This commentary originally ran in the Fort Worth Star-Telegram on April 9, 2014.
Texas’ thriving economy is generating so much surplus tax revenue – at least an extra $2.6 billion – that politicians in Austin will have a hard time spending it all while keeping under the state’s spending cap.
Rather than spend all of the surplus tax money hardworking Texans send to Austin, what if our elected representatives gave taxpayers a break in the form of a broad tax cut?
This could be accomplished by simply creating the Sales Tax Relief (STaR) Fund, which would allow lawmakers to reduce the state sales tax rate for a certain period using surplus funds.
Once enacted, the STaR Fund would function by encouraging lawmakers to shift surplus money and the savings achieved by spending less on obsolete or inefficient programs into an account controlled by the Texas comptroller.
The comptroller would then reduce the state sales tax rate for a chosen period and draw upon the STaR Fund to make up any revenue shortfall that may come about due to the tax-rate cut.
Once the money in the STaR Fund was exhausted, the comptroller would return the sales tax rate to its prior level.
How might this work in the upcoming 2015 legislative session?
If the state surplus continues to build, there may very well be enough money to reduce the state sales tax rate from 6.25 percent to 5.75 percent for about two years. This would reduce tax revenue by about $4.2 billion.
Of course, a cut in taxes will boost Texas’ economic activity, so the actual loss in tax revenue would likely be a little less than a simple static analysis would suggest.
How might the average family of four in Fort Worth benefit from a sales tax cut of half a percent over two years?
With median household income of about $48,000 on the west side of the Metroplex, the average family of four pays about $736 in state sales taxes and another $236 in local sales taxes each year, according to IRS calculations.
Cutting state sales tax collections by 8 percent (a 5.75 percent rate is 8 percent less than a 6.25 percent rate) would save $118 over two years.
Of course, there’s always a chance that the STaR Fund won’t be enacted and that the growing surplus will be spent instead.
There is no shortage of “needs” for which special interests will try to convince the Legislature to spend money. But if the Legislature increases spending in times of plenty to match the new revenue, what happens when the economy inevitably slows?
Certainly, immense pressure to increase taxes is one historical outcome.
Rather than see a surplus in tax revenue as a reason to spend more than Texas’ weak spending limit prescribes, lawmakers should view a surplus for what it is: a sign that the state is over-collecting taxes.
When something is over-collected, it should be returned. The STaR Fund is the perfect vehicle to make this a reality.
Without the STaR Fund, saving money in one area of government usually means new spending in another area. Instead, lawmakers who work to achieve savings could transfer that savings to the STaR Fund, providing millions of Texans with real tax relief.
Talmadge Heflin is director of the Center for Fiscal Policy at the Texas Public Policy Foundation.
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