How Rick Perry Created His State's $27 Billion Budget Crisis

The following piece appears in the current issue of the Washington Spectator. For more great stories, check out their site. 

In his State of the State speech in February, Rick Perry described the $27 billion budget shortfall confronting the Texas Legislature.

“Now, the mainstream media and big government interest groups are doing their best to convince us that we’re facing a budget Armageddon,” Perry said. “Texans don’t believe it and they shouldn’t because it’s not true.”

The $27 billion equaled 15 percent of the $182 billion biennial budget the Legislature had passed two years earlier. If not Armageddon, an apocalyptic loss of revenue in a low-tax state that provides bare-bones public services.

Perry’s statement was even more remarkable because most of the budget shortfall was a consequence of a business-tax bill he pushed through the Legislature in a special session five years earlier.

With Perry running for president on a record of fiscal responsibility (and job creation, discussed later in this article), it’s important to understand the consequences of his 2006 “business margins tax” — and to ask if the governor knew that the tax reform he proposed would undermine the state’s budgets in the years that followed.

First, some background. Texas is one of nine states with no income tax. It relies on property taxes to pay for public services — notably, to pay for public education, which consumes the lion’s share of property taxes.

Because there is no income tax, property taxes are high. In 2006, Perry called a special session to address property taxes. With no income tax, there are no easy fixes. Yet Perry found one. A business-margins tax he said would provide enough revenue to allow for reductions in property taxes.

It was evident at the time that the new tax would not deliver what the governor promised. The state comptroller, Carole Strayhorn, had her staff run the numbers on Perry’s tax-reform proposal.

“In 2007,” she wrote in a letter to Perry, “your plan is $3.4 billion short; in 2009, it is $5.4 billion short; in 2010 it is $4.9 billion short, and in 2011 it is $5 billion short. These are conservative estimates.”

The comptroller warned that “no economic miracle will close the gap your plan creates. Even if every dollar of the current [2006] $8.2 billion surplus was poured into the plan, it would not cover the plan’s cost for more than two years, 2007 and 2008. The gap is going to continue to grow year by year.” The shortfall the bill created could only be closed by tax increases, the comptroller warned, “or massive cuts in  essential public services — like public education.”

“It was not only Ms. Strayhorn’s letter,” Houston Democratic Rep. Scott Hochberg told me. “Every official document predicting the state’s financial crisis at the time  predicted exactly what happened.”

Hochberg, the Legislature’s resident authority on public-education finance, also warned Perry that the tax bill he was promoting would not produce the revenue he promised.

“I asked the governor about this in a small meeting amongst legislators,” Hochberg said. “His answer to me, I remember it as clear as day, was ‘Scott, use your common sense. Don’t you know that when we cut property taxes we will see such an economic boom that you will never even notice the drop in revenue?’”

Perry’s response to the Democratic legislator was candid — and newsworthy. Perry admitted he knew that the tax reform he proposed would result in a “drop in  revenue.”