Analysis: Texas Government's Shrinking Financial Buffer

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The message coming out of the state comptroller and various budget wonks in Texas is that a mess of lawsuits could put a serious dent in the state’s tax revenues.

That’s not as important as the message they’re sending to state lawmakers and political candidates who might be in the Legislature next year: Don’t get too spendy.

It’s hard to hold the line — even for conservative Republicans — if there is a lot of money available. One of the remarkable things about the current batch of officeholders is that they met last year and wrote a state budget that didn’t spend all of the money they had available.

That’s especially lucky because the oil and gas boom ran out of fuel and the state isn’t bringing in as much money as expected. The revenue shortfall has gobbled up some of that “available” money that didn’t get spent. But — here’s the important part — the economic stumble hasn’t forced the state to cut any programs or services.

Last year’s spending restraint looks pretty smart.

Next year’s legislative session won’t be so easy. Start with the end of that oil and gas boom. Mix in pending tax litigation on piping and equipment and on intangible property in movie theaters that together could lop $2 billion per year off of the state’s revenue in addition to one-time costs of up to $10.5 billion, according to the comptroller’s estimates. Litigation over the state’s busted foster care program could cost the state up to $100 million annually.

Adverse rulings in any or all of those lawsuits could put the state in a real pickle.

Then there is the school finance lawsuit that alleges the kinds of large disparities between the state’s school districts that cost billions to fix. If the Texas Supreme Court sticks with a lower court ruling, lawmakers will have a choice between raising state spending, lowering the quality of public schools or forcing increases in local property taxes.

Great choices, right?

The odds are against all of that litigation going fully and completely against the state, and even if it did, the consequences might not match the dire predictions. Those are worst-case forecasts, after all.

It’s also possible that even adverse rulings won’t happen early enough to require attention in the legislative session that starts next January.

Keep an eye on the spending half of the board while you’re worrying about those lawsuits.

Surpluses give lawmakers the option of cutting revenue or expanding or creating programs and services. The potential drops in state income might be good news for anyone who wants to retard government growth. But some of those same people would love to cut taxes, and that’s a lot easier to do when the state is flush.

Cutting taxes without surpluses means cutting programs and services, each of which has its own constituencies.

A proposal to cut business franchise taxes would cost the state an estimated $3.5 billion annually. With a surplus in place, that would require the promoters to win support for a tax cut. Without one, they have to win support not just for the tax cut but also for the program or service cuts that would make it possible. That’s doable, but it’s more difficult.

Bigger ideas, like paying off highway debts to get rid of toll roads, are even more expensive: $30 billion to $40 billion, the Texas Department of Transportation told lawmakers last week.

Legislative efforts to cut or limit property taxes face similar hurdles: The taxes are unpopular, while the public schools they support have widespread bipartisan support.

The warning lights come from what might be called a case of cautious pessimism: The state economy remains relatively robust even with the slump in the energy sector, and the state’s lawyers might pull out wins in all of those lawsuits.

The finance folk say otherwise, for now — “Don’t get spendy” is the order of the day.