ELECTIONS

With the passage of Labor Day the election cycle is now in full swing.  While cable TV commercials have been running for those well funded enough to afford them, many campaigns are just now going up on commercial TV with their full ad buys, hoping their budgets allow them to stay up and on for the duration of the campaign.  The negative ads showing up in close races, while those with comfortable margins run positive bio and “vision” ads.  The overwhelming use of negative political ads in contested races, is a long running political tradition.  It is much easier to convince a voter to be against someone than to be in favor of someone.  It is possible that all of us have been in the position of voting for the “lesser of two evils” especially when “none of the above” is not usually an option.  Much of the estimated $170 million dollars that will end up being spent by the 2 candidates in the Governor’s race will be spent between now and November 8^th.  Early voting in Texas begins on October 24^th and continues for 12 days.  It will be here before we know it.  If you are not registered to vote in the upcoming election, you still have time.

HOUSE INTERIM HEARINGS

PROPERTY TAX

The Senate has concluded most of it’s Interim hearing schedule and has none scheduled at this time.  If there are any issues still to be discussed these Senate hearings will probably not resume till after the November election.  The House is still conducting hearings and my understanding is it will continue well into October.  Of interest to many businesses was the recent hearing in the House Ways and Means committee.  Several charges on the agenda dealt specifically with changes made during last session that attempted to reform the property tax system and the property tax appraisal system.  The hearing was lengthy and at times complex.  The property tax system is arcane and not readily or easily understood for many payers, especially homeowners. 

A long list of invited witnesses representing a host of professional and mostly business interests took the witness dais and engaged in a detailed and esoteric recitation of facts and figures that often left the listeners, both the knowledgeable and the uninformed with the feeling of not getting quite enough to be completely satisfied.  The new system, the timing of the postcards, complexity of the worksheets developed by the Comptroller’s office and to some degree a lack of uniformity between taxing districts, all still needs some tweaks to be a bit more user friendly.

Once the invited testimony concluded, the public was allowed to address the committee.  This testimony ran the gamut of personal interests and grievances.  From repeal all property taxes and replace with the expected state surplus (the speaker did not have an answer about what happens next cycle when that surplus does not exist) to the make up and forming of Appraisal Review Boards and the ability to contest appraisals and everything in between.  The changes from last session will continue to be reviewed by this House committee and the appropriate Senate committee as well.  I feel certain that additional changes for the appraisal process and all things connected will be considered next session. 

TAX INCENTIVES

At the conclusion of this discussion the committee moved on to the next charge dealing with not renewing Ch. 313 of the tax code and should it be replaced with something else. Last session the business tax incentive known collectively as “Ch. 313” was allowed to expire.  What is a Ch. 313 tax exemption, you ask?  Well, I will tell you.

Ch. 313 refers to Chapter 313 of the Texas Tax code.  In this case the law allowed for an appraised value limitation on business property in which the taxpayer agrees to build or install property and create jobs in exchange for:

• A 10-year limitation on the taxable property value for school district maintenance and operations tax (M&O) purposes. 

This business incentive was wildly popular in a variety of areas around the state for the past several years.  The reason for the lapse was that it was also extremely unpopular with large swaths of elected officials and just everyday citizens.  The reasons against its continuance are numerous and wide ranging, from morally unfair for the government to pick winners and losers to the belief that some school districts and businesses took advantage of and abused the incentive.  All these abuses, perceived and otherwise were legal, just not overly popular, hence the reasons it was allowed to lapse. 

Many in the business/economic development sector feel that Texas will be at a distinct disadvantage without this type of tax incentive when compared to other states.  The majority of the remainder of the hearing dealt with this discussion.  As with all interim hearings there were no specific bills discussed, votes taken or decisions reached.  I am not going too far out on a limb to suggest that this issue will be engaged at length during the upcoming legislative session and a great deal of money will be spent to see some version of this tax break be reinstated.

WATER

The recent rains allowed some portions of the state to ease out of their current drought status, but that condition may be short lived.  While the rain is always welcome, it does not address the root problem of water need throughout most of Texas.  A potentially larger impediment to business relocation to Texas than lack of tax incentives is most assuredly lack of water.  As this is being written this morning on the first day of fall, Austin is forecast to reach 101 degrees for a high today, no rain in sight.

JKF

The cash registers (both at the state and in private business) continue to ring at a record pace.  I recently sent out a state revenue estimate report from Comptroller Hegar (link provided below) that reflects his latest estimate.  This is the last update before the end of the state fiscal year on August 31st.  The surplus number currently sits at around $40 billion.  Our current budget for the biennium is $122 billion.  I include that number for scale.  Since I have been watching this yearly circus the largest surplus I can recall was around $5 billion and it seems like that has been in the last 6 or 7 years.  Probably safe to say that come next January the number will have increased once again.  Truly unprecedented.

Lt. Governor Patrick has issued his budget priorities:

• 4 Billion for property tax relief for next year
• Increase homestead exemption to $60,000 (long term goal $100,000)
• Suspend state gas tax for remainder of 2022
• Teacher pay raise, maintain current education funding and property tax cuts from 2019
• Provide 13^th check for retired teachers

To date I have not seen anything similar from either the Governor of Speaker Phelan.  When the general election cycle begins in earnest after Labor Day I would expect to see a more complete discussion on how and why some of this money will be spent.  It’s your tax dollars (or stimulus money as the case may be) so make sure your local state Reps and Senators know how you feel these funds should be spent, if at all. 

I begin every day reviewing the Texas drought monitor. You can find this handy information at:

https://www.drought.gov/states/texas

Current levels are:           Abnormally dry                 99.2%

                                                Moderate drought          94.8%

                                                Severe Drought                84.1%

                                                Extreme Drought             56.7%

                                                Exceptional Drought       20.4%

While you review these dry statistics, consider that our rainy season (if Texas actually has a rainy season) is really not until late September or October, unless of course a hurricane blows through.  Truly a unique situation when some might wish for a hurricane, just a small one.  One might suggest that some of the surplus money should be spent on water infrastructure, controlled burns and brush control. 

Hearings on interim charges continue, mostly in the House.  There are a full slate of hearings on a variety of issues over the next 6-8 weeks in the House committees.  As of this date the Senate only has a single upcoming hearing in late August.  Expect that to change in the not too distant future.

If you wish to monitor these activities on your own, the state has an extremely efficient and well organized website (capitol.texas.gov).  In this instance, your tax dollars very well spent.

The race for Texas Governor is getting a little bit more interesting.  There are NO limits on the amounts of money that can be contributed to or spent by candidates for state office in Texas.  If someone wants to write a $1 million check they can or more than 1.  In this case on a recent report, Democratic candidate Beto O’Rourke received $1 million dollars each from an Austin couple.  Don’t worry, Governor Abbott has his list of large donors as well.  In the most recent reports Governor Abbott raised $37 million, spent $52.2 million and has $45.7 million on hand.  Democratic nominee Beto O’Rourke raised $40.9 million, spent $15.9 million and has $23.9 million on hand.  These numbers are based on campaign reports that came out at the end of June.  There will be updated reports available at the end of October.  We won’t see final fund raising and spending totals till after the November election.  Regardless, THIS. WILL. BE. BY. FAR. The most expensive Gubernatorial race in Texas history. (Bold, caps and periods added for effect)

What do they spend ALL THAT MONEY ON?

For a little balance (just a little) Texas population is almost 31 million people.  Texas has 20 media markets (that’s a bunch for 1 state) 2 in the top 10, DFW #5 and Houston #8 and San Antonio rounding out the group at #31.  That means it is EXTREMELY expensive to get on TV in Texas.  Plus as we all know the last 3 weeks of the election every time we go to the mailbox we take out LOTS of direct mail that we put in the trash, usually without even glancing at it.  That direct mail is very expensive. Plus radio, cable TV, social media, staff, travel, etc. Its expensive to run a statewide race in Texas, always has been.

But, so far the 2 of them have already spent almost $70 million dollars and not one general election vote has been cast.  This is for a $153,750 a year salary.  Go figure.

After the election we will do the math to see how much the winner spent to receive each vote.  One other thought, do you think the future Governor answers the phone when the $1 million contributor calls? 

Another interesting point that, while it is an on-going problem in the private sector, most of us do not consider the situation at the state level, and that is personnel.  The state is having a difficult time not only finding new employees but retaining those that are currently employed.  Over the past several months I have attended a variety of Sunset hearings for agencies big and small.  All of them have the same problem, not enough people do to the work, much less any new responsibilities.  These are jobs at all levels from clerical and administrative to professional requiring advanced degrees.  The state just cannot keep up with what the private sector is willing to pay.  Think about that next time it takes longer than usual to get your license or permit or some other service the state provides on which you might depend. 

More to come…

JKF

THE 2022-23 CERTIFICATION REVENUE
ESTIMATE UPDATE

The conclusion of the first primary run has ushered in the initial set of Interim Hearings in both the House and Senate.  That coupled with the first Sunset review hearings promises a busy rest of April and May.  There are still several run-offs that need to be concluded (May 24^th) but not enough to derail the start of these hearings. 

 As of today Texas is currently experiencing Severe Drought or worse (per US Drought Monitor). Almost the entire state is at least Abnormally Dry and 53% is at the Extreme Drought level.  Unless the state has an extremely wet April/May we will have a good chance of repeating the drought of 2011.  How this will impact citizens, industry and ag businesses remains to be seen but it won’t be good.  We have not done much to fix the problems identified during the 2011 drought except we have more people.  In 2021 Texas grew by approximately 810 people per day or over 310,000 people for the year. That is the equilivant of a new city larger than Plano coming online every year.  With all statewide offices, Senate and House seats up for election, now would be a good time to ask these potential future office holders how they might want to address these issues.

The Interim charges in both the House and Senate have been released and the hearings have begun.   Water availability, groundwater management (both Senate and House committees), marine desalination rural employment, workforce education and the ever present review of property taxes are all of interest to folks in our industry.  We will monitor these hearings and report anything of interest in the future.

We met with the Comptroller senior staff recently to discuss a variety of issues, including taxes and the expected budget surplus.  While they were fairly close-mouthed on the exact amount of surplus that is expected,  they did reveal that the surplus will be exceptionally large.  How decision makers will deal with this influx of surplus funds remains to be seen.  I think it is a given that the term “spending like drunken sailors” may be appropriate when all is said and done.

Board Member, Mike Irlbeck, has been good enough to develop a PowerPoint presentation that presents  a very comprehensive view of the current state of water in Texas.  It is not encouraging.  Between our current drought conditions and the inadequacies of the statewide water plan, it would be fair to say that we are heading toward a challenging time in regards to water availability in Texas.  Mike and I have begun to offer this presentation to virtually any decision maker or key staff person who is willing to sit for the 45 minutes to listen.  The presentation is not necessarily centered on desalination, instead, it is focused on raising awareness of the lack of “realistic” planning that constitutes the statewide water plan.  We will report any feedback we get, positive or negative. The upcoming legislative session begins in 247 days (depending on what day you read this).  That time period will pass in the blink of an eye.  As with any legislative session, this one promises to be unique, maybe even more unique than usual.  More to come…

JKF

Primary Election Results
Texas election results 2022 for governor, Congress and more primaries | The Texas Tribune

The 2022 primary election held few surprises yesterday.  Governor Abbott and Beto O’Rourke each won their respective primary elections with respectable margins.  Governor Abbott was forced to spend considerable funds to achieve his victory but has an immense war chest waiting in the wings for the upcoming general election in November and is an accomplished fundraiser.  Former Congressman O’Rourke is also a talented fundraiser and should be able to raise sufficient funds to run a respectable race.  Both candidates have already begun sparing, should be interesting to watch.

The only other statewide race that was interesting to watch was the race for attorney general.  With General Paxton’s legal problems, the outcome for this race was always in question.  Current Land Commissioner George P Bush outpaced the other candidates and will face Paxton in the runoff on May 24^th.

Other statewide runoffs include:

• Lt. Governor- Democratic
• Land Commissioner- Democratic and Republican
• Comptroller- Democratic
• Railroad Commissioner- Republican

There were very few surprises in the Texas Senate races.  Phil King will take on Incumbent Beverly Powell in the redrawn SD 10.  Mays Middleton won the SD 11 seat formerly held by the retiring Larry Taylor, there is no Democratic opponent.  Republican Tan Parker will take on Francine Ly in Senator Jane Nelson’s old seat.  Former Senator Pete Flores will take on Paul Reyes in the SD 24 open seat and in the South Texas seat formerly held by Eddie Lucio II, Morgan LaMantia will face Sara Stapleton-Barrera in the Democratic primary runoff.

In the House there were a number of Incumbent Republicans with contested primaries.  Kyle Kacal in a redrawn district 12 will face former House member Ben Bius in the runoff. Incumbent Glenn Stephenson will take on Stan Kitzman in HD 85.

 Ellen Troxclair and Justin Berry will face off in the newly drawn and open HD 19.  While Ms. Troxclair was in front going into the runoff, the margin was much closer than people suspected.  The recent announcement of the indictment of Austin Police officer Justin Berry actually appeared to help him in this race.  Only time will tell whether that trend will continue into the runoff.

Attempts by far-right groups to drastically alter the House makeup appear to be stymied, at least at this time.  It is reasonable to expect that Speaker Phelan will again be elected as Speaker.  But, with the large number of retirements in the House, look for new leadership on several key committees.  On the Senate side, Lt. Governor Patrick will have general election opposition, it remains to be seen who that opposition will be and whether the individual can raise sufficient funds to be competitive.   

There are a number of additional runoff races around the state, for a complete listing follow the Texas Tribune link above.

Getting voters out again (Texas is notorious for low turnouts anyway) is difficult in the best of circumstances.  With the ongoing distractions both in Texas and abroad and the lack of several big-ticket statewide races on the runoff ballot (other than the AG race), turnout will be marginal and sporadic. 

While House and Senate interim charges have not yet been released those listings should appear soon on both sides, promising a busy summer and fall.  There is always the possibility of some of these hearings to occur in areas of the state outside of Austin.  Stay tuned. How the current situation in Europe will impact Texas is not yet known.  While the amount of Russian oil imported into the US is small compared to Europe, it may influence an increase in oil and gas production here in Texas.  That means more jobs and yet another potential increase in state tax revenue.  Remember that Texas is already awash in surplus tax revenue from the various COVID relief efforts, both personal and governmental.  How this money is spent will be the next big series of questions to be considered.

JKF

Early voting begins on February 14^th and concludes on February 25^th.  Primary election day, seemingly early this year is on March 1^st.  With an unprecedented number of primary and open seat elections, there apparently is something for everyone.  What this large number of races does is to ensure a significant number of new members destined for the House and Senate for the 2023 legislative session. 

Potentially as many as 40 new House members and 5 new senators.  Possibly more when you include contested general election races.  With all the statewide offices also on the ballot and an ever more unpredictable electorate, forecasting what will happen has become a much larger cottage industry.  The accuracy of these predictions remains to be seen.

The single most important factor in all of this chaos is you the voter and your responsibility to go and vote.  Changes in the “absentee” voting process make this option a bit more challenging so if this is your usual voting method, begin early.

What does the upcoming legislative session have in store for employers and businesses in Texas? There are as many predictions as there are predictors.  There are 3 items that are for certain:

1. Substantial number of new decision makers
2. Influx of a significant amount of new federal money funneled into the system
3. Significant amount of new state tax money pumped into the system

All of this new money, a larger influx of “new” funds than I have seen in my lifetime around state government (39 years) will impact our state, for good and bad, for years to come.

The Federal Government has injected significant amounts directly, $194 Billion sent to the State of Texas directly or sent to individuals and families with that total expected to reach $246 Billion when all is said and done.

In turn, much of the Federal money has been spent within our local communities.  These expenditures have helped drive our various state tax revenues significantly higher.

As a percentage change current vs. last year, total tax collections are up 30%.  Of that total, Sales Tax (typically our largest source of state revenue) is up 23.31% vs last year, Motor Vehicle Sales and Rental Tax is up 20.66 % and Alcohol Beverage Taxes up 49.13% as examples. 

What does all this money mean?  It means that everyone will want to spend it.  Pet projects, new projects, old forgotten projects, new programs, failed programs, bad programs, etc.  EVERYONE will have their hand out including the elected officials seeking something specific for their districts.  Legislative sessions are always easier when there is NO money, decision makers can tell everyone NO.  Not this session…

The one caveat that everyone must remember is that this particular gravy train will come to an end.  The federal government, more than likely will not be sending large amounts of cash our way in the future. Our various sources of state income will not maintain this increased level and everything should at some point in the not-too-distant future return to normal (whatever that looks like). 

This unique situation does offer the prudent the opportunity to make one-time long-term investments. Infrastructure, roads, water, rural health care, electric grid, rural broadband, education etc.  Also, opportunities to make long needed investments in our state and teacher retirement systems.

When candidates come knocking, these are the questions that you need to ask.  How will they utilize this situation to the betterment of the people they represent and Texas as a whole?  What will they do in this real-life unique circumstance and how will they work with the other elected officials to achieve what is best for our state? 

These are not the easy “hot button” questions, but these are the questions and the ultimate answers that will impact us all. 

Oh, and one more thing…

If Russia invades Ukraine all bets are off.

JKF