Texas: Governor’s Report to the People Highlights Both Triumphs and Misses on Tax Reform

In a recent Report to the People, Texas Governor Greg Abbott wrote the state of the state is strong. He highlighted “a year of triumphs and challenges – and challenges overcome” which included Hurricane Harvey as chief among them.

Job creation boomed as Texas’ population increased by more than any other state thanks to domestic migration. The governor reports that the 3.9 percent November 2017 unemployment rate was Texas’ lowest in four decades. December 2017 marked 92 consecutive months of consecutive job growth. Adding a record 306,900 jobs last year, Texas experienced growth in 11 of 12 key industries.

According to the governor’s Small Business Study, entrepreneurs and small businesses contribute more than $1 trillion to the state’s economy. Better still, “Texas is the top exporting state, the top tech exporting state, and one of the top states for startups.” The Lone Star State continues to achieve top rankings in business – earning “Best State for Business” for the 13th consecutive year from a Chief Executive Magazine survey.

Unfortunately, government preferences doled out through the Texas Enterprise Fund (TEF) continue to enjoy bipartisan support. TEF ostensibly provides “financial resources to help strengthen the state’s economy.” In 2017, TEF “helped close the deal” on 21 projects representing roughly $655 million in new capital investments over the last two years. Unfortunately for taxpayers, the subsidies and tax incentives doled out by TEF come at the high cost of $230 million. By giving special deals to a select few companies, tax rates remain higher for everyone else. In addition, experts continue to argue that tax incentives are rarely the reason for relocation decisions. Instead of these expensive handouts, Texas could strive to lower property taxes or end the unpopular Margins Tax (a gross receipts tax on businesses).

People and capital flock to Texas to chase opportunities fostered by a pro-growth business climate. Policies such as no personal income tax, right-to-work, and 11th lowest workers’ compensation costs are why Texas ranked 9th best in economic outlook and enjoyed the top economic performance ranking in the ALEC-Laffer State Economic Competitiveness Index. Businesses are already flocking to the state due to the state’s longstanding free market policy outlook – the vast majority of incoming businesses come to Texas without getting any special deals.

Education metrics also vastly improved, with Texas reaching a record 89.1 percent on-time high school graduation rate – in the top five nationwide. The Governor’s Report To the People highlights exceptional growth in math scores of k-12 students, especially among those from lower income households.

Looking to fiscal issues, the report notes Texas continues to maintain a fiscally responsible state budget by restraining spending growth below the combined increases in population and inflation. However, this limitation applies only to General Fund “discretionary” spending;  “Dedicated” (mandatory) funds are exempt from this limitation. Governor Abbott’s veto of “approximately $120 million in proposed spending” and nearly $200 million in savings through state agency hiring freezes are positives. But the mandatory spending crisis looms large over Texas’ long-term budget health. Mandatory spending comprises a 55 percent—and growing—share of the total state budget. Increasingly used as a catch-all fund for lawmakers who wish to see their projects continually funded with less oversight, the primary drivers of this are healthcare, structural and environmental programs. This expansion is crowding out resources available for important core services.

Maintaining the Lone Star State’s status as one of the world’s most competitive economies requires vigilance. In the next session, lawmakers should once again consider real limits on spending growth,  property tax reform, and ideas to remove the economic burden of the Margins Tax. These pro-growth fiscal reforms that will further galvanize their economy’s competitiveness and expand prosperity and opportunity for all.