For 16 years the Texas Public Policy Foundation has examined the state of Texas’ taxes, repeatedly urging lawmakers to pursue only those policies which promote economic growth, limit government’s access to the taxpayer’s wallet, and offer transparency to all.
Success is within our grasp.
A great deal of time and resources have been spent these last several years by the Foundation in examining alternatives to the current tax system, as a way to offer recommendations for improving school finance. We consulted with noted economists, scholars and commentators from around the nation, including the likes of Nobel prize winner Milton Friedman, Dr. Eric Hanushek of Stanford University’s Hoover Institution, Dr. Richard Vedder of Ohio University, Stephen Moore formerly of the Cato Institute and now with the Free Enterprise Fund, and David Tuerck of the respected Beacon Hill Institute in Massachusetts.
Each gave the existing state’s tax system high marks. Our general tax burden is low, and the taxes are highly visible. Unfortunately, our business tax levy is nationally in the middle of the pack; we cannot make the burden heavier and expect economic growth. Texas did not make the Tax Foundation’s top-ten states for business climate in 2004. Economists have warned that the one thing we must not do in this debate over school finance is enact new classes of taxes, on businesses or individuals.
The surest way to increase our tax burden and decrease our economic competitiveness is to impose new classes of taxes. While they might initially be “revenue neutral,” history shows that taxes levied are taxes increased. They become an addictive substance to policy makers in outlying years, and the taxes become nearly impossible to eliminate. Even when unpopular. Even when destructive.
Texas has a recent history of this. The Texas Infrastructure Fund tax was implemented to raise money for the wiring of schools, libraries and hospitals to the Internet. (The idea of “wiring” for the Internet, a decade later, seems almost quaint.) The TIF tax raised the revenue it was designed to raise, and yet it did not disappear. It met the legislative date of expiration, yet it did not expire. The TIF tax has been simply re-purposed.
And so the Foundation developed a tax plan, now more than a year old, that does not require the imposition of new taxes. This plan simply provides for an initial 25-cent reduction in the property tax, replacing those “lost” revenues with a half-cent increase in the state sales tax. Future reductions in the property tax could be achieved through future surpluses.
Further, the Foundation’s plan calls for the complete elimination of the franchise tax. This can be accomplished by a modest broadening of the sales tax, and through an approximate one-percent, across-the-board decrease in spending.
Our dynamic econometric model shows this plan would increase investment in Texas. Investment spurs job creation and drives personal income growth. This is good for Texas.
By all reports, the movement in the House and Senate is closer in this direction. The plans now being reviewed, while not perfect from our perspective, are a far-sight better than those offered in recent months. The legislature appears to be on the right track.
But challenges remain. The rhetoric still promotes a pervasive fiction permeating tax policy decisions. The myth? That businesses pay taxes.
In truth, businesses merely remit taxes; people pay them: for business owners, in the form of lost profits; for employees, as lost wage increases or even job opportunities; for consumers, as higher costs or reduced choices.
In the zeal to finish the school finance debate, at least for a time, the legislature must be wary of short-term cash-raising gimmicks like raising cigarette taxes to match surrounding states. Texas benefits by having a lower cigarette tax than our neighbors. Individuals from surrounding states cross into Texas daily, pay our (lower) taxes, and return to their home state without their habit being a burden to us.
That’s good for our treasury.
The eyes of the nation are upon Texas. The Wall Street Journal and others have weighed in on the debate, simply because Texas is so important to the national economy. The legislature, in acting now on school finance reform, must be careful to heed the physician’s dictum, to first do no harm. And then, to make improvements to our system of taxation that are based in sound economic theory.
Michael Quinn Sullivan is the vice president of the Texas Public Policy Foundation.