As the Texas House and Senate recently rolled out dueling tax cut plans, reports indicate a slowing of the Texas economy in the 1st quarter of 2015.
The Senate, led by Lt. Gov. Dan Patrick, wants significant property tax reductions. Patrick campaigned on a promise of property tax cuts.
The House favors a cut to the sales tax. Sales taxes – which range from 6.25% – 8.25% – are the 2nd largest revenue source in the state, a total of $ 27B, or 26% of all state revenue in fiscal year 2014. The thinking goes that sales tax cuts would put more discretionary income in the hands of consumers and stimulate additional spending to boost the economy.
Property taxes accrue to local governments and municipalities. These cuts are targeted at the homeowner.
Can either plan jumpstart a sagging economy? The Dallas Federal Reserve said the Texas economy slowed by 3.8% in Q1, mainly due to falling oil prices, a strong dollar, and a slowing U.S. economy. http://www.dallasfed.org/research/update/reg/2015/1503.cfm
While the Texas economy has diversified in the last 20 years, energy is still king. Oil and natural gas production taxes totaled $ 5.77B in FY 2014, or 5.5% of the total budget. It’s safe to assume that revenue will decline in 2015. How will the difference be made up? There’s been no serious debate about cutting oil and gas taxes.
It’s interesting to note the juxtaposition of Texas’ philosophy vs. other states; Texas policymakers take a supply side approach – as the economy slows, tax revenues may logically fall, but rather than raise tax rates to increase revenue, we cut taxes to stimulate spending and therefore increase revenue.
The Texas economy and state budget will be an interesting case study to watch over the next 24 months.
Speaking of taxes, there are ways the State of Texas can stimulate economic growth that will not only parallel the supply side approach but also be good politics for the state’s Republican leadership.
The New Markets Tax Credit program started as a federal program in 2000 and has been renewed by Congress every year since. Since then, 12 states have passed a state program to leverage the federal money and attract investment in small businesses and other entities, particularly in rural and distressed areas of the state. Texas ranks 43rd in Federal New Market Tax Credit investments, in part because we lack a state New Markets Tax Credit initiative to attract outside capital. Investors are deploying capital in states with initiatives to match those at the federal level. As a result, Texas is missing out on growth investments, especially in rural and other distressed areas.
As the theory goes, small business owners are more likely to be conservative thinkers, favor limited government, etc. If Republicans don’t turn growing constituencies like Hispanics into entrepreneurs they are likely to find themselves in the minority in the next decade or so.
A recent report by Dr. Simon Mak of the SMU Cox School of Business examined Texas deals funded by the Federal New Markets Tax Credit program. The report concluded that the total potential economic activity driven by a Texas New Markets Tax Credit program what would almost twice (1.76) any foregone tax revenue, create approximately 5,000 jobs and attract additional private capital to Texas at a rate of $4-to-1, driving further job growth. Dr. Mak’s study notes that the return on investment (ROI) multiplier is even greater in rural Texas.
The New Markets program is, in essence, a public-private partnership that gets capital to areas of the state that otherwise may not have access to it; the program offers the best of both worlds- preserving the independence of private investment decisions in Texas, while smartly deploying available government incentives.
The program can also serve to create and keep jobs in Texas, rather than having companies funded by outside interests and moved elsewhere.
From a policy perspective, cutting taxes is a strong symbolic move to continue attracting corporate re-locations and the job growth that comes with it. To stay competitive with other states over the long-term, Texas should also consider innovative programs like New Markets to spur economic development.