Texas’ 2021 legislative season overflowed into three special sessions and was full of high-impact politics and policymaking. Yet hidden under the headlines was Senate Bill 1336, a bill that sets the stage for Texas’ bright fiscal future. The bill might not have made the biggest splash in 2021, but its ripples of positive impact will be felt for decades to come.
Senate Bill 1336, sponsored by state Sen. Kelly Hancock and state Rep. Greg Bonnen and signed into law by Gov. Greg Abbott codifies a new state spending limit for Texas. The law clarifies that Texas’ consolidated general fund appropriations can grow from one budget cycle to the next by no more than Texas’ growth in population and inflation.
This change effectively puts tax relief on Texas’ permanent agenda. Policymakers can lock in tax relief by tying Texas’ future fiscal surpluses to automatic tax cuts.
Hard-working Texans and local business innovators are driving nation-leading economic growth, expanding the state’s tax base and growing state tax revenue more rapidly than growth in population and inflation. Thus, strong economic growth will result in a fiscal surplus. To put it in specific terms, imagine tax revenues grow by $10 billion due to economic expansion, and state spending grows by $5 billion. The difference is the fiscal surplus.
The solution to the surplus is as simple as the cause. The Texas Legislature should provide tax relief to Texans in reward for the fantastic economic growth they are producing for the state. Tax relief is the direct effect of spending discipline, and Texas’ new spending rule specifically allows excess appropriations to be made for tax relief. The ideal tax code has a broad base with low rates. Thus, Texans should enjoy the fruit of the state’s fiscal discipline through lower tax rates.
But what taxes should be cut, and how should it be done?
There are two great opportunities for Texas tax relief: one for families, and one for businesses. The first opportunity is to use the state surplus to buy down the maintenance and operations portion of school district property taxes, which makes up about half of a Texas family’s property tax bill. Another opportunity is to use the fiscal surplus to phase out Texas’ franchise tax, a gross-receipts-style business tax that hits businesses based upon their revenue rather than their profitability. The franchise tax is arguably the state’s most economically harmful tax on a dollar-for-dollar basis. Either reform would benefit Texans, though families are most keenly attuned to the fact that they pay the nation’s sixth-highest property taxes, according to the Tax Foundation.
Tax reform has the greatest impact when it is consistent and predictable. For that reason, Texas should create a tax trigger—a state law that would automatically deploy fiscal surpluses to tax relief. The Texas Comptroller would certify a certain revenue surplus each biennium, and targeted tax rates would fall automatically. How much tax rates fall would depend upon the size of the fiscal surplus, which itself would be driven by Texas’ economic growth.
Texas can advance the virtuous cycle of its 21st century economic miracle by attaching tax triggers to its new spending rule. Fiscal surpluses would then lead to lower tax rates, leaving Texas families with more dollars for consuming and investing, thus catalyzing more economic growth. The expanding economic base would then drive Texas’ ongoing fiscal surpluses. Ultimately, the source of this virtuous cycle can be traced back to Texas’ spending discipline over the duration of Governor Abbott’s tenure, codified in SB 1336, and enacted in 2021, the year when Texas put tax reform on the permanent agenda.