This commentary originally ran in The Monitor on April 25, 2014.
With Texas’ robust economy leading to rising budget surpluses, the Texas Legislature should create the Sales Tax Relief (STaR) Fund next session to put money back into the pockets of hard-working Texans.
The STaR Fund is a simple vehicle that lawmakers could use to return excess revenue to taxpayers by temporarily cutting the state sales tax rate. This vehicle would help restrain the size of government, increase the well-being of all Texans and keep the state’s economy competitive.
More government spending when the economy is growing and tax revenue is rising doesn’t cause much concern. However, when the economy inevitably turns south, tax revenues will fall and then there will be a call for higher tax rates or cuts in government services to balance the budget. Both are politically difficult.
Imagine an opportunity for legislators to let Texans be part of the appropriations process.
Instead of interest groups asking for budget savings to spend on specific programs, lawmakers could consider taxpayers a top priority and shift excess revenue into the STaR Fund for the Texas comptroller to temporarily cut the sales tax rate — thus letting taxpayers reap the rewards of their own success.
The STaR Fund would come from two sources. The first would be from legislators directly appropriating surplus revenue or savings from government programs. The second would be from revenue that exceeded the constitutional cap on the Economic Stabilization Fund (ESF); currently the cap for 2014-2015 is $14.4 billion. Even after diverting funds to water and highway projects the Texas Comptroller expects the ESF balance to be $8.1 billion by end of fiscal 2015, reaching the cap could soon be a reality.
Based on the amount in the STaR Fund, the comptroller would have authorization to cut the state sales tax rate for a chosen period based on the previous year’s sales tax revenue. Any lost revenue in the General Revenue fund from this cut would be replenished with the balance in the STaR Fund until it’s exhausted. After the chosen period, the sales tax rate would automatically return to its original level.
Consider fiscal 2013. Each percent of the state’s 6.25 percent sales tax rate brought in about $4.2 billion. Assuming this amount was in the STaR Fund, the comptroller would lower the sales tax rate to 5.75 percent — an 8 percent cut in the rate—for about two years. Two years later the rate would revert to 6.25 percent.
If you purchase clothes, you pay a sales tax. If you purchase school supplies, you pay a sales tax (unless bought during the state’s annual sales tax holiday). In general, other than non-prepared food products, you pay a sales tax. Therefore, everyone across the Lone Star State would notice a tax cut.
By creating the STaR Fund, legislators can let Texans have more choice of whether to save or spend their hard-earned dollars that will generate more tax revenue by growing the economy instead of paying taxes.
According to IRS calculations, an 8 percent cut in the sales tax rate for two years with the STaR Fund would save an average family of four about $118 in Fort Worth and $132 in Houston. A family could use these extra dollars to save for unexpected events, buy a week’s worth of groceries or pay for a month or more of diapers.
We are fortunate to have a federal system that allows states to be laboratories of competition. Recent data show that Texas is falling behind in a couple key areas. Cutting the sales tax rate with the STaR Fund would also improve the state’s competitiveness.
The Tax Foundation ranks Texas’ state sales tax rate 11th in 2014. California holds the crown with the highest state sales tax rate of 7.5 percent. A sales tax cut to 5.75 percent would put Texas around the middle of the pack, increasing its already competitive advantage in taxes as one of only seven states without an income tax.
The U.S. Bureau of Labor Statistics reported that Texas had the third highest annual job growth rate over the last year. As Texans, we’ve grown accustomed to expect nothing less than first. By cutting the sales tax rate, more dollars will be in the productive private sector where businesses can pass on fewer costs to consumers and consumers can purchase more, giving a shot in the arm to the state’s economy.
Simply, for all Texans to receive clear benefits of restraining the size of government, relieving tax burdens and increasing the state’s competitive advantage, the Texas Legislature should create the STaR fund.
Vance Ginn is an economist in the Center for Fiscal Policy at the Texas Public Policy Foundation.