(Austin)—Senator Rodney Ellis (D-Houston) today released a roadmap for a more responsible budget, which eliminates reckless cuts to Texas schools, generates tens of billions of dollars in revenue to protect Texas families, responsibly invest in our future, and reduces the need for severe budget cuts to education and healthcare, with no new taxes.
“We have another chance to get it right,” said Ellis. “This plan tackles our giant deficit but in a more reasonable and responsible way. It eliminates the shortfall without the smoke and mirrors, protects our school kids and seniors and provides us firmer financial footing next session. Politics has dominated the budget talks for too long; it is time to focus on real long-term solutions.”
Ellis’ budget framework calls for elimination of costly tax loopholes, using the Rainy Day Fund reserves to eliminate $4 billion in cuts to Texas school children, attacks the structural deficit, enforces current tax law on all businesses required to pay sales taxes, and calls for effective, efficient criminal justice reforms which will save hundreds of millions without risking public safety.
The plan includes:
* Close Wasteful Corporate Tax Loopholes: $2.8 billion
* Reform Access Rainy Day Fund: $6 billion
* Fix Margins Tax: $10 billion
* Enforce Sales Tax Law: $1.2 billion
* Criminal Justice Reforms: $493 million over five years
“It is far more important for us to get the budget done right than it is to get it done right now, said Ellis. “We’re ready to get to work and to work with the governor and those in charge. I believe we need to offer solutions, not just stand on the sidelines, and I have done so throughout this session and again reach out to my colleagues on the other side of the aisle and implore them to put politics aside and work in a bipartisan way to address these challenges.”
A Responsible Budget Roadmap
Closing 2 Loopholes Would Generate $2.8 Billion
With our record budget deficit, more must be done than just cutting programs that help people. We need to start closing loopholes which cost the state billions of dollars yet provide little real economic benefit.
The Texas Tax Code contains several preferential corporate tax giveaways that were inserted into the code in the distant past, but live on long past the time the rationale become unjustified spending programs “hidden” within the tax code.
There are potentially billions in tax breaks, loopholes and exemptions in the Texas Tax Code, including:
* Texas gave away over $7.4 Billion in revenue from 2004-09 to Natural gas producers, due to an antiquated definition of “high cost” gas that reduces the tax rate actually paid from the 7.5% in statute to under 2% (1.1 to 1.9);
* From new drills established in 2009 alone , we will lose another $7.9B over the next 10 years;
* Texas gave retailers a tax break of over $200M last year simply to file their sales tax on time.
The natural gas loophole alone cost taxpayers $1.2 billion last year. This “tax incentive” was created in 1989 to help companies with the costs of drilling high cost wells, which made sense as we were in a massive recession and energy costs were a fourth of what they are today. Now, however, virtually every new well produced is a “high cost” well, meaning all new drilling receives an “incentive” to do what they are already going to do. And it is not Mom and Pop producers getting this tax break. Oklahoma-based Devon Energy saved $113.8 million in FY 2010, while reporting net profits of $4.6 billion. A subsidiary of one of the world’s largest oil companies saved $113.2 million.
If Texas is serious about responsibly balancing the budget, eliminating loopholes right now would generate billions over the biennium. At a minimum, Texas must at least start down the road to reforming our tax code. To start the state on that path, Senator Ellis filed SB 1051, legislation to scrub, sunset and possibly repeal scores of preferential tax breaks in the Texas budget.
State agencies are subjected to a “sunset review” every twelve years to determine their effectiveness, and if the agency’s functions need to be continued. The tax code would benefit from a similar periodic review of all its exemptions, exclusions, and special treatments to answer one simple question–are they working?
It’s Raining Now
The Rainy Day Fund was created in 1988 as a savings account to build up in good times and use when times got tough. The purpose was to have a reserve fund available so that the legislature would not have to slash services and raise taxes to address large budget deficits.
Does that sound familiar?
In other words, the Rainy Day Fund was created for budget challenges exactly like we face today. And, because of rising oil and gas prices, the Rainy Day Fund currently has at least $6.4 billion – even with tapping it to cover the deficit from the 2010-11 budget — money which could be used to soften the impact of reckless cuts.
In March, after months of grandstanding on using any of the Rainy Day Fund to deal with our budget emergency, Governor Perry and the House agreed that we are in such a mess that we must tap the fund. Unfortunately, the $3.1 billion taken from the fund is only being used to cover the deficit in the last budget. This would be like taking money out of your savings account to pay off the past-due portion of your electric bill. Sure, it solves the immediate, short term problem, but the lights are still going to go off if you don’t pay the whole thing.
Those opposed to using the rest of the Rainy Day Fund to help bridge the budget gap argue that it would be irresponsible to us our savings account to pay for basic needs. They fail to point out that Texas has spent nearly every penny of the Rainy Day Fund on four occasions, including as recently as 2005, a year in which we had a strong economy and a stable budget and in 2003, the last time we faced a significant shortfall.
In fact, in 2003 $295 million was taken from the Rainy Day Fund to create the Governor’s Texas Enterprise Fund and, in 2005, millions more were diverted to creating the Emerging Technology Fund.
So why is it ok to use the Rainy Day Fund in past years and not today? Pure politics. Opponents are holding the fund hostage to gut vital programs that help Texans in need, whatever the cost. Those against utilizing the Fund believe this is the perfect time to “starve the beast” or “drown the government in a bathtub.”
It is an agenda, not sound economics.
That’s not a responsible way to help Texas families weather this storm. Texas can and must use the remaining $6 billion in the Rainy Day Fund to help as many Texans as possible. Leaving billions in our savings account while nursing homes and schools are closed and tens of thousands lose their job is simply unacceptable. Since taxes on oil and gas revenue is what replenishes the fund, it will quickly gain back the funds we use to stem the tide during this crisis.
Address the Structural Deficit Now: $10 billion
Texans need to know one thing — the $24 billion shortfall was not a fluke occurrence no one could have predicted. In fact, it was predicted and constantly discussed. The truth is a huge portion of the deficit is the result of how the legislature tried to pay for property tax cuts during the school finance debate. The business, or “margins tax” simply did not raise enough revenue to offset property tax cuts.
In 2006, then-Comptroller of Public Accounts Carole Keeton Strayhorn warned the legislature that the swap was completely out of balance. She called it “the largest hot check in Texas history” and was just a few billion off in her prediction:
“As the state’s chief fiscal officer, it is my responsibility to spell out exactly what the Perry Tax Plan means to our state’s fiscal integrity. As you have known since it was made public, your plan simply does not pay for itself. As of this moment, this legislation is a staggering $23 billion short of the funds needed to pay for the promised property tax cuts over the next five years.”
The comptroller was not alone in this prediction, as many of us who voted against the business tax plan in 2006 warned it would clearly lead to a massive deficit.
Rhetoric vs. Reality: Tax Plan Left Texas in Huge Hole
Year 2007 FY 2008-2009 FY 2010-2011
Actual cost of 2006 tax package $2.2 billion $14.2 billion $14.9 billion
Actual revenue raised from 2006 tax package $0.7 billion $4.9 billion $5.4 billion
Actual shortfall $1.5 billion $9.3 billion $9.5 billion
Total Actual Shortfall Over Five Years — $20.3 billion
Standard & Poors, the leading voice on a business or government’s credit worthiness, has stated explicitly that the key factor for Texas’ budget troubles are based on policy, not the economic slowdown.
Indeed, we believe many of Texas’ current budget challenges are the result more of previous fiscal policy decisions that created structural budget deficits, than of a weak economy…We also believe that a balanced approach that includes both revenue enhancements and expenditure cuts has a higher potential of success in preserving the state’s long-term structural budget balance than a strategy that relies solely on expenditure cutbacks. (Texas’ Budget Challenge, Standard & Poors, February 16, 2011)
In January the comptroller testified before the Senate Finance Committee that the state would be faced with a $10 billion shortfall every two years if we do not revamp the state’s tax structure. So doing nothing is not feasible
It will take real leadership to address the elephant in the room: Texas must fix the margins tax and create a business tax structure that is fair, equitable and in balance. The state cannot afford to run a $10 billion deficit, which is what we will face each session until we find the will to fix the system.
Enforcing Current Law Would Generate $1.2 billion
Legislation to require Internet retailers with some sort of presence it Texas to start charging sales tax to customers who live in Texas would generate $1.2 billion each biennium.
For instance, Amazon — which reported $34 billion in sales last year — owes the state of Texas $269 million in sales taxes for sales they made in Texas. According to the U.S. Supreme Court, companies with a physical office or presence in the state in which an online sale is made could be required to collect sales tax on those transactions. The Comptroller estimates that our state loses $1.2 billion per biennium from similar untaxed online sales.
According to the Texas Comptroller, Texas companies are getting out of $2 billion worth of sales taxes owed every single year. If we’re going to be asking for more from those who cannot afford, it we ought to ensure that every company is paying what they already owe.
No one likes taxes, but the fact is that local retailers and mom and pop stores on Main Street have no choice about charging that sales tax. Online retailers are given a competitive advantage over Texas businesses that create even more jobs and truly drive the economy of our local communities. The online sales tax exemption was instituted at a time when Internet commerce was in its infancy and proponents feared choking off this burgeoning technological and economic innovation. I think it is safe to say that the internet and internet sales are here to stay, so it is time to level the playing field for all businesses with an operating presence in Texas.
Other states are taking these steps, it is time for Texas to do the same.
Sensible Criminal Justice Reforms: $500 million over five years
Sensible criminal justice reforms can save the state hundreds of millions of dollars and keep our communities safe.
This session, Senator Ellis filed SB 1076, the Substance Abuse Treatment and Crime Prevention Act, would make Texas’ drug crime laws more effective. It enhances public safety by reducing drug related crime and preserving jail and prison space for violent offenders, saving Texas taxpayers $138 million a year. The legislation decreases Texas’ over reliance on incarceration of non-violent, substance abuse offenders, towards more effective treatment alternatives to reduce crime.
SB 1076 requires low-level, personal use, drug possession offenders, with no serious criminal history, be placed on probation and sent to treatment rather than being sent to prison. The legislation also gives judges the flexibility to exclude an offender if they find an individual poses any “danger to the community”, or think the individual is untreatable. According to Texas Department of Criminal Justice statistics, nearly 20,000 people are in prison solely for drug possession. This legislation will make our criminal justice system better. Study after study has shown that the most effective way to reduce recidivism and help those with substance abuse to get their lives back on track is mandatory drug treatment.
This is not a “liberal” idea. The conservative Texas Public Policy Foundation backs this reform, and Newt Gingrich, recently argued: “If our prison policies are failing…and we know there are more effective alternatives–especially alternatives that do not involve spending billions more on prisons–it is time to fundamentally rethink how we treat and rehabilitate our prisoners.”