Texas’ 2024-25 budget continues to swell to uncomfortably high levels.
On Monday, the Senate Committee Substitute for House Bill 1 (SCSHB1) passed unanimously on the Senate floor. This version added $6 billion in total spending as compared to the House counterpart (CSHB1), bringing the total to $308 billion. This additional spending means a biennial increase of 16.3%, compared to the 2022-23 General Appropriations Act (GAA).
Here are a few things to note about this new spending proposal.
Without any adjustments, this rate of growth surpasses the maximum projected population and inflation increases estimated by our Conservative Texas Budget (CTB) of 16%. Adjusting for property tax relief and pandemic spending in both biennia, the increase grows to 19.4%, according to our CTB methodology. In either scenario, it’s clear that any further rise in spending is no longer justified by the increase in demand for public services (population growth) or the rise in the cost of supplying such services (inflation). It should also be noted that the Senate’s proposed spending growth (16.3%) is above the anticipated growth of the economy (12.33%). This could generate a crowding-out effect, where the public sector spending starts replacing the private sector spending in the Texan economy.
In the context of fiscal rules, the legal limits that constrain the growth in appropriations from state revenue sources are almost maxed out. Keep in mind that these limits have been stretched out with the supplemental appropriations by inflating the base used to compute them from the previous biennium. According to the LBB, the tax spending limit has only $2.3 billion left before it reaches its cap. Similarly, the Consolidated General Revenue Limit has an additional capacity of $4.7 billion in possible expenditures.
However, most of the heavy lifting is done by “Other Funds,” which are not subject to any legal limit and unsurprisingly have a growth of almost 50% of its appropriations. For example, consider the Rainy Day Fund, registered under this category. Due to this source’s increased spending, the Rainy Day Fund will no longer reach its cap of 10% of General Revenue in the next biennium. However, remember that a fully funded Rainy Day Fund might come in handy in the case of a recession to cover any shortfall in tax collections.
Finally, who are the winners of this budget?
One obvious special interest group is retired teachers. They will get a benefit enhancement of $3.7 billion, representing almost $7,900 per retiree. Likewise, the Employee Retirement System of Texas will receive a legacy payment of $1 billion representing $3,100 per participant. In contrast, the $16.5 billion for tax relief divided by the 10 million households of Texas is $1,650 per household.
Consequently, public school teachers are set to receive almost five times more benefits than the average Texas household without considering other ISD pay raises and compensation boosts. This raises some important questions about why taxpayers have been seemingly de-prioritized in relation to other special interests and what kind of ROI they should expect to receive in return.
These questions are even more curious in light of the fact that property tax relief benefits everyone, including retirees from the public sector. Had policymakers simply placed greater emphasis on tax rate compression, then every Texan would stand to gain rather than a single special interest group alone.
These are important considerations to take into account given the nature of the state’s surplus (which it is now using to fund spending growth and tax relief). These resources came through the effort of the taxpayer that paid a double tax: inflation tax and, on top of that, sales tax. Given that, it is entirely reasonable to return most, if not all, of those proceeds to all taxpayers in the form of massive property tax relief, which is the main fiscal burden for Texans.
As we enter the conference committee phase, legislators would do well to remember the taxpayer—and first principles: lower spending, keeping a fully funded Rainy Day fund, and maximizing property tax relief should be the guiding star as we get the budget to the finish line.