By Arlene Wohlgemuth, Texas Public Policy Foundation
The most fundamental political divide in Texas, and the nation as a whole, is over how large government should be to best serve the people. Liberals want higher taxes and more government. Conservatives want lower taxes and less government.
The two largest states, Texas and California, are home to 1 in 5 Americans. Demographically, they are more alike than not: in both states, minorities are a majority. Houston just surpassed New York City as America’s most diverse city. The Golden State and Lone Star State have diverse economies. Both states have plenty of land, too: Texas is the second-largest state by land mass, California is third.
As much as Texas and California are alike, they differ in their governance.
California’s state and local government takes 42 percent more of its residents’ income than does Texas. California had the nation’s fourth highest taxes as a share of income in 2010, with income taxes hiked to the nation’s highest, 13.3 percent, in January of this year. Texas was 45th.
Bigger government is supposed to help the poor, liberals often argue. But does it?
According to the U.S. Census Bureau’s new measure of poverty in America, California has 42 percent more people living in poverty as a share of the population than does Texas. California also has the nation’s highest official unemployment rate, while Texas’ unemployment rate has been at or below the national average for 75 consecutive months now.
To reiterate: a state whose taxes are 42 percent more burdensome so as to fund a larger government has experienced 42 percent more poverty than is found in Texas.
If liberals really wanted to help the poor, they’d attempt to reinforce those things that have made Texas so successful.
Texas lawmakers have a chance to do just that by returning tax dollars to hardworking Texans, improving our economic competitiveness. The opportunity to do so arises because state revenue has soared 12.4 percent over the funds available during the last budget deliberation two years ago. Even with a $7 billion increase in Medicaid spending, driven by federal rules, there is at least $6 billion of additional general revenue available to the Legislature to meet spending priorities.
The economic stabilization fund, otherwise known as the rainy day fund, is growing too, with some $8 billion in the account now expected to expand to almost $11.8 billion by the end of the next budget cycle in 2015. This account was created to serve as a financial reserve when tax money gets tight during economic downturns in order to avoid increasing taxes.
Such a large sum of unspent money tends to attract the attention of politicians, and Texas’ is no exception. As a result, there are several bills that propose to spend billions from the economic stabilization fund on items such as water, roads and education. Never mind that water, roads and education are ongoing, routine expenses in the budget and, as such, ought to be prioritized from the billions of dollars of new tax revenue flowing into the state’s coffers.
But, rather than spend Texas’ economic stabilization fund dry on items that ought to come out of the existing budget, lawmakers should instead be considering a substantial tax cut — a rebate to the hard-working taxpayers of Texas. Reducing the state’s portion of the sales tax from 6.25 percent to 6 percent would take Texas to the national average, returning $2.2 billion to the state’s economy while cutting the effective state sales tax rate by 4 percent. That, combined with the modest Texas franchise tax relief being considered, might approach the additional $2.8 billion expected to flow into the economic stabilization fund over the next two years. This would finance tax relief while leaving the rainy day fund intact for slow economic times.
A tax cut is especially important now because there are increasing signals of a slowing economy in Texas and America at large. In March, Texas lost jobs for the first time in 17 months. Further, retail sales in Texas slowed considerably in April.
Texas is not immune to the larger economic climate. Cutting taxes improves Texas’ ability to attract investment and create jobs, while keeping a robust balance in the economic stabilization fund safeguards Texas state government from the worst effects of a general economic slowdown.
The Legislature should resist the urge to go on a spending spree with Texas’ savings account. Instead of growing government spending, we need to set the conditions for prosperity to create more taxpayers.