The 85th Texas Legislature’s special session ended Aug. 16. While there were several topics in Gov. Greg Abbott’s call that improved economic freedom and opportunity, which are the basis of greater prosperity for Texans, there was much left desired to strengthen the Texas model.
Texans already enjoy more freedom than most other states. For example, Texas ranks third-highest in the 2016 Economic Freedom of North America (EFNA) report, which ranks states on their relative levels of economic freedom. There have been more than 150 independent studies of the relationship between economic freedom at the state level and a variety of economic outcomes. The overwhelming majority of those have found that states with higher economic freedom have better results, including faster economic growth and higher incomes.
While Texas is ranked high for economic freedom, there are several notable areas of deficiency that need improvement. While some of these were on the call, they weren’t addressed and should be studied during the interim for swift implementation next time in 2019.
1) Eliminate the business franchise tax, not included in the call.
The Tax Foundation ranks Texas 49th for its corporate tax burden, worse than every state except Delaware. A big reason is that Texas is one of few states to even levy this particularly burdensome tax, which is a tax on a firm’s gross receipts. Eliminating this tax would make it easier for Texas businesses to expand and hire new workers.
2) Reform property taxes, included in the call but not passed.
The property tax burden in Texas ranks sixth-worst nationwide. Residents across the state have seen huge increases in recent years. Either SB 1 or HB 4 would have provided much-needed structural property tax reform by triggering an election for local voters to approve increases in property tax revenue by local jurisdictions of more than a certain threshold. Neither made it to the governor’s desk.
3) Restrain budget growth to cut taxes, not included in the call.
One option is to cut the sales tax rate. Most Texans pay a combined state and local sales tax rate of 8.25 percent. Only nine states have a higher rate. By restraining government spending, excess money could be put toward reducing the state’s sales tax rate or other taxes, providing much-needed relief.
4) Enact a stringent spending limit, included in the call but not passed.
To not excessively burden taxpayers with funding government services, population growth and inflation are key metrics that reflect that burden. One represents the increase in number of residents while the other tracks closely with wage growth over time, collectively providing an increase in funding to government that probably doesn’t overly distort each individual’s ability to satisfy his or her desires. Either SB 9 or HB 208 would have been terrific steps to enacting an effective cap on government spending that limits increases to no more than the rate of population growth and inflation, but neither made its way to the governor.
5) Increase state budget transparency, not included in the call.
Many government programs continue to get funding years after they are no longer needed. Requiring agencies to explicitly justify the need for their programs on a biennial basis through the practice of zero-based budgeting would make it easier to eliminate those that are unnecessary while making it easier to provide tax relief.
6) Reduce government regulations, not included in the call.
The L egislature recently took a step to address the growth of the regulatory burden by passing a law that requires the state to remove one regulation for every new regulation created. Requiring that all regulations “sunset” after a certain period would go further by actually reducing the number of regulations on the books.
Residents and businesses vote with their feet in response to policy differences. Texas is widely regarded as a top business-friendly state; the flood of new businesses into the state in recent years is testament to that reputation. However, like any sort of reputation, maintaining good standing requires constant vigilance.
These six reforms to tax, budget, and regulatory policy would help increase economic freedom and individual liberty in Texas. While none of these were addressed in the special session, they should remain high priorities by the 86th Legislature to provide relief to taxpayers and put Texas at the top when it comes to economic freedom and associated prosperity.
Dean Stansel, Ph.D., is an economist at the O’Neil Center for Global Markets and Freedom in Southern Methodist University’s Cox School of Business and the primary author of the annual Economic Freedom of North America report. Vance Ginn, Ph.D., is an economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a nonprofit free-market research institute based in Austin.