Wednesday, February 09, 2011

What California should learn about schools, budgets, and taxes from Texas


The so-called Texas Miracle is in trouble, demonstrating that fashioning fiscal policies strictly along low-tax lines doesn't protect you from budget deficits or business slumps or make your residents necessarily happy or healthy.
Michael Hiltzik Feb.9, 2011.
Billions of dollars in government red ink. Classroom spending near the bottom of national rankings and heading down. Desperate appeals to Uncle Sam for emergency funds to stave off cuts to the poor and elderly.
All this points to the obvious question: What's the matter with Texas?
Texas? Yes, the so-called Texas Miracle is in trouble. Unemployment soared and state tax revenue came in sharply below estimates during the recession, and the deficit mushroomed.
California's Legislature has won national renown for its dysfunction, but Texas lawmakers know how to squeeze dysfunction until it squeals. The late Molly Ivins reported years ago that when a good-government group ranked the Texas Legislature 38th among the 50 states, the reaction among knowledgeable Texans was, "You mean there are 12 worse than this?"
Maybe things have improved in the Texas statehouse since Ivins' day. But given that the legislators put off action on the budget this year so they could first debate an anti-abortion measure, a balanced-budget amendment for the U.S. Constitution and a voter-ID law, maybe not.
Pondering the problems of Texas isn't merely an exercise in schadenfreude, the pleasure one takes in the misfortune of others (some examples evoked by the puppets of the show "Avenue Q": "Football players getting tackled; CEOs getting shackled … "). The goal is to gain perspective on our own crisis and the conventional proposals to address it. The bottom line is that fashioning fiscal policies strictly along low-tax lines doesn't protect you from budget deficits or business slumps or make your residents necessarily happy or healthy.
The budget crises afflicting states coast to coast arise from a combination of the nationwide recession and obsolete or wrongheaded state taxing schemes. The National Council of State Legislatures says that at least 15 states face large deficits this year and 35 in fiscal 2012.
As things stand now, the council's figures place California's projected 2012 deficit at $19.2 billion, or 18.7% of its general fund, and the Texas deficit at $7.4 billion, or 17% of its budget. States with broad-based tax policies that balance property, income and sales taxes are best equipped to ride out economic cycles, because those levies don't all move in lockstep with the economy. Neither California, with its over-reliance on income and sales taxes, nor Texas, which has no income tax, qualifies.
Many state budgets will get worse before they get better, because federal stimulus funds used to close their gaps over the last two years are drying up. That points to a fact that hasn't been widely remarked upon: President Obama's stimulus program helped both California and Texas — indeed, many states — manage their deficits.
While Texas Gov. Rick Perry sucked up to the "tea party," declaring himself opposed to "government bailouts" and prattling about seceding from the union, he papered over his state's budget gap with $6.4 billion in Recovery Act funds, including increased federal handouts for education and Medicaid. So when you, the California taxpayer, hear talk of the Texas Miracle, you should take pride in having helped pay for it.
The supposed superiority of Texas over California in fiscal policy long has been a conservative article of faith. In 2009 the libertarian American Legislative Exchange Council published a report co-authored by the conservative economist Arthur Laffer underscoring the contrast. The report posited that "Texas' superior policies over the past several years are making the Lone Star State more resilient to the current economic downturn."
But Texas was hardly immune to the recession. From 2006 through 2010, the unemployment rate in Texas soared from 4.4% to 8.3%. Yes, that's a better showing than California, which went from 4.9% to 12.5%, but the difference may reflect the huge effect on California's economy of the popping of the housing bubble, which jumped our unemployment rate to a new magnitude and is likely to keep it there for a while.

The Laffer report focused chiefly on tax policy, its guiding principle being the lower, the better. Yet Texas' resistance to raising taxes to cover the cost of state government hasn't proved to be any more sustainable on the banks of the Rio Grande than it is on the shores of the Pacific.
With a Republican legislative majority in Austin adamantly refusing to raise taxes to cover a shortfall estimated at as much as $27 billion over the state's two-year budget cycle, budget drafters are talking about shutting dozens of nursing homes, taking a hatchet to college financial aid and university budgets and paring K-12 spending by $5 billion a year.
That last action could drop Texas out of its 2009-10 rank of 37th among states and the District of Columbia in per-pupil spending, as calculated by the National Education Assn., depositing it firmly in the cellar with California (42nd).
Laffer's admiration notwithstanding, part of the problem in Texas is fiscal stupidity. Californians love to cut their own taxes and expand spending programs; Texas in 2005 cut property taxes, which fund the schools, by one third, while increasing business taxes. But the business tax doesn't bring in as much money as the property tax did, and is more vulnerable to the economic cycle besides. The result was a widened budget deficit.
Curiously, Texas' reputation as a low-tax, business-friendly state survives although its state and local business levies exceed California's as a percentage of each state's business activity (4.9% versus 4.7% in 2009, according to a report by the accounting firm Ernst & Young). What's different is that Texas business taxation relies more on property, sales and excise taxes and government fees than California, which relies on taxing corporate income.
Of course, one reason many business owners and executives favor Texas over California is that the Lone Star State doesn't have a personal income tax — a big deal when you're pulling in a Texas-size paycheck.
But self-interest aside, what's at stake from fiscal policy in both states is the same — the services and programs that really matter to business owners, such as functioning schools, high-caliber universities and serviceable transport infrastructure.
Even more important are the measures that point to public well-being. In many categories, California and Texas are closer together than either state's residents would probably find comforting.
But here are a few where they're not: Texas ranks 49th in the nation (that is, third worst) in teen births; California 22nd. In providing prenatal care to expectant mothers, Texas is dead last, California eighth. Texas ranks 34th in median family income, with $47,143; California 13th, at $56,852. This is the harvest of its "superior policies," and given the current budget crisis, it's bound to get worse. Miraculous.
Article at latimes.com/business/la-fi-hiltzik-20110209,0,573520.column
Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.

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