Doomsday Budget Shows Texas the Cost of Not Raising Taxes : A huge deficit looms as a result of court-ordered funding of social services. The unthinkable may occur: an income levy.

In Texas, crisis time is approaching.

The state’s coffers are about to be depleted and the state will soon face a projected $4.6-billion debt over the next two years. And that is if the projected state expenses of $52.4 billion over the next two years are on the mark.

A doomsday budget, prepared recently to show taxpayers what the state could not afford without new revenues, offered some sobering projections in a number of areas.

Among the key items that would go unfunded were these:

* $900 million in commitments to public schools.

* $496 million to universities and junior colleges.

* $197 million to open and run prisons that would house 14,000 inmates.

* $1.17 billion in welfare programs.

Putting that on a more personal level, it would mean lowering the monthly payment under the Aid to Families with Dependent Children program to $45 from $57 per child, reducing payments for nursing home care and cutting follow-up services for abused children.

No one really expects such a scenario to actually take place. But it does underscore the need to raise new money once again. That has happened a lot in Texas recently. In 1987, Gov. Bill Clements signed a $5.7-billion tax increase. He signed another one for $628 million last year to take care of bills coming due in the education and welfare system.

Courts Order Reforms

What separates Texas from other states facing fiscal disaster is that much of its money problems stem from court-mandated improvements in areas in which the state had lagged far behind accepted standards.

For years, Texas routinely scrimped on social services, even when the state treasury was in good shape from taxes on the oil industry. “It is a tradition in Texas to neglect the poor and those in prison,” said Tom Smith of the Austin-based Public Citizen watchdog organization. “It has been the tradition that we should not invest in their future.”

Successful lawsuits over the last decade charging neglect have resulted in judges’ deciding how many nurses and doctors must staff a mental hospital, how much must be spent on each of the 3 million school children in the state and how much space a prison inmate must have. The state is now spending billions more on mental health, prisons and education than it had expected. And the legal problems do not seem destined to stop there, given Texas’ bleak history in other areas, such as the environment.

Even with these court-mandated improvements, Texas still ranks near the bottom of the list in almost all social services. As Leslie Lemon, staff director of the Texas Senate Human Services Committee, put it: “We’re at the bottom of the barrel.”

Crowded Agenda

The key question is how to come up with the money. The answer has been delayed by a Legislature that faces redistricting, changes in the judicial selection process, much-needed ethics legislation, parity in funding among the state’s school districts and much more. One other item on the agenda is a state lottery, proposed by the state’s new governor, Ann Richards, but so far going nowhere.

The lengthy list of issues caused state Sen. John Montford, chairman of the Senate Finance Committee, to call this session of the Legislature one of the most important in memory. Partly because of that, the budget will not be debated until a special session in July.

“I think it will be a serious series of special sessions,” Montford said.

By the time July rolls around, two things will have happened: The state comptroller will have finished his study of Texas’ government agencies, in which more than 100 auditors have fanned out to identify bureaucratic fat; and a task force headed by former Gov. John B. Connally will have made its recommendations on revising the state’s antiquated tax structure. So far, the auditors have come up with reductions that could trim about $500 million from the budget.

Debate on an Anathema

When the debate does begin, it will almost surely revolve around taxes, including the kind that has always been anathema to Texans--a personal income tax. Although most tax experts believe an income tax does not have a chance during this go-around, Lt. Gov. Bob Bullock has called for one. And Connally said it is quite possible that his task force will recommend one.

The reason a possible income tax is getting more attention is that the Legislature and local governments have squeezed out about as many dollars as they can using other devices.

The sales tax in larger metropolitan areas is hovering at 8% and more, a figure legislators do not think they can increase much without howls of protest. Meanwhile, the state’s local governments and school districts have continued to raise property taxes to a point where homeowners feel they are being milked.

In Houston, for example, the property taxes are $1.66 per $100 evaluation, and the figure in Dallas is $2.12.

“Texas has the fastest rate of increase in property tax reliance in the nation,” said Daryl Dorcy, the House Speaker’s director of research for policy development. “That has been true for the last four years.”

Dorcy said he believes a combination of factors might get Texas over the hump this time--perhaps a slight sales tax increase, expanding the state franchise tax and college tuition hikes, if coupled with trims recommended by the comptroller’s office. But, in the end, he sees a need for a major tax overhaul.

“We have a state tax system that is stagnant,” he said. “The collapse of the oil industry brought home the inadequacy of the tax structure.”

He said a personal income tax could be passed only in combination with relief in other areas, such as a reduction in sales and property taxes.

Montford agreed.

“I think the focus ought to be on tax reform. The tax system is unresponsive to economic change,” he said. “I guess the bottom line is that we need to get tax smart and not tax emotional.”

Income Tax Scenario

Connally, for his part, said that “we can’t be blind to the fact that people aren’t the least bit interested in having their taxes raised by any device.”

He said that, at a hearing on the possibility of an income tax, a scenario was laid out in which one would be passed. But it not only had to provide tax relief elsewhere, it had to dedicate the money raised to two things: education and public safety. Connally said it was clear to him that the public was no longer willing to just hand over tax money to state government, that the public also wanted control of where its dollars were going.

“All this means is that there is an inherent distrust of the Legislature,” Connally said.

Whatever the case, July should mark the beginning of a long budget debate in the Texas Legislature.

As Dorcy said, “It’s going to be a long, hot summer.”

Texas Profile

Capital: Austin

Governor: Ann Richards, 57, Democrat

1990 Population: 16,986,510

Key Industries: trade, services, manufacturing, petroleum

Per capita income (1989): $15,483

U.S. average: $16,490

Sales tax: 6%, plus optional 1% local, 1% transit

Income tax: none

Fiscal 1992-93 budget: $52.4 billion

Shortfall: $4.6 billion