Loophole Allows Texas Cities and Counties to Blow Past Spending Limits

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House Bill 1869 is scheduled for floor debate today. The bill would protect last session’s tax reforms by including debt not approved by voters, such as certificates of obligation, in the 3.5% voter-approval tax rate calculation. Under current law, these items are excluded from the tax rate calculation, even though they lead to higher taxes. This loophole gives cities and counties a big incentive to use (and abuse) them.

As you can imagine, the Texas Municipal League has come out strongly against the bill and has even succeeded in softening it somewhat. It may have even mustered the votes to kill it in the House floor.

For further explanation, here’s my colleague James Quintero’s testimony before a House Committee:

Mr. Chairman and Members of the Committee—

Good morning! My name is James Quintero and I’m a policy director at the Texas Public Policy Foundation. I’m here today to testify in support of House Bill 1869.

As we just heard from the bill author, the primary motivation for this legislation is to strengthen the principle of taxation with representation. Its goal is to provide people with the opportunity to participate in the democratic process as their true tax burden rises above a certain level.

The core of this idea is already established in state law, thanks to the passage of last session’s signature property tax reform. HB 1869 would simply expand upon those existing concepts by requiring tax-supported debt obligations not approved at an election to be paid through the M&O portion of the tax rate.

This sort of change is important from a truth-in-taxation standpoint. But it’s also important from the perspective of good governance.

In the decade preceding the reduction in the property tax trigger—which really only took effect this fiscal year—local governments were increasingly indulging in nonvoter approved debt. Consider that from fiscal year 2011 to 2020, CO debt held by cities, counties, and certain special districts grew from $12.87 billion to $15.85 billion.

Much of that debt was owed by a relative few too. As you’ll note on your hand-out, the top 20 issuers accounted for approximately 40% of all CO debt outstanding, with places like Bexar County, Travis County, San Antonio, and Lubbock among the most prolific users.

It’s too early in the fiscal year to say whether this trend will hold or accelerate; however, what I can tell you is that, under current law, local governments have an incentive to lean more heavily on nonvoter approved debt than they did in the past, since those costs are excluded from the 3.5 percent calculation.

Updating the definition of debt for the purposes of truth-in-taxation will eliminate this incentive and, perhaps in some instances, dissuade questionable expenditures in the future.

Despite what you may hear today, CO debt is not always need-based or proper. Here are a few quick examples of their misuse in recent years.

As you take all of these things into consideration, I hope that you will conclude that Texans deserve a greater measure of taxation with representation.