State Lawmakers Start Slowly as Revenue Hits Staggering High

posted on 1.16.2023

- $72 Billion More Than Current Budget; Special Session?

State lawmakers are back in session and getting off to their usual slow start as Senate and House leaders weigh committee assignments and take time this week to inaugurate Gov. Greg Abbott and Lt. Gov. Dan Patrick, each of whom is starting a third four-year term. Top of mind for all of them is the extraordinary amount of additional revenue available to fund not just existing government services, but also potentially a long list of neglected needs and various tax cuts.

Texas journalists broadly reported on Comptroller of Public Accounts Glenn Hegar’s recent announcement that the state had a $32.7 billion surplus in the current budget cycle, but that number is less than half of the story – though certainly notable as the highest surplus in the state’s history.

When that surplus is combined with all of the state’s tax and other revenue projections for the next two-year budget cycle, total revenue available is actually $71.9 billion more than lawmakers appropriated in the 2022-23 budget cycle.

State budget wonks at the Texas Taxpayers and Research Association (TTARA) attribute this new money fairly evenly to inflation, a healthy oil and gas industry and a much stronger economy overall. Moreover, they remind us that Texas doesn’t really live up to its reputation as a “low-tax state.”

THE (PARTIAL) MYTH OF TEXAS AS A LOW TAX STATE

So Much, They Can’t Spend It All

Even if they were so inclined, which they’re not, the legislature would find it difficult to spend all the new revenue.

Legislative leadership has adopted a growth limit in appropriations of state tax revenue for the 2024-25 budget cycle of 12 percent.

Once they complete their biennial ritual of supplemental appropriations for the current budget – primarily $5 billion for Medicaid expenses they knew were coming but deliberately underfunded – that brings the spending limit to $139.6 billion, or $20 billion more than spent in the current budget.

That leaves about $43.5 billion of new revenue above the spending limit, making the spending limit itself the huge question for lawmakers.

They can vote to exceed the limits on their own with a simple majority, or they can avoid potential voter backlash by putting higher spending to a public vote, thereby exempting that spending from the constitutional limit.  The latter move would require a two-thirds vote of both chambers, instead of just a simple majority, meaning bipartisan negotiations would be needed to fund big ticket items.

Such items might include infrastructure investments including broadband, roads, coastal protection, the state’s electrical grid and other state and school facilities.

Other identified priorities include strengthening the state’s pension systems, providing property tax relief, and increasing school funding to address inflation, raise teacher pay and benefits, and reducing recapture payments from school districts designated as “property wealthy” by the state, otherwise known as the state’s “Robin Hood” school funding system.

Sustainable Revenue Picture?

Lawmakers want to avoid creating structural problems in state finances and be certain that the higher revenue base is sustainable for the long term.

With the new revenue picture including a nearly $33 billion surplus, that indicates a roughly $150 billion package of spending increases and tax cuts is readily achievable, which is another $10 billion beyond the new spending limit.

And there’s still the state’s Economic Stabilization Fund, commonly referred to as the Rainy Day Fund, to consider as it approaches its $27 billion limit in 2025.

Clearly, state lawmakers can look beyond spending increases to tax cuts as ways to make a huge difference in Texans’ lives and businesses.

Some potential targets include cutting school property tax rates, increasing the homestead exemption, lowering the homestead appraisal cap, and extending the appraisal cap to include commercial property.

Other potential targets could include reducing the sales or franchise tax rates, expanding exemptions for various state taxes, or even issuing property tax reimbursement checks to taxpayers.

While being awash in money is a great problem to have, it could be more than they can resolve in their regular 140-day session which ends May 29, which begs the question: Will lawmakers complete all this work without a special session?

Questions? Contact TAB’s Oscar Rodriguez or call (512) 322-9944.

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