To slash property taxes, Texas GOP leaders will have to overcome hurdles

AUSTIN — GOP state leaders face hurdles as they seek to redeem campaign promises that the Legislature will deliver big property tax cuts next year.

A routine budget-related action that a group of key lawmakers took Wednesday illustrates the political pickle.

Republicans who run state government are leery of taking a vote to exceed a spending limit that Texas voters enshrined in the state Constitution in 1978.

“Busting the spending cap sets a very dangerous precedent,” Lt. Gov. Dan Patrick said. “Once you’ve done it once, [it’s] easy to do it again.”

But if lawmakers don’t vote to go over the cap in the budget that’s the only must-pass bill in next year’s session, they will have to either parcel out smaller school property tax cuts than some desire or go to considerable lengths to circumvent the limit.

Gov. Greg Abbott has raised expectations that as much as $14 billion or more of unspent state revenues from the current two-year cycle may be rolled forward into the next budget lawmakers write and be used to buy down local school property tax rates.

To do that without exceeding the tax spending limit in the Constitution, the 10-member Legislative Budget Board, headed by Patrick and Speaker Dade Phelan, would have to adopt a ceiling that permits spending — as measured in the constitutional provision — to increase by close to 15% in the next two years.

Instead, the board unanimously chose 12.33% as the maximum allowed increase. That would allow an additional $12.5 billion of spending of undedicated tax revenues in 2024-2025 — enough for some tax relief, for sure, but not the huge amount sought by Abbott. As is often the case, the board took the vote after a three-minute staff presentation — and no discussion.

Conservative approach

A nearly 15% relaxation of spending controls might have induced heartburn for staunch conservatives. One, Arlington GOP Rep. Tony Tinderholt, is trying to unseat Speaker Dade Phelan, R-Beaumont, whom he accuses of being insufficiently “bold” on property tax cuts.

Had the board on Wednesday picked the most conservative estimate of the tax spending limit, a 9.5% rate of growth for Texans’ personal incomes in the next two years, then lawmakers next year would only be able to increase spending by $9.6 billion. And that might have to be divided among tax relief and other pressing needs.

In that scenario, Abbott would get far less than he promised at a campaign stop in the Collin County town of Fairview on Aug. 31, about six weeks after Comptroller Glenn Hegar said he expects a $27 billion general-fund surplus by the current cycle’s close.

“I want to return at least HALF of that money to you with the largest property tax cut ever in the history of Texas,” Abbott tweeted at the time.

On July 14, Patrick, who presides over the Senate, responded to Hegar’s announcement of a big surplus with a list of proposed uses of the money. Among them was the Republican lieutenant governor’s statement, “I support using an additional $4 billion for property tax relief next year.”

At a Wednesday news conference at which he listed his legislative priorities, Patrick said he favors spending about $2.5 billion to increase the homestead exemption on school taxes to $65,000, from the current $40,000. He would continue to buy down the school property tax rates, if possible, he said. Renters would not directly benefit.

Patrick also wants to get rid of a “nuisance tax” on businesses, the property tax on tangible personal property such as office equipment. The current exemption of $2,500 is too low, he said.

“We need a robust property tax cut for everyone in the state,” he said. “We need to look at businesses, also.”

How spending cap came to be

By a majority vote by members of each chamber of the Legislature, lawmakers can declare an emergency and exceed the tax spending cap.

The last time they took such a vote was in 2007, one year after they and then-Gov. Rick Perry approved a one-third reduction in school “maintenance and operation” property tax rates. The money spent to buy down the local taxes counted as new state spending, helping put the budget over the cap.

Since the rise of an anti-tax group known as Texans for Fiscal Responsibility, followed by emergence of GOP tea party activists in 2009, voting to bust the cap has been considered a no-no.

The cap applies to revenue from state taxes not dedicated by the Constitution to specific uses. Spending financed with such money can’t grow faster than the state economy. Between 1979 and 2020, the Legislature defined economic growth as the rate of increase in Texans’ personal incomes expected in the next two years. On Wednesday, the budget board decided not to choose from among five economists’ guesses on that, ranging from 9.5% (offered by Hegar’s office) to 14.6% (submitted by Moody’s Analytics). Instead they embraced S&P Global Ratings’ projection of combined population growth and inflation of 12.33%.

For years, fiscal hawks have complained that using personal income is too generous and leads to too much spending. In November 2020, the board jettisoned the income yardstick in favor of a limit tied to population growth and inflation: 7.06% over the current cycle.

While conservatives have long championed a limit of state population growth times inflation, however, the past year’s surge in inflation has, in effect, stretched that waistband.

Last year, North Richland Hills GOP Sen. Kelly Hancock authored and passed an additional spending limit. It is taking effect for the first time next year, and the board on Wednesday was required to select estimates of population growth and the Consumer Price Index for the next two years.

While conservatives love the law because it won’t count tax cuts as spending, the limit’s expected to be so high because of inflation that it won’t be a serious check on greater spending. At 12.33%, the growth rate also chosen by the board for this cap, that allows nearly $136 billion of spending financed by general revenues, including those in dedicated accounts.

Other ways to use the surplus

The 1978 tax spending limit is the one that may affect behavior. Budget writers have $5.1 billion of “room” under the cap in the current cycle. Next year, they may use their customary “supplemental appropriations bill,” which fills holes in the last budget, to pay for shortfalls in Medicaid, prison inmate health care and a “13th check” for retired teachers.

In July, Patrick said he wants to give the retired educators a nonrecurring boost to their annuity check. Retired teachers don’t get a cost of living increase because their pension fund is not deemed actuarially sound — and making it sound would cost several billion dollars.

If they backfill an additional $5.8 billion of spending into the current cycle, the base from which they calculate the spending limit would increase to $107.4 billion. Applying the newly chosen maximum rate of spending growth would give them more billions from the surplus to use for whatever they want, including property tax cuts.

Another way to use unspent surplus dollars without exceeding the cap is to plow them into constitutionally dedicated funds, such as existing pools of money earmarked for new water supplies and flooding abatement projects. Of the “Big 3″ Republican leaders, Phelan has shown the most interest in tapping the surplus for infrastructure needs. On Wednesday, Patrick spoke of possibly submitting to voters a constitutional amendment to build or improve state mental hospitals. That would be another place to park surplus dollars.

Clarification

8:49 p.m., Dec. 1, 2022: An earlier version of this story said that under a spending limit Texas voters approved in 1978, the Legislature’s budget writers so far have left $5.8 billion of “room” under the cap in the current cycle. The updated figure Thursday from Legislative Budget Board director Jerry McGinty is $5.1 billion.