Lamelle, executive director of the Harris County Community Services Department.

The need is especially pronounced in eastern Harris County after Harvey led to the loss of thousands of cars and trucks, Precinct 2 Commissioner Adrian Garcia said Wednesday as he and other county officials dedicated the five new routes.

“We don’t think about these things until we need them,” Garcia said, lamenting the need for cars in rangy parts of the county.

[…]

Future money to operate the service will come from federal sources, doled out locally by the Houston Galveston Area Council, said Ken Fickes, transit services director for Harris County.

The new county service operates every 30, 60 or 90 minutes, depending on the route, and many connect to Metro at the Mesa Transit Center along Tidwell and along Uvalde at Woodforest Boulevard.

Transfers to Metro, at least for the foreseeable future, will be free, said Metro Vice-chairman Jim Robinson, who represents Harris County on the transit agency board.

“We have pulled out all the stops to make this a going thing,” Robinson said of the desire to extend transit to more places.

You can view the routes for existing and new bus services here. I’ll be honest, I hadn’t realized any of this existed. I knew that Metro’s service area did not include some number of non-Houston cities within Harris County, and many of those cities are in the eastern part of the county, I just either didn’t know or had forgotten that the county provided some limited transit service for them. I guess I have mostly thought of this in terms of transit-less Pasadena, which remains a stubborn island of car-only transportation.

Commissioner Garcia and Metro are both interested in extending Metro’s services out to these cities – I touched on this in my recent interview with Metro Chair Carrin Patman, though again I was more Pasadena-focused than I might have been – which is a great idea and something that will require both legislative action and local voter approval, to add a penny to their sales tax rate. That means that even in a best-case scenario, we’re talking at least two years for such a thing to happen. The main thing to do to facilitate that in the meantime is get as many people as possible using the service, and making the case to everyone else in those cities that it benefits them as well even if they’re not riding those buses. And please, do bring Pasadena into this – there’s really no reason why Metro’s service doesn’t include all of Harris County. Houston Public Media has more.

Metro moves towards cashless fares (maybe)

We started with this.

The Metropolitan Transit Authority on Thursday will consider the first in a series of agreements to revamp its fare payment system that eventually could offer riders the option of using smartphones, credit cards and electronic wallets to hop aboard its buses and trains.

In a nod to the changing ways consumers use to pay for services, the transit agency is expected to spend nearly $100 million to remake its collection of bus and train fares for the next 15 years. That future could lead to cash being kicked off the bus as transit officials weigh whether to replace aging fareboxes.

Metro is among a handful of large American transit agencies giving some thought to how to reduce the number of riders tossing coins and convert them to tapping a card, which could help speed up bus trips.

“Metro would be in the first wave of agencies making this transition but won’t be doing it alone,” said Ben Fried, communications director for TransitCenter, a New York-based advocacy group.

The first step for Metro is a seven-year $37 million contract with INIT, Innovations in Transportation Inc., for new software and management of its fare collection system, including new validators — the cinder block-sized devices people tap with their Q cards.

Two-thirds of the initial cost, more than $24 million, would go toward equipping buses and installing computer systems in Metro offices to handle fares.

With the new gear will come new options for riders. Currently, riders can use Q cards, cash or Metro’s smartphone app to hop aboard.

The new machines will accept the current Q cards, along with such options as contactless credit cards that allow customers to pay by tapping a card reader and Apple Pay and Google Pay that store credit card info on mobile phones.

“The system will let us use mobile wallets,” said Denise Wendler, chief information officer for Metro. “It transitions very nicely with our old system and new opportunities.”

[…]

Many transit agencies are looking to reduce or avoid cash payments altogether for a variety of reasons, including speeding up transit and eliminating the cost of handling money.

“Boston has made cashless bus fare collection an explicit goal, and the (Metropolitan Transit Authority) in New York has eliminated cash payment on express buses, intimating that regular buses could go cashless in the next few years (the earliest would be 2023),” Fried said.

Paying cash typically takes a few seconds longer than tapping a Q card, with those seconds adding up along a route. The faster people can board, the faster the bus can get moving again — improving the efficiency of trips and getting people to their destinations faster.

Eliminating cash fares also could give transit agencies better use of bus space by allowing passengers to board at the front and rear doors. In Houston, Metro riders can only exit from the back door, but must enter in the front to tap their cards or pay cash.

San Francisco opened its buses and trains to all-door boarding in 2012, and checks fares now with fare inspectors, similar to Metro’s enforcement of light rail payments in Houston. A 2017 study showed San Francisco’s bus speeds increased 2 percent and ridership on buses increased 2 percent.

As the story notes, it would probably not be till 2022 when we see something like this happen. About twenty percent of Metro fares are paid in cash, so ensuring that those riders would not be left behind is a priority. The benefit for Metro is clear – better and more efficient boarding, which means buses can run on a more dependable schedule, which boosts service and ridership overall.

The story then got this reaction from Tory Gattis:


On the surface, this makes a lot of sense. Fare collection revenue is a very small part of Metro’s budget. Free fares would make boarding even more efficient, would certainly ensure that cash-paying riders are taken care of, would increase ridership further, and would free up capital for buying more buses. Seems like a win all around, right?

It appears that argument had an effect.

Metro on Thursday delayed consideration of a $37 million contract for a new fare system so transit officials can ponder how it would affect efforts to eliminate fares altogether for some riders.

The Metropolitan Transit Authority board of directors was scheduled to approve the seven-year agreement, but the item was pulled from the agenda in the morning, Chairwoman Carrin Patman said, “in light of the fact we are also doing a free fare study.”

The transit agency is researching options for eliminating fares, or eliminating them for certain groups of riders, such as schoolchildren and college students.

[…]

Though fares make up a small percentage of Metro’s budget — $67.6 million, or 11.1 percent, of its 2017 operating revenues, according to federal data — eliminating them entirely can be tricky. Transit agencies must follow federal laws, which require fares to be fair and equitable for all users, based on the type of service offered. Removing fees for bus or rail use likely would mean Metro also would have to remove fares on paratransit for disabled and elderly passengers, an increasingly costly part of the agency’s budget.

Eliminating fares also could complicate federal funding for major agency projects if officials in Washington worry that Houston is not bringing in enough money to share the costs of projects.

[…]

Though some transit agencies offer free rides in partnerships with schools or within certain fare-free zones to encourage bus use in urban areas, Chapel Hill, N.C., is the only large transit agency to entirely remove fares in the U.S. That transit system is heavily subsidized by the University of North Carolina, the main campus of which is in Chapel Hill. Several small systems in college towns offer free transit.

Free ride programs have faced ups and downs in other cities, with transit systems similar in size to Houston. Portland, Ore., offered free trips within a special zone for nearly 40 years and saw huge gains in transit ridership as a result. The free zone, however, also led to complaints of increased crime and vagrancy, and it made enforcing fares difficult in a larger region around the zone. Tri-Met, Portland’s transit agency, abolished the fare-free zone in 2012.

Metro Chair Patman said in this story that she had spoken to Gattis, and that the fare box contract would be taken up in December, after a free fare study had been conducted. I think Tory’s argument has merit, but I worry about the politics of it. If public transportation were completely fare-free, a significant portion of the population will come to see it as an entitlement, something that “poor people” get that “the rest of us” pay for with our taxes. Once that happens, there will be political pressure to cut funding for transit, since after all it only “benefits” a small number of people. Republican legislators in Texas are already scheming to siphon off city sales tax revenues. Don’t think for a minute that making Metro rides free wouldn’t increase their incentive to do that. And yes, I am fully aware that this is a factually inaccurate and morally bankrupt way of thinking about transit. But it’s there, and it will be even more there if we eliminate fares. Which is a shame, but this is the world we live in. We’ll see what the result of Metro’s study is.

Someone is opposing the Metro referendum

I suppose it was too optimistic to hope that the Metro referendum would not get any organized opposition.

Opponents of Metro’s $3.5 billion bond referendum have formed a political action committee to lead a grass-roots campaign to curtail what they say is wasteful spending by the regional transit agency.

“To ask for $3.5 billion is irresponsible,” said Bill Frazer, one of the organizers of the Responsible Houston PAC and a former Houston city controller candidate.

[…]

Opponents used the Post Oak project as the backdrop for their announcement Tuesday, noting that Metro is asking for money to build 75 miles of bus rapid transit in the region despite having nothing to show Houstonians are eager to hop aboard. Critics also noted Metro’s newest light rail lines have never delivered the ridership officials promised when they started construction and failed to build many of the things promised voters in 2003 — as they used the $640 million voters approved to build three rail lines and did not add the park and ride locations and increased bus service promised by the ballot item.

“Before we do another blank check, someone needs to hold someone accountable for the past,” said Wayne Dolcefino, a media consultant that helped organize Tuesday’s announcement.

With so many areas in need of improved street drainage, Frazer said transit officials should invest their money there — something he said is possible because Metro’s agreement with cities promises 25 percent of the transit sales tax for street and drainage projects. Nothing, Frazer said, prohibits Metro from spending more than a quarter of the money for streets.

Note that “organized” does not mean “coherent”, or “logical”, or “sensible”. Last I checked, Houston already had a funding system in place for street and drainage improvement, which as I recall from his campaigns for Controller Bill Frazer opposed. Drainage is certainly a vital thing, but it doesn’t improve mobility. I’m also old enough to remember the 2012 election, in which there was a referendum that not only reaffirmed Metro’s one quarter share of the transit sales tax, it granted Metro a full share of the revenue growth on top of what was then being collected. The rest of this is largely unsupported claptrap, which will appeal to the kind of person who thinks any of this makes sense, and nobody else. I’ll be sure to look for their 30-day and 8-day finance reports.

The tax swap is dead

For this session, at least. Most likely, barring anything strange.

State Rep. Dan Huberty, the top public education leader in the Texas House, postponed two items of legislation Tuesday that would pay for long-term, ongoing school district tax cuts by raising sales taxes — effectively killing any chance of passing the legislation this year.

Huberty tabled until 2021 — the next legislative session — House Joint Resolution 3 and the accompanying House Bill 4621, which would ask voters to increase the state sales tax by one penny to buy down school district property taxes. The Houston Republican’s move came the day after the Senate, headed by a lieutenant governor who had endorsed the proposal, stripped such a provision from its version of the school finance bill in what was perhaps a signal that the measure would be dead in the upper chamber anyway.

Despite Tuesday’s postponement, the idea could still be revived this session; lawmakers could use a different bill as a vehicle to fund school district tax cuts.

Huberty criticized members of the Senate on Tuesday who “have spent their whole careers calling for property tax relief” but did not vote for the school finance measure the day before. And he repeatedly affirmed questions by House colleagues that suggested state Sen. Paul Bettencourt, the Houston Republican who leads the upper chamber’s property tax committee, had failed to take responsibility for coming up with a viable mechanism for property tax cuts when he was part of a school finance commission last year and during the current legislative session.

Bettencourt has arguably been the most vocal GOP senator opposed to the tax swap proposal, a position that has caught some by surprise since he’s closely aligned — both personally and professionally — with Republican Lt. Gov. Dan Patrick, who has made clear he supports the measure. Bettencourt marked himself “present, not voting” on the school finance bill Monday, while the majority of the upper chamber approved the legislation. And on Tuesday morning, ahead of business in both chambers, Bettencourt took to Facebook to once again reiterate his opposition to the tax swap, saying there is “simply no need to raise taxes even higher.”

In response to House members’ criticisms, Bettencourt said he’s long been clear about his concern that the tax swap proposal could amount to a tax increase. When Huberty proposed that the tax swap devote 80% of the new sales tax revenue to property tax cuts and the remainder to public school funding, for example, “I immediately red-flagged that,” Bettencourt said.

“Emotions run high when bills fail,” Bettencourt said. “If you have the votes, pass your bill — don’t blame somebody in the other chamber. That’s just kind of a rule that I’ve learned.”

[…]

On Tuesday morning, before the House gaveled in for the day, Bonnen told House Republicans during a caucus meeting that there would be no point in bringing up the proposal for a vote in the lower chamber if it was considered dead in the Senate, according to multiple people who were at the gathering. Caucus members at the meeting, according to those sources, largely agreed with Bonnen, who said the Senate stripping such a provision from its version of the school finance bill Monday suggested the upper chamber couldn’t muster enough support to approve a tax swap proposal.

After Huberty postponed the tax swap legislation, a Bonnen spokesperson said in a statement that the proposal had been “an opportunity for lawmakers to further reduce property taxes” and sustain tax relief found in the lower chamber’s school finance bill.

“Speaker Bonnen believes it is in the House’s best interest to devote the limited time left in session to our Day One priorities — passing legislation to provide meaningful school finance and property tax reform for all Texans,” the statement read.

See here for some background. To an extent, I agree with Bettencourt, in that a sales tax increase is a terrible idea. Of course, Bettencourt sees no need to pay for tax cuts. He just wants to cut them, and nothing else really matters as far as he’s concerned. The tax swap is a terrible idea that deserved to die, but at least Huberty was trying to pay for what he wanted to do. What happens next, with school finance and everything else, we’ll see.

Where goes the tax swap plan from here?

We start with the double down.

Showing their usual united front, the state’s “Big Three” political leaders on Friday tried to remake their case for why the Texas Legislature should deliver on long-term, ongoing property tax relief before the session wraps up this month.

They also expressed confidence that they would get the work done — even as House Democrats said they appeared to have the votes to block the lower chamber’s current main vehicle to provide the biggest property tax cut.

“Our goal is really simple: We’re going beyond the point of hoping to reform property taxes to the point where we’re hoping to to deliver true property tax relief through property tax reductions,” Gov. Greg Abbott said at a Capitol press conference Friday afternoon, flanked by Lt. Gov. Dan Patrick and House Speaker Dennis Bonnen, the Republican leaders of the Senate and House, respectively.

The three reaffirmed their commitment to a proposal that would increase the state sales tax one percentage point, raising about $5 billion per year to lower school district tax rates — which many have seen as a long shot from the start, with lawmakers from both parties skeptical about a sales tax hike.

The proposal has been moving through the Capitol so far in the form of a joint resolution, which needs two-thirds of each chamber to pass — at least 100 votes to pass the House and 21 votes to pass the Senate. If it passed both chambers, the proposal would then land on the November ballot for voters to decide, which leaders in support of the resolution have framed as a more democratic process.

House Joint Resolution 3 — which would ask voters to approve the sales tax swap for property tax relief — and its enabling legislation, House Bill 4621, passed out of the House Ways and Means Committee on Wednesday. The tax swap is expected to head to the lower chamber for a debate Tuesday.

The original version of the bill would have used 20% of the increased sales tax revenue to fund schools and 80% for property tax relief. That changed earlier this week, when state Rep. Dan Huberty, a Houston Republican who authored the legislation, tweaked the proposal to instead funnel all new sales tax dollars into property tax relief.

The move seemed to be an effort to bring on some of the Legislature’s more conservative members who had signaled they could be on board with a proposal if the new revenue was entirely dedicated to property tax relief. But it also seemed to solidify Democrats’ opposition to it, especially since the sales tax is regressive, meaning it takes a higher percentage of income from poorer people than richer people. A sales tax swap would raise taxes overall for Texas households earning less than $100,000 and would bring tax relief for households above $100,000.

State Rep. Chris Turner, who chairs his House Democratic Caucus, told The Texas Tribune that there are more than 60 “hard no” votes from Democrats against the proposal. If that opposition sticks for Tuesday’s expected vote on House Joint Resolution 3, its chances of passing the lower chamber would seem unlikely.

Patrick said he hoped both chambers would be able to get the needed two-thirds approval for the joint resolution from each chamber, but indicated he was open to getting it passed in different ways, exclaiming, “If it doesn’t, we’ll make it happen anyway!”

Sure, Dan. If you want to know why some of us are so skeptical of this, while plutocrats like Dan Patrick love it, consider this.

The state-run Legislative Budget Board estimated that the top 40% of wealthiest Texas households would see enough property tax savings to offset their increased sales tax payments in fiscal 2021. The bottom 60% of Texas households would pay more in taxes overall.

Households that make less than $99,619 would pay a total of $171 million more in taxes under the tax swap. Households that make more than that would pay a total of $424 million less in taxes, according to the analysis.

The disparity is because poor Texans tend to spend a greater portion of their money on taxable items.

The bottom fifth of Texas household incomes — those with incomes less than $37,630 — spend about 7.3% of their income on state sales tax while households in the top fifth of incomes — those with incomes of $149,453 and more — spend 1.6% of their income on state sales tax, according to the Texas Comptroller of Public Accounts.

Of course, we’ve known this forever, but the same bad idea crops up every few years and gets beaten down by the club of the same evidence. So we go through the motions. You can catch up on reading about this at various locations – the DMN, the Chron, Better Texas Blog with a handy chart – but be sure to read the analyses of the politics of this by Ross Ramsey and Scott Braddock. The reason the Big Three are putting on such a show of bravado is because they’re holding an eight-high hand in a game of five card stud, and they know it. And as Braddock notes on Twitter, so do members of the Lege.

Which may be why in the end, we got this.

The Texas Senate on Monday approved a bill to massively overhaul public school finance, but did so while backing away from a proposal to use an increased sales tax to lower school district property taxes.

After an hours-long debate on dozens of proposed changes, the Senate voted 26-2 on House Bill 3, which under the version passed by the upper chamber would increase student funding, give teachers and librarians a $5,000 pay raise, fund full-day pre-K for low-income students, and lower tax bills.

The House and Senate will have to negotiate their significant differences over the bill — including how to offer teacher pay raises and property tax relief — in a conference committee before it can be signed into law.

“When you’re doing something as complex as this, there’s going to be something you don’t like,” said state Sen. Larry Taylor, R-Friendswood, the bill’s author, anticipating tension throughout the day’s debate.

[…]

Taylor stripped the [sales tax] increase from HB 3 and offloaded some of the more expensive property tax relief provisions in the bill. The bill no longer includes an expansion in the homestead exemption from school district taxes. It lowers property tax rates by 10 cents per $100 valuation, instead of 15 cents, saving the owner of a $250,000 home $250 instead of $375.

The legislation would still limit the growth in school districts’ revenue due to rising property values, a proposal pitched before session began by the governor. School districts that see their property values significantly increase would have their tax rates automatically reduced to keep tax revenue growth in line. That would now start next year, instead of in 2023.

“The bill before us today has no linkage to the sales tax and is not contingent upon a sales tax,” Taylor said.

Instead, the bill creates a separate “Tax Reduction and Excellence in Education Fund” to fund school district tax relief. State Sen. Kirk Watson, D-Austin, said a working group came up with a plan to get $3 billion from several sources, including the severance tax on oil and gas extraction and an online sales tax.

“This does not increase any taxes of any kind,” he said.

So does this mean that the tax swap is dead? Well…

In for a penny, in for a million pounds, I guess. Have fun taking that vote, Republicans.

More action on the school finance/property tax front

From Tuesday:

Rep. Dan Huberty

The Texas House gave preliminary approval to a priority property tax reform package Tuesday, teeing it up for negotiations with the Senate and impelling the upper chamber to act on an omnibus school finance measure.

Together, the education and tax overhaul bills have been the top policy issues of the 2019 legislative session, and they are ultimately expected to be ironed out behind the scenes — and perhaps simultaneously.

Tuesday’s vote marks a small milestone for House leadership, which has muscled its must-pass budget, public education and tax reform bills to passage, all before the last month of session begins. But the House and Senate will next need to reconcile notable differences among the three measures, and the upper chamber has yet to move the school finance bill out of committee.

“We have done our job in the House — and we have sent everything over to the Senate,” said state Rep. Dan Huberty, R-Houston, author of the school finance bill.

Senate Bill 2 was approved on a 107-40 margin after a half-dozen hours of debate. More than 20 Democratic lawmakers broke party ranks to support the measure, which has garnered adamant opposition from city and county officials since its introduction.

See here for the previous update. The House version of SB2 makes it contingent on the House version of school finance reform passing, namely HB3. The Senate started that process yesterday.

The Senate Education Committee held a hastily arranged hearing Wednesday morning to vote out comprehensive school finance reform legislation — accelerating the bill’s journey to the Senate floor and eventual negotiations with the lower chamber.

The fast-tracked revision and vote on House Bill 3 came the day after House lawmakers voted through a property tax reform bill, making it contingent on school finance reform passing this session. State Sen. Larry Taylor, the Senate Education Committee’s chair, had originally told The Texas Tribune on Tuesday he did not anticipate a committee vote on school finance until Thursday or next week.

The full Senate is now expected to vote Friday on the legislation, which aims to increase the base funding for each Texas student, increase teacher pay, provide money for full-day preK for low-income students, and allow for long-term property tax relief.

Many details of the bill still need to be ironed out, however, and committee members voted Wednesday without an official analysis of how their districts would fare financially. Still, the vote seemed to address concerns that the Senate was moving too slowly on school finance.

[…]

Senate Education Committee members voted out a version of the school finance legislation that differs in many ways from the version the House voted out in early April. It includes a $5,000 across-the-board raise for full-time classroom teachers and librarians, funding for districts that want to pay higher-rated teachers more, money for districts with better student academic outcomes, and a few different long-term property tax relief proposals.

The House’s version of the bill requires districts to use a portion of their additional base funding per student on raises for all school employees and designates extra money for raises to be given at districts’ discretion. It lowers school tax rates by 4 cents per $100 valuation — $100 off a tax bill for the owner of a $250,000 home — and lowers rates further for districts taxing higher. But it doesn’t include a proposal for long-term, ongoing tax relief.

As we know, the Republican plan to pay for property tax “relief” is raising the sales tax. That would require a constitutional amendment, and for the House version of the joint resolution to be voted out of committee by next Tuesday at 11:59 PM. As you know, I think that’s a terrible idea and am rooting for it to fail. The clock is ticking, but at least by next Tuesday we’ll know what parameters the conference committees will have to work with.

One more thing, from the first story:

Few attempts to make major changes to the bill were successful Tuesday.

One amendment, from state Rep. Charlie Geren, R-Fort Worth, seems to bar anyone but licensed attorneys from representing taxpayers in the property tax appeal process on a contingency fee basis. The change would likely affect the author of SB 2, state Sen. Paul Bettencourt, a Houston Republican and a property tax consultant.

“It affects a lot of people. We’ll talk about it in conference,” Geren said. He added, “I don’t believe in contingency fees, but if we have to have contingency fees to do this, then I want the lawyers to do that.”

Heh. Someone please give Charlie Geren a fist bump for me. The Chron has more.

School finance and property tax update

From last week.

Rep. Dustin Burrows

Blasting the Senate for taking a symbolic approach on school district taxes, a panel of House lawmakers heavily altered then approved the upper chamber’s version of priority property tax legislation late Thursday. And committee members pointedly included a provision meant to rebut claims that they were not committed to wholesale reform.

The chair of the tax-writing Ways and Means committee, state Rep. Dustin Burrows, said the House had kept a provision in Senate Bill 2 that attempts to constrain school district property taxes. While he and finance experts have said the language needs to be addressed in the Education Code, there “is an intent in the Senate to symbolically express that they are committed to lowering school property taxes,” Burrows said.

“Well, because of that, I want to make sure that the House also expresses its full commitment to lowering people’s property tax bills related to schools,” the Lubbock Republican said.

The Senate had tried to limit schools’ tax rate increases to 2.5%, without an election.

“We actually used a 2.0 number,” Burrows said, “to show that the House is equally as committed to doing significant things this session for the property taxpayers of the state of Texas.”

The insertion of the 2.0 figure may be a dig at hardline conservatives and Senate lawmakers, who have suggested the House gutted its own property tax reform package when they removed school district language from it in March. The lower chamber’s approach, however, has earned the backing of experts who say a separate public education bill is the most feasible way to make changes to the school finance system.

“To do property tax reform for schools, you really have to do it in the Education Code. I think that all of the experts agree,” Burrows said. “This bill has never touched the Education Code. It can’t touch the Education Code, that is House Bill 3,” he said, referencing the lower chamber’s omnibus school finance package.

As adopted in a 8-3 vote Thursday, SB 2 now closely resembles House Bill 2, a companion measure passed by the House committee last month — even taking on the same name: The Texas Taxpayer Transparency Act. The Democratic vice chair of the committee, state Rep. Ryan Guillen, joined Republicans in support of SB 2’s passage Thursday.

In the latest version of the bill:

  • Cities, counties and emergency service districts must hold an election if they wish to raise 3.5% more property tax revenue than the previous year
  • Those entities can increase their property tax levies by $500,000 a year, without triggering an election
  • Other taxing units — namely, hospital districts and community colleges — remain at an 8% election trigger, with Burrows’ citing the inflation of medical and education expenses
  • Homestead exemptions offered by local municipalities can be factored into the revenue growth calculation, preventing cities and counties from being penalized if they offer their residents tax reductions
  • A five-year carry-over provision lets taxing units bank unused revenue growth

[…]

A final change Thursday makes passage of SB 2 contingent on HB 3’s approval.

“These two are tied together,” Burrows said.

See here for more about HB3, and here for more on SB2. Ross Ramsey gets into the politics of the moment, which includes the Republican leadership’s continuing fealty to the property tax for sales tax swap that isn’t going anywhere. It’s hard to compare, because each session is its own story, but it sure feels to me like not a whole lot has happened so far, with less than five weeks to go. The big ticket items dragging along and seeming to go nowhere isn’t unusual, but what else has even made it to the floor of the other chamber? Not that I’m complaining, mind you, I’m just curious. Word is that SB2 will be up in the House today, so we’ll see how it goes. There’s still a wide range of possible outcomes.

Yes, they really are now pushing a sales tax for property tax swap

Some bad ideas never die.

Texas’ top three political leaders — Gov. Greg Abbott, Lt. Gov. Dan Patrick and House Speaker Dennis Bonnen — threw their support Wednesday behind a proposal to increase the sales tax by one percentage point in order to lower property taxes across the state.

But that’s only if lawmakers agree to limit future local property tax increases.

The proposal would raise the state’s sales tax from 6.25% to 7.25%, generating billions of additional dollars annually for property tax relief, if voters approve a constitutional amendment. But the idea will be a hard sell to Democrats, since the sales tax is considered regressive, meaning lower-income Texans end up paying a larger percentage of their paychecks than higher-income Texans.

“Today we are introducing a sales tax proposal to buy down property tax rates for all Texas homeowners and businesses, once Senate Bill 2 or House Bill 2 is agreed to and passed by both Chambers. If the one-cent increase in the sales tax passes, it will result in billions of dollars in revenue to help drive down property taxes in the short and long term,” said a joint statement from the three Republicans.

Neither chamber has passed HB 2 or SB 2, which would require voter approval of property tax increases over 2.5%.

The House Ways and Means Committee was scheduled to take public testimony on the House’s sales tax swap proposal this week but delayed hearing the bills. Rep. Dan Huberty, R-Houston, who authored House Joint Resolution 3 and House Bill 4621, is considering changing the legislation to use a fraction of the additional money generated by the sales tax for public schools — in order to get more Democrats on board.

The bills are intended to provide another revenue source to help significantly cut down local school property taxes, which make up more than half of the local property taxes levied in Texas.

If the Legislature approves the resolution, the constitutional amendment would go to voters to approve in November, and if voters sign on the tax rate change would apply in January 2020.

See here for the background and my opinion about this lousy idea. Given that a constitutional amendment is needed for this, it will be easy enough to prevent it from happening. The progressive case against swapping out property taxes, which will disproportionately benefit commercial real estate and wealthy homeowners, for regressive sales taxes, is clear cut, and likely to hold a lot of sway with the current Democratic caucus. There’s also polling evidence to suggest that the public doesn’t care for a sales tax increase. I’m a little skeptical of that, since the question was not asked in conjunction with a potential cut in property taxes, but that’s an argument for the Republicans to make, and given the baked in doubt about anything actually reducing property taxes (for good reason!), I’d take that bet. HB2 is up for debate today, so we’ll see how this goes. The Chron and Texas Monthly have more.

Inevitably, we come back to a sales tax/property tax swap

It’s an idea we just can’t seem to quit.

Texas lawmakers are considering an infusion of $9 billion to improve public schools and lower property taxes over the next two years. The additional $6.3 billion in the classroom is being billed as a transformational effort to better educate the state’s 5.4 million students, while another $2.7 billion would stem the tide of escalating property taxes for homeowners.

“If we’re going to make some strides on these really big items, it really has to happen this session,” said Rep. John Zerwas, R-Richmond, chairman of the influential Appropriations Committee.

While lawmakers are confident the state’s booming economy will provide big bucks to spend on public schools, they are also pitching a number of plans to increase the state sales tax in the future. The proposals include hiking taxes on items such as sweet snacks, gasoline, e-cigarette fluid and heavy machinery rentals. But the proposal with the most apparent momentum is a tax swap that would allow local governments to charge a higher sales tax in exchange for reducing property tax levies.

Even raising the sales tax by one percent “contributes a lot of money” that school districts, cities and counties could use to offset reductions in property tax revenue, Zerwas said. Some estimates predict such an increase would raise more than $5 billion a year. The statewide sales tax rate is now 6.25 percent a year. Local governments can add up to two percent.

Although Republicans are leading the charge with major tax swap proposals, it’s unclear how they will fare in the GOP-led House and Senate, particularly among lawmakers who narrowly won their reelections as Texas Democrats gain ground.

Financial implications of the bills are shaky. Several tax bills were filed a week ago, just under a deadline, and have yet to be analyzed by the Legislative Budget Board which predicts financial effects.

Increasing reliance on the sales tax troubles Eva DeLuna Castro, a budget and policy expert with the left-leaning Center for Public Policy Priorities. Not only is a sales tax considered regressive for taking more money from low-income people than the rich, but its collections are more susceptible to the ups and downs of the economy, she said.

“You need to find a revenue source that doesn’t all the sudden tank on you. Or if you know that it is going to do that, you need to put most of it away for a rainy day and use it when that rainy day comes,” she said.

[…]

Rep. Drew Springer, R-Muenster, is proposing Texas increase taxes on gasoline and close tax exemptions on items like ice cream, certain baked goods, e-cigarette vapor fluid and over-the-counter medicine.

“I don’t think people realize their ibuprofen is tax-free,” said Springer. In exchange, House Bill 2915 would allow the state to lower the maintenance and operations property tax that funds schools. His bill would also increase the homestead exemption to 50 percent of a home’s value. Texans in a home valued at $274,000 would average $1,400 a year in property tax relief, he said, amounting to $6.2 billion less in property tax collections statewide.

Another bill, House Joint Resolution 3, proposes inching up the sales tax and using money from that increase exclusively for public schools. The resolution is proposed by Rep. Dan Huberty, R-Houston, the architect of the House’s $9 billion school finance plan. The measure would require a vote in November to change the state Constitution and increase the statewide sales tax, which is now 6.25 percent. Huberty emphasized that raising the sales tax is just one measure under consideration, and that it’s still too early to pencil in numbers.

“We have to put more money into the system. It’s our responsibility,” Huberty said Thursday at an event hosted by the Texas Tribune.

Rep. Chris Turner, D-Grand Prairie is proposing the state systematically examine each tax exemption every six years to decide whether it is needed. House Bill 3968 will raise revenue by expiring out-of-date tax “loopholes” over time, he said, and is a good alternative to raising sales taxes.

“It is important to note that Texas already has a high sales tax — 8.25 percent in most areas,” said Turner, who chairs the House Democratic Caucus. “The lower someone’s income, the more it hurts, so an increase in the sales tax will hurt a lot of Texas families.”

This comes up every few years – in 2005, in 2007, in the 2012 and 2014 elections – and each time we confront the fact that swapping property taxes for sales taxes greatly benefits property owners while burdening lower income folks the most. That’s a feature and not a bug, as far as its Republican advocates are concerned. I appreciate that at least this time it’s being proposed in the context of putting more money into schools, which would then have the effect of easing the pressure on local property taxes, but the same problem remains. Rep. Turner’s proposal to evaluate tax breaks also comes up whenever sales-tax-increase bills are filed, and it usually gets quietly ignored as the higher-profile swap bills eventually die. It’s still a good idea, it just never gets any momentum behind it. Rep. Springer’s idea to expand the sales tax to more things also comes up in conjunction with swap bills, and there is merit to this approach as well, though the real money is in taxing services, which is pretty much as big a taboo as an income tax is.

To review: I support requiring a process to scrutinize and sunset every tax break we have on the books, and I support at least exploring the imposition of a sales tax on selected goods and services where it is not currently imposed. If the goal of that is to put more state money into public education, and one result is that it allows local governments to ease up on property tax collections because they are no longer trying to make up for the state’s inadequacies, I would consider that a good outcome. The Trib has more.

SCOTUS and sales taxes

This ruling will be good for Texas.

Texas stands to gain hundreds of millions of dollars in tax revenue after the U.S. Supreme Court on Thursday ruled that states may force online retailers to collect sales tax even when they have no physical presence in the state.

Every year, Texas loses $1.1 billion in uncollected sales tax, according to the Texas comptroller’s office — well over the $800 million the state will spend securing its southern border this year and next. That’s the result of the high court’s 1992 decision, now reversed, that retailers are responsible for collecting sales tax only in states where they had “nexus.” That decision — which predated the astronomical rise of the internet and the subsequent boom in online shopping — was outdated, argued lawyers for the state of South Dakota, who won the case this week.

That lost tax revenue is particularly meaningful in Texas, one of just a handful of states without a personal income tax. This May, for example, the state’s sales tax revenue totaled $2.76 billion.

[…]

Customers themselves owe sales tax on their purchases, but it’s sellers who are required to collect that money and send it to the government. States have little mechanism — and little incentive — to chase down sales tax on small-ticket purchases from average consumers when the retailers don’t do it themselves. Some of Texas’ largest online retailers — Amazon, for example — already remit sales tax to the state. Amazon has almost a dozen distribution centers in the state.

Texas is highly unlikely to gain back all of the $1.1 billion it’s currently losing, experts said, and any money the state gets back won’t come overnight. While the Texas comptroller has a great deal of taxing authority, some changes to the state’s tax structure might have to be carried out by the Legislature when it reconvenes in 2019, said Dale Craymer, the president of the Texas Taxpayers and Research Association. The Comptroller’s office is looking into that, a spokesman said.

“We welcome the court’s ruling in this case and are currently assessing any potential revenue impacts,” said Kevin Lyons, a spokesman for the agency.

I have long believed that the sales tax exemption for online purchases outlived its purpose years ago. This is not just for states like Texas but also for local governments that rely on sales tax revenue, and for traditional retailers who are no longer at an automatic disadvantage. Sales tax rates vary by locality, and not all items are subject to sales taxes, so this will be a challenge to set up, but that’s not our problem. Online retailers will figure it out, and life will go on. This was the right decision.

From the “Nothin’ but good times ahead” department

Given the good economic conditions in Texas right now, you’d think the budget outlook would be better than it is.

The Texas economy is growing healthily, but that doesn’t mean state budget writers will have more money at their disposal next year, state officials said Tuesday.

In fact, though unemployment is low and tax revenue is on the rise, big bills coming due for the state’s highways and health care programs are giving Texas lawmakers reason for concern.

“I would like to offer a few words of caution for reading too much into the positive recent economic numbers,” Texas Comptroller Glenn Hegar told lawmakers at a Senate Finance Committee hearing.

As they often do, state budget writers last year underfunded Medicaid, the federal-state insurance program for the poor and disabled, which, alongside public education, makes up one of the largest shares of the state’s $217 billion two-year budget.

Then, during a special session called by Gov. Greg Abbott over the summer, state lawmakers shifted another $500 million away from the Texas Health and Human Services Commission to pay for public education programs.

As a result, lawmakers could face a $2.5 billion Medicaid bill shortly after they reconvene in Austin in 2019. Then there are the additional drains on Texas coffers from Hurricane Harvey recovery efforts, Hegar said.

That’s bad news for lawmakers given the comptroller’s prediction that the state will only have a $94 million “beginning balance” when lawmakers convene in 2019. By comparison, lawmakers had an $880 million beginning balance in 2017, which was ultimately a tight year for the state budget. Two years before that, lawmakers enjoyed a $7.3 billion beginning balance.

[…]

Another source of heartburn for budget writers is the ravenous state highway fund. In 2015, amid complaints of a highway system in disrepair, Texans voted to amend the state Constitution to require that up to $2.5 billion in sales tax revenue be dedicated to the highway fund.

That means that even as Texas collects more money from sales taxes — Hegar testified that sales tax revenue grew by an average of 10.3 percent over the last three months — the rest of the state budget will not benefit from that revenue since it is earmarked for the highway fund.

That was also an issue for budget writers in 2017. Last year, in order to free up some of that money for other purposes, Senate lawmakers pushed for an accounting trick that delayed a payment to the state highway fund into the next two-year budget cycle. That freed up about $1.6 billion for lawmakers last year, but it means there will be another bill to pay in 2019.

“In short, despite a strong economy and positive outlook for revenue growth in this biennium, it seems likely the next budget will be much like the one crafted in 2017, having to contend with restricted revenue relative to the spending trends of the state,” Hegar said.

Just a reminder: Underfunding Medicaid was a choice. Shifting money away from HHSC was a choice. The amendment to require all that highway spending was ratified by the voters, but it was there to be ratified because the Lege chose to put it there. Deferring that payment to the highway fund was a choice. And though the story doesn’t include it in its litany, spending nearly a billion dollars on boondoggle “border security” stunts was a choice, too.

We’ll probably be fine in the 2019 session, though the potential for shenanigans is always high. But remember, winter is coming, because it always does. When it does, we’re going to have a mess to clean up, one that was caused by the Republicans in charge of our state, one that could have been mitigated in many ways. I hope we’re ready for it.

(Note: This is the inspiration for the post title.)

State of the County 2017: Ed Emmett versus state leadership

That sound you heard was a fight breaking out.

Judge Ed Emmett

Harris County Judge Ed Emmett on Tuesday used his annual State of the County speech to blast state leaders who he said attack local governments and seek to cut needed taxes but offer no real solutions to the myriad problems Texas’ large urban counties face.

Before a crowd of hundreds at NRG Center, Emmett called on state officials to invest roughly $500 million in a third reservoir and dam to boost area flood control efforts, fund a beleaguered indigent health care system, and revamp “broken” tax policies that force the county to rely on property taxes to serve an unincorporated area that, on its own, would be the fifth-largest city in the country.

In addition to helping with the county’s flood control efforts, Emmett called on the state to contribute more for mental health care and transportation improvements, citing the need for an Interstate 69 bypass on the east side of the county and renewed emphasis on railroads and technology to move freight from area ports.

He also reiterated his call for state leaders to accept increased Medicaid funding from Washington.

“The next time a state official makes a big deal about a fraction of a cent cut in the property tax rate, ask them why they won’t help Harris County property taxpayers fund indigent health care,” the judge said. “State leaders who are eager to seek for disaster relief should also be willing to accept federal dollars to provide health care for poor people. That would be real property tax relief.”

The state, he said, should treat the county more like a city, which by law can levy a sales tax and pass ordinances. The county is an arm of state government and relies on property taxes for most of its revenue.

“The whole point of today’s speech was to say ‘enough is enough,'” Emmett said afterward. “We need to be able to provide the services and the government that people expect in an unincorporated area.”

[…]

Emmett criticized the bills that would have forced the county to get voter approval on taxes and spending.

“Such a populist approach might sound reasonable, but the late British Prime Minister Margaret Thatcher, who nobody ever accused of being a liberal, described direct referenda as ‘a device for dictators and demagogues'” he said.

He also lit into lawmakers’ attempts to limit property tax collections during the last legislative session, saying leaders “attacked counties and cities and other local governments, all the while offering no real solutions.”

“County government relies almost completely on property tax revenue, but the property tax is widely hated, and wholly inadequate as a means of financing the unique urban government that we have. Unfortunately, narrow-minded politics has pushed unfunded mandates from the state onto county government,” Emmett said.

“It is just pure ugly politics. And, by the way, the portion of county taxes paid by business is, I don’t need to tell the business community in this room, growing. We are reaching the point where tax policies are a drag on economic development.”

You can read the whole speech here. Most of the criticisms Emmett made about state leadership and recent political actions are in the story, but the whole thing is worth a read. Oh, and he was introduced by outgoing House Speaker Joe Straus, which was a further provocation. Like the useless demagogues they are, Dan Patrick and Paul Bettencourt responded petulantly in the story. This is another skirmish in the culture wars of the Republican Party, and Republicans who are in the Ed Emmett/Joe Straus camp – including Emmett himself – are going to have to decide next year if they really want the likes of Greg Abbott and Dan Patrick dictating to them. A vote for the status quo is a vote for four more years of the things that Emmett was railing against in his speech.

Emmett calls for changes to county’s flood strategy

Good to see.

Judge Ed Emmett

Calling Tropical Storm Harvey’s devastation a “game-changer,” Harris County Judge Ed Emmett on Monday called for a sweeping reexamination of the region’s flood control strategy, a process that could include billions of dollars to upgrade aging dams, building a new storm water reservoir and ramping up regulations to tamp down booming development in flood-prone areas.

The set of options outlined by Emmett on Monday, if implemented, would be the biggest change in decades to how the Houston region protects against its perennial rains and floods. Emmett said everything would be on the table, including large-scale buyouts, banding with surrounding counties to create a regional flood control district and seeking authority from the state to levy a sales tax to pay for what likely would be a massive initiative.

Emmett, a Republican who has served as county judge since 2007 and largely is seen as a pragmatist, likened the changes to a post-flood push in the 1930s that led to the creation of the Harris County Flood Control District and the construction of the Addicks and Barker dams on the city’s west side, which today protect thousands of homes of homes, downtown Houston and the Texas Medical Center.

“We can’t continue to say these are anomalies,” Emmett said. “You’ve got to say, ‘We’re in a new normal, so how are we going to react to it?'”

Jim Blackburn, an environmental lawyer and frequent critic of Harris County’s flood control strategy, was encouraged after hearing Emmett’s comments Monday.

“This is the single best piece of news I have heard post-Harvey from any elected official,” said Blackburn, who has sued the county on several occasions and co-directs Rice University’s center on Severe Storm Prediction, Education and Evacuation from Disasters. “I would like to hear every one of them say that.”

[…]

Included in the options Emmett outlined Monday were buyouts, not just of individual homes, but whole tracts of land. He said a wish-list of homes that are not already being targeted by projects, such as the upgrades on Brays Bayou, could cost $2.5 billion.

A regional flood control district could be modeled after the Harris-Galveston Subsidence District, created in 1975 to oversee the conversion from well water to surface water after sinking ground alarmed residents and public officials.

Emmett said given the repetitive flooding, the 100-year standard the county uses to design projects and regulate development, would need to be reexamined.

“We basically had three 500-year events in two years,’ he said.

An additional reservoir and a levee in the northwest part of the county to back floodwaters from Cypress Creek – both part of the options Emmett outlined – had been part of an original U.S. Army Corps plan when it built the Addicks and Barker reservoirs. Those projects failed to materialize, however, and land costs became prohibitive as people moved in.

As we now know, this includes a bond issue of up to $1 billion. On top of that, Commissioners Court has filed an application with FEMA to buy out some houses in high risk areas. Emmett has also mentioned federal funds for some projects, which state officials are also seeking, reallocating the county budget to put more of an emphasis on flood mitigation, and maybe asking the Lege to provide another revenue stream such as a sales tax. Some of this may now be mooted by the bond issue, and some of it may be discarded for lack of support. The important thing is to get the conversation started, so kudos to the county for that.

The “border adjustment tax” is a sales tax increase by another name

That’s a feature, not a bug.

Retailers across Texas and the country are warning that a proposed border adjustment tax would increase the cost of imports and, by extension, the price of food, clothing and other consumer goods. Texas companies, including Stage Stores of Houston and Neiman Marcus of Dallas, have joined more than 150 other U.S. firms in a coalition fighting a possible border tax, part of a broader tax overhaul championed by Rep. Kevin Brady, The Woodlands Republican who chairs the tax-writing Ways and Means Committee, and House Speaker Paul Ryan, R-Wisconsin.

The plan essentially proposes a 20 percent tax on imports, which the National Retail Federation, a trade group, expects would raise the price of consumer products by 15 percent. Randi Sonenshein, senior vice president of strategy and finance for Stage Stores, which has more than 800 locations in 38 states, said her company worries that the higher prices related to the tax would particularly hurt customers who shop at stores located in small and mid-size towns, where it primarily operates.

“The plan will have a disproportionately negative impact on retailers,” she said. “It’s a tough thing to contemplate.”

Border adjustment is one component of a tax plan that aims to shift the U.S. tax code toward favoring production of goods over their consumption. Under the plan, companies would lose deductions for the costs of importing goods; at the same time, sales revenues from goods they export would be exempt from corporate income taxes.

[…]

Companies with significant sales in foreign countries, including aerospace manufacturer Boeing, the industrial conglomerate General Electric, chemical maker Dow Chemical and pharmaceutical maker Pfizer, support the plan. But critics of border taxes say U.S. consumers will ultimately pay more, with the costs borne disproportionately by low- and middle income households.

If a border tax was enacted, apparel, autos, furniture and electronics equipment – much of which is imported – would see some of the largest price increases, at least initially, according to a recent analysis by the Wall Street investment bank Goldman Sachs. The National Retail Federation expects the cost of clothing, for example, would rise at least $350 a year for an average consumer.

Walmart, the nation’s largest retailer, as well as trade groups such as the U.S. Fashion Industry Association and the Association of Global Automakers, have joined the coalition against the plan, called Americans for Affordable Products.

The Texas Retailers Association, which represents companies of all sizes in every retail sector except convenience stores, has followed suit. George Kelemen, the association’s president and CEO, said every retail business in the state would be affected by the proposal in some way. In addition to clothing and other manufactured goods, food grown outside the United States, including everyday groceries, such as avocados, bananas and coffee would become pricier, he said.

“We are opposed to this,” he said. “It’s a cost passed on to the consumer.”

The real point of this is that once this is implemented, you – and by “you” I mean “Republicans” – can cut taxes elsewhere, which is always the goal. In that sense, it’s like the Craddick-era proposals to hike the state sales tax in return for a property tax cut. Dan Patrick would do that today if he thought he had the votes for it. I’m sure you can guess who would pay more and who would pay less in such a scenario. The bottom line is those tax cuts for the rich aren’t going to pay for themselves, but this might.

Time once again to talk about the Super Bowl and its economic impact

We’re less than 100 days out from Super Bowl LI here in Houston. I don’t know how much people who are not directly involved in the planning and execution of it are thinking about that.

The economic benefits of hosting a Super Bowl and other major events have long been a matter of debate, however. Houston’s host committee has yet to release its impact analysis, but these reports typically estimate that Super Bowls generate economic activity in the hundreds of millions of dollars. Academics who study such events generally find the added activity, with all the costs taken into account, is much smaller.

“I can’t tell you whether there will be a zero net impact or a modest positive one,” says Andrew Zimbalist, an economist at Smith College who has long studied the sports industry, “but it’s not going to be large.”

Houston, though, may be better prepared to benefit from the Super Bowl than other cities, for several reasons. First, there isn’t much winter tourism in Houston to displace, as in other Super Bowl cities such as New Orleans and Miami, so the net gain here is much greater. Second, Houston’s hospitality industry needs the business, with new hotels built during the shale boom struggling with lower-than-expected occupancy rates as business travel declined.

Third – and perhaps most important – the city really could use a period of prolonged exposure to show business leaders and the millions watching at home that it’s not just a stodgy oil town like it was in the early 2000s.

[…]

The accounting firm PwC has estimated the economic impact of the Super Bowl since 2003, pegging the game’s value to Houston in 2004 at about $130 million in direct spending. It estimated that the last Super Bowl, number 50, was worth $220 million to the San Francisco Bay Area.

Cities have gotten better at making the most of Super Bowl week, said Adam Jones, a PwC analyst. By planning events within a relatively small radius so visitors spend more time on experiences than getting to them, cities can capture greater returns.

Houston has done that, with NFL Live at Discovery Green — a 10-day music and food-filled festival open to the public — only a few minutes from NRG Stadium via light rail or taxi. Additional bus and shuttle lines will be available should guests want to venture to the Galleria as well.

“What we’ve seen within the past five years is communities going out, learning what has worked, what hasn’t worked in cities that preceded them,” Jones said. “We continue to see year over year improvement in the model.”

University of Houston economist Bill Gilmer looked at additional tax revenues generated during the 2004 Super Bowl, about $5 million, and estimated the 2017 edition would bring in an extra $6.6 million in sales taxes for the city plus another $2.2 million in hotel occupancy taxes and $6.8 million for Metro.

Longer-term benefits are harder to measure. The city’s tourism promotion arm, HoustonFirst, said it was able to go after bigger conventions when the Hilton Americas was completed in 2004. That added 1,200 rooms directly connected to the convention center, and the Marriott Marquis will have a similar effect. The city booked a record number of room nights for future conventions in 2015 and expects to break the record again this year, according to HoustonFirst.

We’ve discussed this a few times before. I’m sure that the economic benefit of hosting a Super Bowl is generally overstated, but I do think there is a benefit, and I do think it’s possible that cities have learned from past experiences and academic study to maximize the benefit that is available to them. As the story notes, Houston doesn’t have much tourism trade to displace, but we do have an extensive food-and-drink sector of our economy that will surely enjoy having all these out-of-towners around. The spending that has been done on infrastructure is spending that needed to be done, and which will be a public good long after the Super Bowl people have gone home. In the end, someone will put out a number, and we can make of that what we will. Whatever that number is, I expect the city of Houston will look back on this experience and decide that it was worth it.

Our tax system isn’t quite as stupid as it could be

Good news!

BagOfMoney

A Texas Supreme Court ruling has spared the state from having to issue billions of dollars in tax refunds to oil and gas drillers — a prospect that had had threatened to shake up the next legislative session.

The justices on Friday sided with Texas Comptroller Glenn Hegar in an arcane tax dispute that the Republican feared could have far-reaching consequences for the state’s budget outlook.

Denying Midland-based driller Southwest Royalties’ request for a refund, the court ruled that state law did not exempt metal pipes, tubing and other equipment used in oil and gas extraction exempt from sales taxes.

“Southwest did not prove that the equipment for which it sought a tax exemption was used in “actual manufacturing, processing, or fabricating” of hydrocarbons within the meaning” of the tax code, Justice Phil Johnson wrote for the majority in an opinion that affirmed decisions in lower courts. “Thus, Southwest is not entitled to an exemption from paying sales taxes on purchases of the equipment.”

See here, here, and here for the background. As noted in the story, some $4 billion or more would have had to be refunded to various businesses if the Supremes had ruled for the plaintiffs. Needless to say, that would have been bad news for the state, as well as for cities and counties who get their share of sales tax revenue, too. Thankfully, there is a bottom to the stupidity in our tax code. Good to know.

Council unanimously passes Turner’s first budget

Good job.

Mayor Sylvester Turner

Mayor Sylvester Turner

Mayor Sylvester Turner achieved his goal of securing unanimous passage of his first general fund budget Wednesday morning, a month ahead of the typical schedule and after an unusually brief and uncontentious discussion of council members’ proposed changes.

The $2.3 billion general fund budget, which pays for most basic city services with revenues from taxes and fees, represents only the second budget cut for Houston in two decades. The first came after the 2008 nationwide financial crisis.

“It’s not my budget, it’s our budget,” Turner told City Council. “There are fewer than 20 amendments today, which I think speaks to the collaborative nature of the partnership we have. I want to thank you for the trust you’ve placed in me.”

[…]

Turner’s budget proposal in general , which spends $82 million less than was budgeted in the current fiscal year, despite an additional $27 million for employee raises and an increase of $29 million in pension payments, cuts 54 vacant positions and includes roughly 40 layoffs.

The document pulls $10 million from reserves, makes $56 million in permanent changes, mainly cuts within departments, and relies on $94 million in one-time fixes to bridge the $160 million gap the city had faced between its revenues and expenses.

The Mayor’s press release is here, and a longer version of the Chron story is here. This is the “easy” budget, in the sense that it doesn’t yet do anything related to pensions, and was able to use a number of one-time items to help boost revenue and mitigate the need for deeper cuts. Next year will be harder, especially if sales tax revenue continue to sag. The relative ease and widespread harmony with which this budget was passed gives Turner some momentum and a fair amount of political capital to deal with that budget as it comes. The Press has more.

Have I mentioned lately that the revenue cap is stupid public policy?

Because it is.

BagOfMoney

Sales taxes are Houston’s second-largest source of revenue for the general fund, which pays for most core services.

Just as concerning for city officials, however, was more news about the city’s largest general fund revenue source: property taxes.

Mayor Sylvester Turner, as he did in February, criticized what he said is an unjust and inequitable system that lets commercial property owners abuse legal loopholes to successfully challenge their property appraisals and pull millions out of local governments’ budgets.

As of February, the hole created by those tax lawsuits was to be a projected $16 million for the current fiscal year, which ends June 30. By Wednesday, Turner and his finance director, Kelly Dowe, said that projection had risen to more than $32 million.

Council cut the property tax rate last fall to ensure the city would not collect more property tax revenue than is allowed under the city’s decade-old, voter-approved revenue cap, which limits growth in property tax collections to 4.5 percent or the combined rates of population growth and inflation, whichever is lower.

Companies’ successful lawsuits are pushing tax collections below the cap, however, with no way to adjust the rate back up to fill that hole.

“It’s a double hit. Last year you all lowered the tax rate based on the revenue cap. Had we known then we were going to be down another $32 million, I don’t think you would have lowered it that low. You cannot budget that way,” Turner said. “I will again ask the Legislature to remedy this situation. Taxes from hard-working homeowners should not effectively subsidize wealthy commercial property owners.”

But hey, look on the bright side: The system is working exactly as designed.

Final Four weekend was pretty good for Houston

We’ll take it.

Beyond the basketball court, the Houston economy appears to be the big winner of the Final Four.

Across the city, several restaurants, bars and hotels reported big boosts in customers and cash flow, as an estimated 70,000 out-of-town basketball fans arrived for the NCAA men’s basketball championship. Organizers say those fans could spend $150 million in a city that could use a lift as a prolonged oil slump persists.

“I feel like it’s exceeded expectations,” said Rachel Quan, vice president of external operations for the Houston Final Four Local Organizing Committee.

Many local officials and business leaders said they view the Final Four as something of a test-run for next year’s Super Bowl. The city is sprucing up to accommodate the thousands of expected visitors with a slew of development projects – from road improvements around NRG Stadium and Hobby Airport to building the Marriott Marquis that will connect with the George R. Brown Convention Center.

The benefits of hosting major sporting events -weighing costs and crowds versus the visitor spending and promotion – have long been debated. At times, the city struggled over the weekend to accommodate the swarms of Final Four visitors. Concerts at Discovery Green in downtown were so busy that police were forced to turn people away, leading some to complain of poor planning.

The Final Four alone might not create a wave of economic growth, but is the culmination of events like the Super Bowl and the annual Offshore Technology Conference next month that have the greatest potential impact, said Barton Smith, professor emeritus of economics at the University of Houston.

“Collectively, it can be a very important part of the Houston economy,” he said.

I’ve made plenty of fun of economic impact projections for sporting events, but this at least is talking about something that has already happened, and whatever you think about those projections, it’s a different matter when a business like Phoenicia reports a big increase in sales during the period in question. As always, you still have to be careful about accepting numbers like these on their face, as some folks might have stayed home instead of going out or otherwise not spent money that they would have if there hadn’t been a big event crowding the streets and clogging up traffic. We also don’t know how much the city had to spend on maintenance, overtime, cleanup, and what have you – that figure is never taken into account in these stories. But overall it seems that local businesses got a boost from the weekend’s activities, and that’s always a good thing. Let’s hope we get more of the same from next year’s Super Bowl.

Lawsuits and low oil prices

Both are threatening the next Texas budget.

BagOfMoney

Last week, lawyers for the state of Texas got the latest in a string of bad legal news.

A lawsuit challenging the state’s foster care system as inhumane appeared to gain steam when an appeals court rejected the state’s request to stop the appointment of two “special masters” to recommend reforms.

The overhauls that have been discussed so far would be pricey to implement — as much as $100 million per year, according to rough estimates from the state comptroller’s office. But they actually are on the lower end of all the extraordinary legal expenses the state is facing at a time when stubbornly low oil prices are simultaneously threatening to blunt its coffers.

Three other lawsuits against the state — two of them pending before the Texas Supreme Court, with rulings expected soon — could cost the state billions if it ends up on the losing side. Experts say the state may have the cash to cover one of them in a single budget cycle, but probably not any more than that — especially if low oil prices persist, dampening the state’s stream of tax revenue. That could mean budget cuts when lawmakers meet for the 2017 session, at least if the Republican-dominated Legislature remains steadfast in its refusal to tap the state’s nearly $10 billion Rainy Day Fund.

Two of those three lawsuits, both tax cases, could cost the state a combined $10.4 billion in tax refunds and up to $2 billion in collections per year beyond that, according to the comptroller’s office, which is closely monitoring them.

Potential cost estimates do not exist for the last case — a high-profile challenge to the state’s public education funding system — but past school finance rulings have cost the state billions.

Such sums would handily eclipse the state’s $4.2 billion projected surplus, which could itself dwindle if oil prices remain low and further blunt tax collections. (Comptroller Glenn Hegar has already lowered projections once.)

“Any of those by themselves are a huge hit,” said Dale Craymer, president of the business-backed Texas Taxpayers and Research Association. “But if you start losing two or three of those issues then, yeah, it’s much more questionable that the state’s general revenue reserves are sufficient to cover that.”

See here and here for some background. There’s not much that can be done about the price of oil, though after years of living it up, and of politicians claiming credit for all that robustness, I doubt there’s much sympathy out there for us. The rest are the result of policy and/or legislative decisions, some of which may well bite us in the bottom line. I’m rooting for the Supreme Court to stick it hard to the Lege on school finance, but the other cases I’d rather see the state win. As much political hay as there is to be made in a chaotic situation, there’s nothing good from a public policy perspective on those cases, and I have little faith the Lege would do a good job cleaning up the mess. But on school finance, all bets ought to be off. We’ll see how it goes.

The Supreme Court hears that case about how stupid our tax system is

There’s a lot of money riding on the outcome.

BagOfMoney

With billions of dollars at stake, the Texas Supreme Court heard arguments Tuesday in a tax showdown whose outcome could shake up the next legislative session while straining the historically friendly relationship between state lawmakers and the iconic oil and gas sector.

Throughout a spirited debate over arcane accounting rules and oil-tinged science, the justices offered few clues as to how they might rule.

“They’re all great poker faces,” said James LeBas, an economist with the Texas Oil & Gas Association and a former chief revenue estimator for Texas, following arguments.

The case ultimately focuses on a single question: Are metal pipes, tubing and other equipment used in oil and gas extraction exempt from sales taxes?

[…]

David Keltner, an attorney representing Southwest Royalties, argued that certain extraction equipment clearly fits the exemption’s definition.

The company’s equipment “processes” West Texas crude by separating it into marketable oil and gas, he argued, at times pointing to a chart that displayed the various stages of petroleum extraction. Once the crude is brought up from the ground, it is no longer part of a mineral owner’s estate, he said.

“It is tangible personal property. People own it,” Keltner said. “If you were to hold otherwise, there would be serious consequences.”

Among the consequences he named: Texas regulators would struggle to hold drillers accountable for the oil they extract.

Arguing for the state, Texas assistant solicitor general Michael Murphy disagreed, arguing that minerals are not “tangible personal property,” and that Southwest’s equipment was not necessarily responsible for transforming the crude.

“Southwest’s mineral extraction is really like gathering raw materials,” he said, dubbing the mechanics “pre-production or pre-processing.”

“Until that oil and gas bubbles out of the ground, it’s part of the [real estate].”

Justice Phil Johnson, questioned that interpretation.

“It’s not personal property in the tubing, when it’s coming up, it’s still realty?” he asked. “Even though it’s outside the ground, outside the natural environment?”

Justice Eva Guzman wondered how Texans could determine the precise moment the crude changes phases. “But how would we know when?” she asked.

Keltner, the driller’s attorney, said that instrumentation on the surface would reveal that information. Murphy disagreed.

Murphy also pointed to a separate tax exemption on the books for purchases of some of the same equipment in question — if it’s used for offshore drilling outside of Texas. Texas lawmakers, he said, would not likely intend to consruct overlapping exemptions.

He also argued that the court must revert to a narrow interpretation of the tax code — siding with the state — if a rule is deemed ambiguous.

But Keltner argued that the wording clearly supported the driller’s side, and that denying the exemption was unfair. He listed several other purchases that Hegar’s office has allowed companies to write-off under the policy — including equipment that speeds the ripening of bananas.

“Our concern here is, that we have a new stance applied to the oil and gas industry differently,” he said. “A banana is going to ripen anyway. That is inevitable.”

See here and here for the background. As I said, it’s all angels-dancing-on-the-head-of-a-pin stuff, just with billions of dollars on the line. There’s a part of me that’s rooting for the court to rule for the plaintiffs on the grounds that this would force the Legislature to take action and try to make our tax system better. It quickly gets overwhelmed by the much larger part of me that recognizes the huge potential for mischief and malfeasance by the Lege if this door ever gets opened. So for better or worse I do want to see the state win.

Supreme Court to decide just how stupid our tax system is

Oh, goody.

BagOfMoney

The Texas Supreme Court on Tuesday will hear arguments in a case that could deliver a multi-billion windfall to struggling oil and gas producers by taking a major bite out of state tax revenue.

The issue before the justices may sound arcane: Are metal pipes, tubing and other equipment used in oil and gas extraction exempt from sales taxes? But a yes to that question, brought by a Midland-based driller, could trigger a flood of refunds that would wipe out the state’s projected $4 billion budget surplus, Texas Comptroller Glenn Hegar warns.

“This one’s as big as they come,” the Republican said in an interview. “The neon light lights up, because of the sticker shock.”

Southwest Royalties, a subsidiary of Clayton Williams Energy, filed its lawsuit in 2009, just before improved technology unleashed a surge of oil production that transformed the U.S. energy landscape. Susan Combs, Hegar’s predecessor, was named in the original lawsuit, which has wound through the court system for years.

[…]

Granting the exemption would affect more than the company’s tax bill, Hegar argues in court filings. It would “impose a severe financial penalty on Texas taxpayers” amounting to $4.4 billion in 2017, and $500 million each year after that as companies around the state seek to cash in, according to estimates compiled in 2012.

On Tuesday, the justices will parse the language of a sales tax exemption for goods and services used in the “actual manufacturing, processing, or fabrication of tangible personal property,” and consider how that description relates to the mechanics of petroleum extraction.

The case hinges on whether certain extraction equipment — like casing, pipes, tubing and pumps — fits the definition cited in the exemption.

[…]

Ideally, judges decide such cases only on their merits, experts say, but the budget impact can factor into their decision-making.

Warnings from the comptroller’s office already seem to have helped its cause in this case.

At a hearing in 2012, Travis County District Judge John Dietz said he would rule in favor of Southwest Royalties, only to later reverse his position in a written decision.

The driller suggests that a Wall Street Journal article quoting dire warnings from Combs swayed the judge.

An appeals court in Travis County upheld Dietz’s written decision, backing the comptroller’s interpretation due to “a lack of clarity” in the way lawmakers wrote the exemption.

Hegar cited those earlier rulings in expressing confidence that Texas would ultimately prevail.

“The state’s legal arguments are 100 percent valid,” he said in an interview. “The law is not on the side of those asking for the tax refund.”

But Dietz’s initial inclination may have telegraphed that Southwest’s arguments are “pretty strong,” Dale Craymer, president of the business-backed Texas Taxpayers and Research Association and a former chief revenue estimator for the state, told the Tribune earlier this year.

See here for the background. Just a reminder, it is well within the Lege’s power to clear this up. Now maybe the Supreme Court will bail them out, and maybe if they don’t some other case will jump up and bite the state’s bottom line in the bottom. And again, the Lege could fix it if they wanted to. I think we both know how that’s going to go.

We have a messed up tax system in this state, part deux

Sooner or later, it’s going to collapse under its own weight.

BagOfMoney

The state’s highest civil court last week agreed to hear a case hinging on whether metal pipes, tubing and other equipment used in oil and gas production should be exempt from sales taxes. While the issue is arcane, the impact to the state could be significant.

Texas Comptroller Glenn Hegar is sounding the alarm that a ruling favoring the industry could force the state to issue tax refunds of as much as $4.4 billion — enough to wipe out the state’s projected budget surplus.

“This is very serious, real money,” said Hegar, the state’s chief financial officer, this week in an interview.

Midland-based Southwest Royalties, a subsidiary of Clayton Williams Energy, sued the state in 2009 — just before a drilling boom transformed the U.S. energy landscape — after Susan Combs, Hegar’s predecessor, rejected a claim for refunds on purchases dating back to 1997. Over the years, the case has wound its way through the court system.

Now, the state’s Supreme Court justices are set to weigh the company’s appeal of a lower court’s ruling amid concerns that a prolonged drilling slowdown might hurt Texas’ bottom line.

It is one of two ongoing tax cases — the other filed by the parent company of AMC movie theaters — that budget watchers fear will cost Texas millions in past and future tax revenue if the final outcomes don’t go their way. Hegar called the pair of cases “two of the biggest potentially that could impact what appropriators do in the next legislative session,” though he expressed confidence that the state would prevail in both.

The oral arguments in the drilling case, set for March 8, are likely to enthrall accountants and chemistry teachers alike. The justices will need to parse the language of a sales tax exemption for goods and services used in the “actual manufacturing, processing, or fabrication of tangible personal property,” and debate how that description relates to the mechanics of petroleum extraction.

The case hinges on whether certain extraction equipment — like casing, pipes, tubing and pumps — fits the definition cited in the exemption.

See here for the background on the other case. Honestly, it’s all angels-dancing-on-the-head-of-a-pin stuff, and no one who isn’t a specialist will understand the ruling when it gets handed down. Which frees me up to think about the political angle, and what I think is this: With the state economy potentially in a multi-year slump, a budget that may fall into deficit again regardless of this case or the school finance case, and a property tax system that privileges the wealthy and powerful at everyone else’s expense, the time may be ripe for a candidate to grab the Mary Beth Rogers playbook and make a case for giving our state government a complete overhaul. The case for change, if things don’t get better, will be compelling. The counter, as always, will be to blame the federal government, and to be sure that will exert a strong allure on many. But after 15 years of all-Republican control, and multiple cycles of Republican candidates promising to fix the budget and build the economy, maybe there will be room for people to consider an alternative. Just something to think about.

We have a messed up tax system in this state

The latest exhibit:

BagOfMoney

The volatile oil and gas industry already has prompted Texas Comptroller Glenn Hegar to reduce his state revenue estimate, but that may not be the last of the bad budget news.

A court decision potentially could cost Texas around $1.1 billion a year in franchise tax revenue, plus require four years’ worth of refunds totaling another $6 billion, according to the comptroller’s office.

“It could be enormous. Enormous,” Hegar said in an interview about the possible effect of the lawsuit brought by American Multi-Cinema, which so far has won its court battle for a bigger deduction from its franchise tax payments.

If the 3rd Court of Appeals ruling in the case stands, the two-year refund due AMC is calculated at nearly $1.2 million.

But Hegar is predicting a potentially much bigger hit for the state based on the assumption that a wide range of businesses would be quick to take advantage of the deduction awarded Missouri-based AMC. The state is asking the court for a rehearing.

The AMC lawsuit centers on the franchise-tax deduction for “cost of goods sold,” which includes such things as the raw material used to make an item.

The 3rd Court of Appeals ruled in the lawsuit in April that exhibiting a movie amounts to a “good” because it’s “perceptible to the senses,” fitting the definition of tangible personal property. Therefore, the court said, AMC can include its auditorium expenses as production costs when figuring its franchise-tax deduction.

“As a practical matter, the court’s holding could potentially treat a business exhibiting a movie as producing TPP (tangible personal property) in much the same way that a carpenter produces a chair or desk” and allow many other service providers to claim deductions, Hegar wrote to state leaders in June.

“It could be lawyers, accountants, people that mow yards. It’s just unbelievable how broad it was,” he said. It opens the door to deductions for their computers or other equipment. “You can even argue that now when somebody comes and mows your yard, you sit in the back yard and you smell that grass, and it’s real pretty. It’s perception to your senses.

“The list just doesn’t stop,” Hegar said. “It would kind of be like the kids’ Christmas list in a Santa Claus movie. It’s a real long list. It just keeps on rolling out the door.”

In a similar fashion, this ruling could also affect the state sales tax, and that could wind up offsetting some of the franchise tax loss. Or maybe not – estimates of the possible total cost of this ruling are in the $6 billion per year range. That’s getting into some real money, at a time when the state could wind up also being on the hook for a lot more money to public education. Like the public ed issue, this will ultimately be decided by the Supreme Court, but the ultimate responsibility lies with the Lege, which could clarify what the franchise tax covers or – since abolishing the franchise tax is the current fetish – replace it with something else. I wouldn’t hold out much hope.

The Prop 7 funds are already being claimed

Get ready for a lot more road construction in the near future.

Voters have a little more than a week to decide whether to give Texas highways a $2.75 billion annual funding boost, but Houston-area officials are already making plans to spend the money.

In the event Proposition 7 passes – the proposal has silent, token opposition – officials with the Houston-Galveston Area Council on Friday approved a revised 10-year spending plan that reflects when area road projects could begin, using the new money.

“Readiness will be the name of the game,” said David Wurdlow, program manager for short-range transportation planning at H-GAC. “We are going to be real aggressive to move projects forward.”

Without Proposition 7 the amount of money available for regional transportation projects is roughly $2.1 billion for the next decade, according to the current 10-year plan. Though not the only source of highway money, the funds directed by H-GAC’s Transportation Policy Council are among the most significant to build or rebuild highways.

Adding Proposition 7, officials estimate, increases that total to more than $4.6 billion, taking long-sought projects and moving them much closer to reality much sooner. In fiscal year 2018, for example, Proposition 7 would increase highway spending in the Houston area from $211 million to $696 million.

In 2018 alone, Proposition 7 means an earlier start to two segments of widening Interstate 45 near NASA Bypass 1 in Webster and earlier construction on FM 2100 east of Atascocita.

Another project accelerated by planners is a long-sought widening of Texas 36. Though the road isn’t a major commuting bottleneck, widening it is a major focus Freeport and Waller County officials who contend the highway is a natural truck bypass for the Houston area.

[…]

Like Proposition 1, the money comes with some conditions. Officials cannot pay off any of Texas’ highway debt, which is how many previous transportation programs were paid. All of the funds must be used on state highways – meaning no tollways, transit or alternative modes such as bicycling can benefit.

Some non-highway projects, however, could benefit, if regional officials approve. The transportation council is made up of local elected leaders and the heads of transportation agencies such as the Metropolitan Transit Authority and TxDOT’s Beaumont and Houston offices. Council members use a formula that divides the federal and state funds spent by the agency, which caps spending on non-highway projects, called alternative modes, to between 18 percent and 25 percent of total funds.

If the Proposition 7 windfall gives officials hundreds of millions of dollars more for highways, they could restructure.

“We might be able to move those (highway projects) to the proposition side and move some of those funds to alternative modes,” Wurdlow said.

Prop 7 isn’t raising any new money to spend on transportation, because we don’t do that sort of thing in Texas. It simply mandates that $2.5 billion of sales and use tax revenues in Texas specifically to transportation – in other words, it takes money from one pocket of the budget and puts it in the other. If you’re wondering why legislators who have been writing the state’s budget over the pasty few years were unable to allocate extra funds for transportation on their own, or thinking that this is just another band-aid that doesn’t actually solve anything, you would not be alone. Streetsblog and the Rivard Report present a more comprehensive case against Prop 7, but I doubt it will have much effect. Like it or not, we’re going to see a lot more highway construction in the near future. Better get used to it.

Revisiting the Texas-Amazon sales tax deal

The Statesman looks back and concludes it was a pretty good deal all around.

Amazon

In 2012, the state rolled the dice on a controversial deal with e-commerce giant Amazon.com.

To end a two-year battle, Texas said it would drop a $269 million sales tax bill due from the Seattle-based company in exchange for an incentive deal, among other agreements.

Amazon said it would begin collecting sales taxes within 60 days and create 2,500 jobs in Texas and invest $200 million in the state by 2014.

Now, as the company says it’s exceeded those benchmarks, state officials and economists say the agreement was the right call for Texas.

“I believe Texas benefited from the deal with Amazon. The agreement meant Amazon began collecting and remitting taxes to the state, which the comptroller’s office felt were legally due,” Texas Comptroller Glenn Hegar told the American-Statesman. “The agreement also allowed Amazon to start building warehouses and to greatly expand their physical presence in the state, which was largely beneficial to the economy.”

This summer, the Internet retailer told state officials it reached more than 3,500 employees in Texas and made more than $300 million in capital investment in Texas by the end of 2014, according to documents filed with the comptroller’s office.

Amazon also paid an undisclosed amount to settle the matter in 2012.

With the deal, Texas ended a two-year fight seeking the company’s uncollected sales taxes, and Amazon began collecting on July 1, 2012 — potentially adding millions of dollars in new revenue to state coffers in coming years. Now, current figures seem to prove that out.

An American-Statesman analysis of data from the comptroller’s office shows the state’s sales tax collections have risen by hundreds of millions of dollars since Amazon.com began issuing the levy on Texas residents.

Since July 2012, sales tax revenue in Amazon’s sector has gone up more than $325 million, comptroller data shows. While state law prohibits the comptroller’s office from releasing sales tax collections by individual companies, it’s clear a significant portion of that increase is a result of Amazon’s Texas sales.

Although Hegar wasn’t the comptroller at the time of the 2012 deal, he says the state has benefited from Amazon’s presence.

“We welcome and appreciate Amazon like we do all the retailers in our state,” Hegar said in weighing the company’s role in Texas today. “We encourage and benefit from the economic activity generated by both their physical activities in the state through capital investment and job creation, and also greatly appreciate their following the law by collecting and remitting taxes from our citizens when selling taxable items.”

See here, here, and here for some background. I supported this deal back then, and I’m glad to see it has basically worked as intended. The rationale from two decades ago for making online sales tax-free has long since been rendered irrelevant, and the effect of that policy has become increasingly expensive for state and local governments. It just made sense for Amazon and other online retailers to start charging sales taxes. A few years later, this isn’t even controversial any more. Like I said, a good outcome and I’m glad to see it.

BP settlement cash

Nice.

BagOfMoney

The city of Houston, Harris County and Metro netted $23 million in compensation from BP for revenue they could not collect in the wake of the company’s 2010 Gulf oil spill, officials announced Thursday.

Houston will pocket about $12.2 million from the costliest environmental lawsuit in U.S. history to cover hotel and sales tax shortfalls. The Metropolitan Transit Authority will receive more than $9.2 million for lost sales tax revenue, and Harris County will get $2.1 million for lost hotel occupancy tax revenues, officials announced in a joint statement.

However, expenses for the case and fees for two outside lawyers who represented the city, county and Metro will carve off nearly 40 percent of those totals.

Nearby communities and government entities, including the city of Galveston, Jefferson County, the city of Beaumont, and Orange Port Authority also are among the 511 entities that said the spill caused an economic shortfall.

The payouts are part of the $18.7 billion that BP agreed to pay earlier this month for damages and penalties resulting from the Deepwater Horizon spill – the worst environmental disaster in U.S. history.

[…]

Houston Mayor Annise Parker and Harris County Commissioners Steve Radack and Jack Morman said they were satisfied with the settlement. Commissioners Court has not yet determined how the county will split the money.

“Frankly, I wish we would have gotten more, but certainly it was a worthwhile lawsuit,” Radack said.

Several commissioners received a total of 1,700 identical emails from BP employees, via a server in United Arab Emirates, urging them not to pursue legal action against the company, according to Soard at the County Attorney’s office.

County Judge Ed Emmett, who voted in Commissioners Court against seeking damages, said, “I thought it was a stretch to say that we lost so much revenue because people didn’t rent hotel rooms here because of the BP spill.”

“Am I glad the county won? Sure. Would we have been part of the lawsuit if it had been just up to me? Probably not.”

He said he was disappointed the county would only to realize $1.3 million after the lawyers took their cut. Commissioner R. Jack Cagle had also voted against entering the lawsuit, in his case because he thought the county attorney could handle the case.

As to whether it was appropriate to seek damages, Janice Evans, spokeswoman for the mayor, said, “We raised the same exact issues as more than 500 other governmental entities and all parties have agreed to this, as has the court, so we would not characterize it as opportunist.”

Whether the amount that these three entities will receive is “enough” is not one I can answer, nor can I answer it for the 500 others involved in the litigation, not to mention BP itself. It’s something, and I’m quite sure it will be put to good use.