More on the Texas Enterprise Fund

The Dallas Morning News has a story (“Audit: Perry’s business fund gave millions to firms, universities that never sent an application“) that suggests that funds from the Texas Enterprise Fund (TEF) was being distributed by the Office of the Governor much less cautiously than the State Auditor considered prudent. The report from the Texas State Auditor identifies a number of way in which the funds were distributed without adequate documentation.

One of the most significant findings (from page 7 of the full report) was that early in the program’s development TEF funds were distributed without an application.

During the 2004- 2005 biennium, the Office [of the Governor] did not require recipients to submit an application and/or did not require recipients to create direct jobs for award agreements associated with 11 projects. The awards associated with those 11 projects totaled $222,281,000, or 44 percent of the $505,838,696 in Texas Enterprise Fund awards the Office made between September 2003 and August 2013.

That’s a lot of money going out the door with very little systematic analysis or documentation. On one hand, many Texas state employees will feel some sympathy with the Office of the Governor because we’ve grappled with the elaborate process behind spending state dollars. On the other hand, you can not help but question why the governor’s office felt it could dish out over $222 million without meticulously detailing and documenting the process. As someone who has been tormented for forgetting to get the sales tax removed from the bill for feeding a job candidate I’m amazed that the people dispensing the TEF were not more systematic in their oversight of much larger sums.

The TEF’s future was already in doubt. Some Texans are questioning the wisdom of getting the government involved in subsidizing some businesses. Others support the idea in theory but question the way in which the funds have been distributed. It’s a good bet that the TEF will be abandoned or transformed when the legislature meets next year. The questions about the fund are closely identified with Rick Perry and the next governor will want a fresh start.


Reefer Revenue

Reefer Madness

The latest incarnation of “reefer madness” is the idea that the legalization of marijuana is the solution budget woes. I’m amazed how often students suggest legalizing marijuana as their answer on assignments about balancing the budget. So, I was intrigued when I saw that the folks over at “Nerd Wallet” had put together some analysis of potential state revenue from legalized marijuana (“Cannabis Cash: How Much Money Could Your State Make From Marijuana Legalization?“).

Nerd Wallet’s estimate assumes at 15% surtax on marijuana similar to the tax in Colorado on top of the Texas’ existing sales tax rate (they use 8.15%). Of course, it’s hard to estimate the size of a market for a product that is currently illegal. I’ll just have to take their word on their estimates of how many people under 25 are/will be using marijuana. In then end, they are very proud of their nation-wide estimate of $3.1 billion per year. I’ll leave others to point out how that compares to the federal deficit.

I’m focused on Texas. Nerd Wallet’s estimate for Texas is $166 million. They take pride in pointing out how their figures compare to the budgets of small state agencies. A more realistic way of looking at this is to consider how this compares to the Texas budget overall. The bottom line is that revenue from marijuana sales would total just under .3% of the Texas state budget. That does not take into account administrative costs of the state takes up the task of deciding who gets to sell marijuana and the costs of any regulation of the product itself.

It’s worth noting that this year Texas is expected to bring in just over one billion dollars from the alcohol beverage tax alone. There are lots of other sources of revenue that could produce as much money as a tax on marijuana. You’re not going to win over many conservative Texans unless you make a bigger dent in the bottom line.

There are lots of other reasons to consider decriminalization of marijuana. However, the idea the legalization of marijuana is some kind of budget balancing miracle is a bigger hallucination than the drug itself would ever induce.

Nerd Wallet Map

Has Texas been spending lots more money?

There has been a debate over how much spending in Texas has increased. It’s an important debate and like more important policy questions the answer can be complicated.

The debate got louder when the Wall Street Journal (WSJ) published an editorial (“Texas Goes Sacramento: Republicans spend their energy gusher, and then some“) that attacked Perry for supporting spending in a fashion they compared to liberal icons former House Speaker Nancy Pelosi and current California Governor Jerry Brown (Both the Wall Street Journal and Perry love playing off the rivalry between Texas and California):

This is the kind of stunt one would expect from Nancy Pelosi. The budget contains a roughly $1 billion tax cut, but for every $1 of tax relief, $19 in new revenue will be spent…

Mr. Perry traveled on a business recruiting mission to California in February and poked fun at the tax-spend-and-borrow cycle in Sacramento. He can fix the reckless Texas budget by vetoing all or most of it and insisting on deeper business tax cuts. He should not want people to start comparing him unfavorably to Jerry Brown.

The first question is whether or not the WSJ attack on Perry is wrong.

First, consider the Legislature (who passed the budget that the WSJ considered too big). The House and the Senate both had very large Republican majorities. Further, many of those Republicans were of the “tea party” variety. It seems unlikely that such a majority can be credibly called  big spenders. It strains credibility to call Perry a California liberal for signing a budget passed by a conservative Texas Legislature.

Second, the WSJ uses the previous budget as their baseline for judging the new budget. We need to remember that the state faced a huge budget shortfall. The legislature had to make huge cuts while agencies and universities actually had to give back money that had been appropriated in the previous budget. Those cuts were the product of tough economic times and the Legislature made some politically difficult decisions. Making that budget the baseline is highly questionable. Finally, the Legislature cut down on budget gimmicks that it had used to make the last round of budget cuts easier. This budget did less of that and the Legislature should be given some credit for more fully confronting budget issues.

Third, there’s plenty of evidence that spending in Texas is growing at roughly the rate of population growth plus inflation. There are more Texans using more stuff provided by government. PolitiFact Texas sided with Rick Perry’s claim that state spending was growing in line with population and inflation and concluded:

Perry said the 2014-15 Texas budget that legislators approved would keep spending increases below combined changes in population and inflation.

Setting aside the [Texas Public Policy] foundation’s analysis, which split expenditures by when they were authorized and not which budget they belonged to, we found that state spending rose no more than 8.7 percent from 2012-13 to 2014-15.

That falls below the 9.85 percent population/inflation rate embraced by legislators last fall, which is also in line with recent biennial average increases of 9 percent. Then again, the spending could exceed other predictions for that rate.

On balance, we rate Perry’s statement as Mostly True.

The Legislative Budget Board’s analysis takes a longer view and looks at growth going back a full decade and looks at the impact of property tax relief. Their figures include spending on  water and transportation projects that could be rejected by voters in constitutional amendments. The analysis there indicates that general revenue spending has grown more slowly that inflation/population. (The Houston Chronicle has suggested that the WSJ relied on Texas Public Policy Foundation.)

The Wall Street Journal piece is remarkable in a number of ways. First, it was unusual for a national publication to engage in the debate over a state budget at is approached a governor’s desk. Clearly, this was an attempt to leverage Perry’s presidential ambitions against him. We have all come to expect partisanship and bias coming out of the opinion pages of national media. However, the WSJ’s desire to inject itself in an intra-party battle before candidates have even declared is interesting. Perry certainly deserves scrutiny as he positions for a possible run for the presidency. And, conservatives  found plenty to criticize during his 2012 bid for the nomination.

The WSJ does correctly noted that the Legislature did fund the Emerging Enterprise Fund and other slush funds run out of the governor’s office. That may be a fair criticism. However, those funds account for only the tiniest bit of the Texas budget.

The WSJ article provides a good excuse to look at budgeting issues and consider what kind of standard should be applied to spending.

Investing in a top-heavy bureaucracy

The Austin American Statesman has run several stories (“Management positions, salary increase at DPS while state trooper pay languish” and “State agencies defend executive pay“) that reveals how quickly administrative salaries have grown in the Department of Public Safety while the salaries of state troopers have lagged behind. A relatively few administrators receive high salaries while most of the people who do the day-to-day work of the government receive much less. Earlier this year the Dallas Morning New reported (“Audit: Texas governor, AG, land commissioner boosted staffs as state workers’ overall numbers shrank“) that while the state lost 3,200 employees, the governor, attorney general, and land commissioner’s offices grew. Texas also saw the Governor approve a big salary for his choice for education commissioner (“Texas Schools Chief Michael Williams Will Make $215K“), granting his political appointee a salary 15 percent above the amount appropriated for the position the year. Of course, that year also so large budget cuts to the Texas Education Agency and school budgets across the state. Meanwhile, we learned that the Governor’s Chief of Staff earned $325,000 a year–that after earning a $162,000 bonus as she left the Employee Retirement System (ERS) even as state employees were told that reductions had to be made to their benefits because of budget shortfalls.

We’re told that these salaries and bonuses are needed to compete with the private sector. However, they only seem to be worried about staying competitive on top executive salaries and I see much less interest in providing competitive salaries for everyone else.

The fact that our state’s leaders and their appointees have made giving pay raises to high level bureaucrats a priority while street-level bureaucrats like state troopers and teachers went neglected tells us that either this is what they want or that they are incompetent. I suspect most Texans are not going to like either answer.

Texas Property Tax Rates has put together a report (Property Tax Rates By State 2013“) ranking the states by their property tax rate. Many Texans will be surprised to see how high we are in  the rankings.

Map of tax rates by state

Our ranking out of the fifty states varies depends whether you calculate our ranking based on median property tax (14th),  property tax as percentage of income (12th), or property tax as  percentage of property value (3rd). According to their analysis of Texas property taxes, the median property tax in Texas is 1.81% of a property’s estimated value each year. The median value of a home in the state is $125,800 and the media yearly property tax is $2,275.

Regardless, we generally think about Texas as a low tax state. What’s up?

One of the answers is that keeping up the image of a low tax state has encouraged state politicians to push as much of the tax burden to the local level. If the sales tax goes up, voters blame the governor or legislature. If property tax rates go up, voters blame local officials–even as those local officials operate under funding schemes dictated by the state.

The Texas Constitution bans an official state-wide property tax. However, it permits local governments to tax property to pay for public schools, services provided by the county, and other things often paid for by state taxes in other states. It’s kind of a tax shell game since the state government has final say over the tax policies at both the state and local level.

A taxing shell game

The tax shell game in Texas is illustrated in the demand Samsung is making for tax breaks (“Samsung could double Austin investment, depending on incentives, official says“) on their school property taxes.

Politicians often act as if the avoidance of an income tax is the solution to a problem. In reality, our rejection of an income tax shifted the burden to property taxes and lead to high taxes on industrial properties in Texas. That leads companies like Samsung asking for a tax breaks and local authorities wanting to grant those breaks in order to keep jobs. Eventually, those tax breaks shift the burden to other property owners who see their taxes go up.

In the end, we have created a shell game and it’s hard to tell who is winning and losing. The state lures workers to the state with the promise of no income tax. Then we grant their employer a property tax break and local officials then shift the tax burden to the homes and businesses of other residents.

shell game

How fair the system is depends on where you live, who you work for, and many other factors. Of course, to judge the fairness of the system you need to know who is paying what. That’s pretty hard to sort out.

The Case Against the Sales Tax Holiday

The Tax Foundation, a conservative-leaning group, has a report (“Sales Tax Holidays: Politically Expedient but Poor Tax Policy“) making the case against sales tax holidays like the one expected to save Texans about $65 million this weekend.

The report is worth a look because you will not see very many politicians willing to take on such a politically popular notion. Governor Perry has been out reminding citizens about the tax holiday and State Senator Rodney Ellis, an author of the original 1999 bill that created the holiday, was at Macy’s urging that the holiday should be protected. Ellis defends the holiday because the cost to the state is a small compared to the tax breaks to energy companies.  Of course, we could consider getting rid of both sets of tax breaks. And, maybe a three-day shopping orgy isn’t the only way to help make going back-to-school more affordable for working families. In any case, it’s a popular tax break that isn’t likely to go away.

Rick Perry at WalMart
Texas Senator Rodney Ellis as Macys