Nobel Prize-winning economist Milton Friedman once famously derided the idea that government can spend money at nobody’s expense. He cheekily called it: “the free lunch myth.” That’s true even in Tyler, Texas.
Friedman’s point—which remains as true today as it was back then—is that government doesn’t have any money of its own, and so every dollar it spends on programs and services is a dollar that it must seize from someone else, either through taxation or inflation.
This is an important lesson to remember, especially as bond election season approaches.
Soon, people wanting governments to borrow more—including some with a strong financial interest in seeing it done—will begin promoting bond packages and downplaying their cost. One favorite tactic is to disarm voters by declaring that going further into debt doesn’t have to mean paying a higher tax rate.
But as Friedman reminds us, there’s no such thing as a free lunch.
The spenders’ claim that new debt can be paid for without raising tax rates is a deceptive one. It uses sleight of hand to promise something for nothing.
The scheme hinges on the tax rate being held steady (or even reduced slightly) while property values soar. By virtue of the tax rate not being lowered properly to compensate for the rise in values, homeowners and businesses see their tax bills grow from one year to the next. With this added tax money, the spenders can pay for the new debt service costs and tell taxpayers their tax rate didn’t increase.
As the election cycle nears, watch for this sort of underhanded promotion. It’s quite common.
For instance, the Tyler Morning Telegraph recently reported on a large, upcoming school bond. “The Tyler ISD bond package on the May ballot totals $89 million…After approving the bond package to be placed on the May ballot, Tyler ISD School Board President Wade Washmon said it will not change the district’s tax rate.”
Notice the emphasis on keeping the tax rate steady. Such a policy, in tandem with rising valuations, will cause tax bills to rise, even if it’s not explicitly said.
But as effective as this tactic has been in the past, it’s getting harder to pull off. That’s because the Texas Legislature passed a law in 2019 that requires ISDs to include the following statement on new bond propositions: “THIS IS A PROPERTY TAX INCREASE.” The change is intended to help voters understand that new debt generally brings new taxes, no matter what the spenders claim.
Not everyone is happy that voters have more information at the ballot box though. The article mentioned earlier features a representative with the Texas Association of School Boards, one of the state’s largest taxpayer-funded lobby groups, saying: “I’ve heard from several trustees that they’re frustrated because they may be doing a bond this year or something else that won’t actually increase their tax rate, but they’re required to put a statement on there in all caps—can’t even change the font—that says ‘this is a property tax increase.’”
That’s quite a revealing statement.
But if pro-debt advocates are frustrated that voters are a little better informed now, then they better brace themselves for 2023. When the Texas Legislature next convenes, fiscal conservatives, including the Texas Public Policy Foundation, will attempt to take debt transparency to the next level by recommending that lawmakers include a cost element on every bond proposition. That is, voters should know how much a bond’s passage will add to the average homeowner’s tax bill—and they should have that cost estimate provided in the voting booth.
Given that most voters are busy working and raising families, this extra detail could go a long way. At a minimum, it’ll remind folks that there’s no such thing as a free lunch.