The Coming Legislative Session

Yesterday TSCPA sponsored a Grassroots Seminar in Austin for legislative volunteers. The program was to make CPAs aware of issues pertinent to the 2013 legislative session and provide suggestions and instructions on working with legislators. The program included presentations by two CPA legislators, Sen. Tommy Williams (R-The Woodlands), Senate Finance Committee Chair, and Rep. John Otto (R-Dayton), Vice-chair of the House Ways and Means Committee. TSCPA legislative consultants Jack Roberts and Rusty Kelley also provided insights into the November election and how its results might affect the upcoming session. Texas Tribune mavens Evan Smith, Editor-in-chief and CEO and Ross Ramsey, Executive Editor rounded out the session with a glimpse of both national and Texas politics.

Participants were treated to an excellent understanding of the state’s budget issues. You may have read that the growth in Medicaid could ultimately bankrupt the state and what we heard yesterday supported that concern. Over the last decade Texas budget growth has been in the 6-8% range while Medicaid growth has averaged 14%. That means all the state’s revenue growth is consumed by Medicaid expenditures. Reminds me of the Federal dilemma where all revenues are consumed by entitlement programs and the government has to borrow to pay for everything else.

Regardless of whether or not Texas participates in the Medicaid expansion of the Affordable Care Act, Medicaid is not sustainable on its present path. It was pointed out that although the feds promise to pay almost all the initial costs, the feds don’t have the money either, so they would have to borrow it. You can imagine how a group of CPAs reacted to all this good news.

State revenues are up in Texas thanks to economic recovery and a booming oil and gas industry. Gas severance taxes are 84% ahead of estimates and oil severance taxes are 48% ahead of estimates. Some even speculated that the Margin Tax might meet original expectations for the first time in 2012. Even so there are significant challenges. For example, enrollment growth in public education along with the Medicaid costs will consume 89% of the state’s revenues over the next two years. That leaves 11% to pay for everything else.

The good news for Texas, at least for the next biennium, is it appears the state is collecting sufficient revenues to be able to adopt a biennial budget without resorting to new taxes, which is a very good thing, especially since most of the legislators ran on tickets promising not to raise taxes. However, Texas revenues will have to increase or the state faces significant infrastructure failures in the not-so-distant future. We evidently have no money for new roads and barely enough to fix the old ones. We are facing some severe water shortages down the line if we don’t do something soon and the long range power generation outlook is questionable.

One proposal discussed yesterday was to increase vehicle registration fees by about $50. Evidently Texas has one of the lowest fees compared to other large states. This fee increase could raise enough funds to tackle most major city congestion problems. Another idea was to dedicate auto sales tax revenue to highway construction. It remains to be seen if this legislature will even consider such proposals.

What about education finance reform? There are six lawsuits underway against the state of Texas claiming the current education funding system is unconstitutional. Despite conventional wisdom that the courts will once again determine the system to be out of whack, some on the program yesterday thought this time it might be different. In any event, it is unlikely that the court’s decision, whatever it may be, will be rendered before the end of the 2013 session. School finance is so significant to the state budget, that it being in limbo is enough excuse for the legislature to not try to do any other major financial or budget reform. If the courts rule as expected by most, the question would be whether or not the governor calls a special session or they just wait until 2015 to reform the system.

The CPAs present were interested in potential tax legislation for 2013. Not much tax legislation is expected. Some thought there might be a few tweaks to the Margin Tax. With so many candidates winning election on a no-new-tax and no tax increase platform, most tax bills will be DOA. One bill has been filed to increase the franchise tax minimum revenue amount from $1 million to $5 million. That would exempt most (98%) Texas business from paying any franchise tax. While a number of legislators might like to lower taxes, the state’s fiscal picture makes that very difficult.

Governor Perry and Speaker Straus have both called for more budget transparency seeking to eliminate the time-honored practice of raising money for a specific purpose but not spending it, which helps balance the budget. There is about $5 billion in such funds (accumulated over about 20 years), so if transparency were restored all at one time the legislature would have to find another $5 billion to balance the budget. It was suggested that they might start with a bill that keeps the $5 billion from growing any larger.

On the operational side of the legislature, it was pointed out that half the House of Representatives will be freshmen or sophomore legislators and there will be six new senators out of 31, which is more at one time than anyone can remember. This means a lot of institutional knowledge on such difficult subjects as school finance reform has been lost and will likely result in some starts and stops throughout the session. All these new legislators also means a more conservative legislature.

Other than the budget (the only bill the legislature has to pass) what will be the hot buttons of the session? The items mentioned yesterday were Voter ID reprise, school vouchers, standardized testing, expansion of charter schools and higher education reform. Possible additional abortion control legislation is also a possibility.

Water concerns were mentioned above. One legislator is considering suggesting a tap tax: a small tax that would appear on your monthly water bill that might raise as much as $25 billion to be used to fund the existing water conservation plan. The water conservation plan was adopted a few sessions back but has never been funded. Another suggestion was to use some of the estimated $8 billion in the Rainy Day Fund to kick start the water plan.

Yesterday’s seminar was informative and entertaining. The presenters were knowledgeable and articulate. We will watch to see if they are also good prognosticators.

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