Road to the 85th session faces major budget potholes

Published 6:18 pm Saturday, May 7, 2016

Editorial by Dade Phelan


With the next legislative session beginning in just eight months, the road is getting bumpy as the state begins to consider the next biennial budget.   Most are aware that stagnant oil prices have a direct impact on the state coffers and especially the Rainy Day Fund, but what is under the radar for many Texans is the trio of lawsuits the state is facing that could be decided between now and early 2017.

The first is a sales tax battle. Southwest Royalties filed a suit over the state refusing to refund monies paid based on what the company thought should have been a tax-free item. The argument being certain drilling equipment, pipes and drill bits are part of the “manufacturing practice” of mining. They claim the separation of crude into oil and gas makes both commodities marketable and therefore the company has manufactured a product. This dispute began in 1997and the suit itself was filed just over seven years ago. It has finally made its way to the Texas Supreme Court. The case will be decided ultimately on whether or not the materials fit the existing tax code definition of an exemption. A verdict against the state could reach as high as $4.4 billion in 2017 alone and an additional $500 million each year thereafter.

The second is a franchise tax battle. This year the 3rd Court of Appeals in Texas sided with AMC movie theaters in its lawsuit against the state. The company is challenging the interpretation of “personal property” by the Comptroller Office. This would allow the company to use the overhead of its buildings, rent, taxes, insurance, etc., to offset revenue under the state’s franchise tax law. Due to the broad application of this suit, a final price tag could reach $6 billion plus an additional $1.5 billion going forward.

Last and certainly not least is the ever-present far reaching public school finance lawsuit and what has become a perennial challenge to the formulas, structure and overall fairness of the state’s public education funding policies. The same judge in Travis County has once again decided that Texas has failed its Constitutional duty to “establish and make suitable provision for the support and maintenance of an efficient system of public free schools.” However, due to the increased appropriations made available in both the 83rd and 84th Sessions, it is likely this suit has lost much of its merit since it was filed following the cuts to public education funding following the 82nd session. Until the case is decided, it has the potential to add billions to an already expensive legal tab.

The silver lining in these courtroom showdowns is an estimated $4+ billion budget surplus the last legislature left unspent, and a separate Economic Stabilization Fund (Rainy Day) due to top $10+ billion in 2017. Also, due to increased diversification, the oil and gas sector is only 14% of the overall economy compared to nearly 25% of the economy during the 1980s downturn. The State of Texas with a robust GDP and continuous positive job growth should survive a lawsuit doomsday scenario.

The fiscal restraint shown by the Legislature in 2015 is a testament to conservative fiscal policies and shows that learning from past mistakes is a valuable budget tool.

It is honor to serve the citizens of Southeast. If I may ever be of assistance, please contact me at, 512.463.0706 or 409.745.2777.

May God bless you all and the great state of Texas,

Dade Phelan is Texas House Member Representative for District 21