It might seem that closing tax loopholes and ending exemptions would be an easy way to balance a state budget during a pandemic. It’s not. In fact, that might be the hardest option available.
The economy in Texas isn’t what anyone expected in 2019, when the state comptroller made his two-year forecast of how much tax and other revenue would be available to support the current budget.
The coronavirus toppled the economy. State revenue is way short of Glenn Hegar’s projection.
And the Texas Legislature will return next month to try to rebalance the budget. To do that, lawmakers will have to cut spending, find new money, employ some accounting tricks or do some mix of those things.
That bit about finding new money brings us to the latest edition of a 74-page report from the state comptroller: Tax Exemptions & Tax Incidence. Ignore the title. This is a shopping list for lawmakers who hope to find outdated or unjustified holes in state tax laws that might solve their budget woes without the political risks of raising new taxes.
It might be easier to raise taxes or create new ones than it is to get rid of tax breaks and loopholes. Plugging holes is harder than it looks; it’s an idea that works better in casual conversation, or in a campaign, but turns into a dogfight when proposed at the statehouse.
Hegar’s new report, ordered by the Legislature, “estimates the value of each exemption, exclusion, discount, deduction, special accounting method, credit, refund and special appraisal available to payers of Texas’ sales, motor vehicle sales, franchise and oil production taxes, as well as property taxes levied by Texas school districts.”
Those breaks amount to $58.6 billion, most of which stays in the hands of taxpayers instead of in the state treasury. Some of it, like motor fuels taxes and insurance premiums, is exempt from one tax (sales) but subject to another.
Every break has its champions. You’re probably one of them. School property tax exemptions amount to $14.1 billion. Groceries aren’t subject to sales taxes, which cuts the state out of a share of $3.3 billion in food sales. Neither are sales of water, many medical services, management and public relations consulting, real estate sales and car washes. Prescription medicine and over-the-counter drugs aren’t taxed, either — another $1 billion exemption from the state’s sales tax.
Legislators made a lot of those decisions, but not all of them. In 2015, Texas voters approved a constitutional amendment that keeps home sales from being taxed. That’s an example of an exemption lawmakers can’t touch without voters’ permission.
Sales taxes are the state’s biggest source of tax money, bringing in 59% of state taxes in fiscal 2020. That’s where you’ll find the most exemptions, in dollar terms: About $42 billion in sales go untaxed in Texas.
It’ll all get a look when lawmakers convene. But there are easier ways to balance a state budget than to patch holes in the tax code — especially when those patches aren’t popular with big numbers of voters.
It’s easier — if they decide they have to go beyond budget cuts and accounting tricks — to rely on novel ideas that appear to give people a choice about whether to pay a tax. That’s how Texas got a lottery; legislators were in a budget crunch and let voters decide whether to pass a constitutional amendment allowing the games. One argument was that voters didn’t have to play if they didn’t want to.
A similar strategy is in its early stages now, as casino companies interested in Texas are hiring lobbyists and consultants to persuade lawmakers to legalize gaming here. It’s not their first attempt, and it echoes the effort that brought the lottery to the state: Put it in a constitutional amendment and let voters decide, dedicate the money to state services that voters like, and sell the idea to lawmakers who are trying to balance a tight budget.
It comes down to what’s easiest. Maybe lawmakers will find enough spending cuts to work out the current trouble, or a few accounting maneuvers to cover their problems. If they need more, they’ll scrounge for the least-painful options they can find — the options that look the least like new taxes.