Texas Faces a Texas-Sized Challenge: Fixing a $4.6 Billion Budget Shortfall

IT'S the stuff of which political mine fields are made. For its next two-year budget period, the state of Texas is facing a $4.6 billion-dollar shortfall, overcrowded prisons, increased demands on human services, and court-ordered school funding reforms that could cost the state an additional $1.2 billion.

Most parties agree a new tax bill is inevitable. But the tax sources the state has traditionally turned to are already overburdened and out of touch with the state's economic growth.

Texas has one of the nation's highest sales tax rates, inequitable property taxes, and an outdated franchise tax that weighs heavily on capital-intensive businesses, leaving service industries virtually untouched.

Although state lawmakers have long recognized the need for a tax overhaul, previous efforts have ended in simply raising existing taxes and fees. But the pressure of the projected budget shortfall has spurred talk of major tax restructuring - including possible new business taxes and a personal income tax.

Countering the immediacy of the shortfall are the political consequences of a new tax bill. Texas is one of the few states in the nation without either a personal or corporate income tax, and many a Texas politician has made a career out of touting a constitutional ban on such taxes.

Whether the Legislature will choose long-term, fundamental reform or quick-fix ``band-aids'' is the crux of the debate, says Gary Wood, president of the Texas Research League, a business-funded study group. ``How to fix the budget is a philosophical question couched in political terms,'' Mr. Wood says. He adds that most people agree Texas' tax structure is unfair, but says but the price of changing it is a political risk.

Walking the fine line between the practical demands of the budget and the political pressure of the populace is Democratic Gov. Ann Richards. While Mrs. Richards ``recognizes the need for revenue measures,'' says a spokesperson, ``she hasn't seen any support for a personal or corporate income tax.''

Only one elected officer, Democratic Lt. Gov. Bob Bullock, has spoken publicly in favor of an income tax.

While Mr. Bullock's declaration of support for an income tax puts pressure on the legislature to consider such a move, it also puts Richards in a politically precarious position, says Bill Miller, an Austin-based political consultant. ``Ann knows that if she's governor and a personal income tax passes, she's history,'' says Miller, assuming Richards will run for a second term. ``With Bullock, reelection is not a big factor. He believes an income tax is the thing to do from a public policy standpoint.''

In considering tax restructuring, the legislature must decide how to distribute the tax burden between the state's two tax sources, individuals and businesses, says Tom Plaut, chief revenue estimator for the state comptroller's office.

And in weighing the tax burden, lawmakers have mainly three options: a personal income tax - unlikely to pass at this time, Mr. Plaut says - new business taxes, or raising the state sales tax rate or broadening its base to include professional services, such as legal and accounting services.

State Comptroller John Sharp, a Democrat, has proposed abolishing the franchise tax, generally agreed to be a disincentive to business growth because it taxes mostly capital investment of corporations only. In its place, Mr. Sharp has proposed a Texas Business Tax (TBT), based on the Michigan Single Business Tax. A modified value-added tax, the TBT would cover the business activity of sole proprietorships, partnerships, and limited partnerships, as well as corporations. Businesses could deduct the costs of research and development conducted in Texas, a move aimed at attracting more high-technology firms to the state. The tax would reap about $2 billion over a two-year period.

Sharp's Texas Business Tax has won the endorsement of former Republican Gov. John Connally (R), chairman of an advisory board created by Governor Richards. The 16-member, bipartisan task force is examining state revenues and tax options and hopes to recommend a plan to the Legislature.

House Republican caucus also will be presenting a ``live-within-our-means'' budget, focusing on tax revenues from projected economic growth, says Karl Rove, a Republican political consultant. The state leadership has made ``an extraordinarily deft effort at creating the sense the state is out of money,'' Mr. Rove says, when in fact there is enough money for a moderate increase in spending.

The Texas Legislature holds regular sessions once every two years, so each new budget must cover a two-year period. The state budget was put aside during this year's regular session this spring, pending completion of a comprehensive audit of state government spending and practices.