Past gaps in budget bridged by taxes

Advocates of cutting services were outvoted in 1987, 1991

By Dave McNeely
AMERICAN-STATESMAN STAFF
Sunday, April 6, 2003

President Bush is in his third year in the White House. The nation is tense about conflict with Iraq. The economy is in a big slump. And Texas and many other states face budget shortfalls.

No, this isn't 2003. It was 1991. And as is the case this year, times were tough.

The past two times the Texas Legislature faced significant budget shortfalls were in 1991 and 1987. Both times, taxes were raised.

Now, as lawmakers are dealing with a nearly $10 billion gap between income and the cost of current services, leaders are pledging to write a budget without new taxes. Some lawmakers made the same pledge in '91 and '87, while others argued against deep cuts.

In 1987, top Democrats, including the Senate's longtime presiding officer, Lt. Gov. Bill Hobby, said cutting spending to the bone would endanger -- not help -- the Texas economy.

Hobby told the Rotary Club of San Antonio at the time that Texas' failure to continue investing in such things as public and higher education, transportation and other needs would destroy the magnet attracting big companies to Texas. He noted that in Fortune magazine that year, "Dallas got favorable mention for a diversified economy, Houston for entrepreneurs in medical technology and computer software, and Austin for the University of Texas at Austin.

"By contrast, our neighboring state Louisiana gets poor reviews in the business media because of a high rate of illiteracy and a substandard education system," Hobby said. "Louisiana's answer to the same kind of state deficit Texas faces was to cut the education budget $235 million, or 11 percent."

The 1987 Legislature, controlled by Democrats, eventually passed an estimated $5.7 billion in new taxes, including broadening and raising the sales tax and making permanent a nickel-a-gallon motor fuel tax. Early in the debate, the raised taxes were tied to specific cuts in state agencies, universities and other programs if the taxes were not approved.

Then-Gov. Bill Clements, a Republican, had campaigned against a tax increase. He later pledged to veto any tax bill of more than $2.9 billion, the amount raised by making the gas tax increase permanent.

Clements eventually reluctantly signed off on the tax increases. At the time, it was the largest tax bill ever passed by a state and amounted to 14.7 percent of the $38.8 billion two-year budget the Legislature approved.

Four years later

The 1991 budget crunch was not quite an echo of the one in 1987, which came after the bottom had fallen out of the Texas oil market. But the '91 crisis was serious, and like the one four years earlier, it took some fast footwork to deal with it, plus special legislative sessions.

In 1991, in addition to the national recession that was hurting all states, Texas' situation was made even worse by a federal prison lawsuit that demanded more space for prisoners, plus a state Supreme Court ruling that said spending on schoolchildren throughout the state needed to be equalized.

The new governor, Democrat Ann Richards, had been smart enough to resist efforts to back her into a corner of committing herself to oppose a tax bill. And she was reluctantly pushed during a hard-fought gubernatorial primary in 1990 into endorsing a state lottery.

Once elected, she pulled out all stops to get the votes to pass it, saying that Texans wouldn't stand for a tax bill until a lottery to add new revenue had been passed. It was estimated that the games of chance would bring in $505 million in the first two years, leaving the state about $4 billion short of revenue needed to maintain existing services.

With a sense of the impending financial problems in 1990, the idea was hatched to give the state comptroller the power to conduct performance review audits of all state agencies in 1991. The auditors would look for duplicative or unnecessary services that could be cut and potential consolidations that could save money.

But that was going to take time. The state's top officials decided to postpone debate on the spending bill until after the new comptroller, John Sharp, completed the reviews.

The massive performance review plan was hatched in secret and closely guarded until it was unveiled.

"It had to be kind of like a D-Day thing," said Greg Hartman, then a top aide to Sharp, a Democrat. "You had to hit strong, hit hard and hit fast. And you couldn't do it during a regular session because of too much time and too many distractions.

"That was a big part of it: absolute confidentiality," Hartman said.

"Every dollar spent by the state has some special interest behind it, and we didn't want to allow time for them to pick it apart."

The conservative Heritage Foundation lauded the effort.

"In five months, the team came up with over 1,000 recommendations and identified over $2.4 billion in budget savings, ending the budget crisis and averting the need to impose a state income tax," it said.

Republicans in the Texas House had called for a state budget with no new taxes, just as they had in 1987 and as their leaders who now are in charge have done this year. They proposed $6.5 billion in budget cuts, such as shutting down government one day a month, making state employees pay half their Social Security taxes and cutting support for full-day kindergarten for all but children from low-income families.

They also called for reducing state holidays, consolidating all licensing agencies, privatizing everything from prisons to the Commission on the Arts, repealing prevailing wage laws and consolidating all public safety agencies.

But Democrats succeeded in sending to the governor a $2.7 billion tax bill, which included a nickel-a-gallon increase in the motor fuel tax. The new taxes, combined with the performance review cuts and the lottery, helped fund a $59.4 billion budget.

Richards signed the bill, which accounted for 4.5 percent of the budget. In 1994, Republican George W. Bush defeated Richards for re-election. He persuaded the Legislature in subsequent years to cut taxes, which took from state coffers some of the money that the tax increases under Richards and Clements had generated.

Now, Republicans have significant majorities in the House and Senate, and Republican Rick Perry is the governor. But on their maiden voyage in control of every branch of government, Republicans face a budget shortfall that is making some of the more moderate GOP legislators nervous.

Their leaders all say they will pass a state budget with no new taxes. If they do, it will be a new way to deal with a budget shortfall in Texas.

Following Hobby

Sen. Eliot Shapleigh, D-El Paso, has campaigned passionately for more state investment in education, health care and transportation. He says the Republican approach is incredibly shortsighted. Where, he asks, are the great leaders whom Texas once enjoyed?

"Great leaders once dreamed of investing in people, fought for good schools, legislated access to technology, spoke of great universities," Shapleigh said. "Current leaders talk about only one thing: cuts."

He blames the change from "centrist leaders" on a handful of huge donors to Republicans.

"The wealthy few that fund really big campaigns paid to keep a Texas tax system that has benefited them for decades and want no changes," Shapleigh said. "They have spent millions to develop the mantra `no new taxes.'

"As a result, Texas is now 50th, or dead last, in what it invests in its own people on programs like education, universities, highways and health," Shapleigh said.

Texas' regressive tax system has pushed responsibility for public schools, health care and transportation increasingly from the state to the local taxpayers, Shapleigh said.

"Governor Perry has it backward," Shapleigh charged. "It's not cuts first. It's people first."

Perry's press spokesman, Gene Acuna, said the governor and legislative leaders have called "for legislators to examine each program on its merits and weigh the importance of that program against other programs. . . . The challenge is to define the state's priorities, distinguish between wants and needs, and live within available revenue."

Whether the approach of continuing to fund services, even with a tax bill, will win out in 2003 will be the battle in the Legislature and the governor's office over the next several weeks.

dmcneely@statesman.com; 445-3644