The Green New Tax Code
How our tax code and the transition from fossil fuels are connected, and why we need new streams of revenue to fight climate change.
Happy Monday, and welcome to the sixteenth edition of Waco Can’t Wait, a progressive newsletter focusing on McLennan County, Texas, and Federal politics.
The story of Texas has been shaped and defined by oil and gas. Our history books would be incomplete without acknowledging the effects the fossil fuel industry has had on our economy, politics and culture. That said, the future of Texas is uncertain as our global economy becomes less reliant on fossil fuels. Democrats need to be thinking about ways that we can sustain renewable energy development while implementing policies that will smooth that transition.
One way that we could create a more favorable political environment is to address the ways we derive revenue from oil and gas, while also revisiting the ways we spend that money. If we can reduce our reliance on fossil fuels to fund our state government, then we can ensure long-term financial stability.
If we do not seek out more stable forms of taxation (like legalizing marijuana, closing corporate tax loopholes, or expanding Medicaid), then it will become more difficult to combat climate change. But before we jump into that, let’s take a look at the news!
Week in review (a collection of news from Waco, Texas, and beyond)
Waco:
The Waco City Council is currently considering two proposals, both from the Turner Behringer Group, to potentially build a total of 390 new homes in Waco’s urban core. The Floyd Casey Stadium project includes 240 homes (60 fewer than originally proposed), and the other project would build 150 homes between Cameron Park and the Waco Center for Youth. It remains to be seen what percentage of these new housing units will be “affordable,” as defined by the Department of Housing and Urban Development.
Texas:
Texas Republicans have spent the last week trying to cobble together a coherent response to the mass shooting in Uvalde. Governor Abbott has asked for legislative recommendations from the Texas House and Senate, a call which is distinguishable from a full-fledged special legislative session. In response to this ask, Lieutenant Governor Dan Patrick has appointed state senators to the new “Senate Special Committee to Protect All Texans.” A glaring omission from this committee is State Senator Roland Gutierrez, who represents Uvalde.
United States:
On Thursday night, President Biden delivered an address to the nation about the recent mass shootings, calling for Congress to pass commonsense gun reform. In his speech, Biden called for a ban on the sale of assault weapons and high-capacity magazines, and for the repeal of the liability shield that protects gun manufacturers from being sued for violence committed by people using their products.
Over in the United States Senate, Texas Senator John Cornyn is spearheading a bipartisan negotiation on gun legislation. While Cornyn was able to pass a narrow background check bill in the wake of the Sutherland Springs church shooting in 2017, it remains to be seen if he will be able to negotiate an acceptable compromise bill.
Current proposals being floated include:
changes to the background check system;
providing additional investments in mental health and school security; and
giving grants for states to establish red flag laws.
In addition to bills concerning gun violence, Senators Joe Manchin and Chuck Schumer have signaled a small glimmer of hope that there will be a reconciliation bill containing prescription drug reform, renewable energy incentives, and a reversal of the 2017 GOP tax cuts. If this comes to pass, this would be a huge domestic policy win for Biden before the midterms.
Political Organizing/Communication:
In “Voters Say They Want Gun Control. Their Votes Say Something Different,” Nate Cohn with the New York Times analyzes recent state referendums on gun control where there was often a large delta between the expected support (extrapolated from public polling on the issue) and the actual results on election day. The most notable example was in Maine, where only 48% of voters supported a universal background check proposal, when polling suggested 83% support for the proposal. In summation, what people say they support in polling is not necessarily how they’ll ultimately vote on the issue.
My takeaway is that national and Democratic pollsters need to be asking key follow-up questions such as:
Voters’ motivation to advance this proposal;
Their familiarity with the issue; and
Whether they would be more or less likely to support a candidate based on that candidate’s position on the issue.
What are the different forms of taxation on oil and natural gas, and how does the state spend that money?
It all starts with fossil fuels leaving the ground. Texas imposes two different taxes on the market value of crude oil (4.6%) and natural gas (7.5%). According to the Texas Comptroller’s Office, these taxes raised over $5 billion in FY2021. Revenue collected from these production taxes is then divided between the Economic Stabilization Fund (37.5%), State Highway Fund (37.5%) and Foundation School Program (25%).
The Economic Stabilization Fund, often referred to as the “Rainy Day Fund,” was created in 1988 to set aside tax revenue in good years to help the state during economic downturns. The State Highway Fund provides for the maintenance and construction of highways and the policing of public roads. The Foundation School Program is a fund administered by the Texas Education Agency (TEA) for teacher salaries, bilingual education, and special education.
The Texas General Land Office (GLO) earns revenue for the state from its oil and natural gas leases on Texas public lands. These public lands were set aside by the state constitution in 1876 to fund the Permanent School Fund (PSF), which provides funding for primary and secondary education. The GLO leases the mineral holdings of these public lands for oil and gas development, and then it collects a 20-25% royalty. In FY2021, these leases generated $1.07 billion for the PSF. In recent years, the PSF has made direct yearly payments to the ASF in the amount of $300 million.
The Permanent School Fund’s assets are managed by the GLO and the TEA, and distributions are then made from both government entities to the Available School Fund. From the Available School Fund, the money is split between the Instructional Materials Allotment and the Foundation School Program.1
The Permanent University Fund (PUF) produces revenue in a similar fashion. The PUF is comprised of 2.1 million acres of land, including the return on investment (ROI) from revenue earned from this land. Texas A&M and the University of Texas then receive annual distributions from the ROI (plus surface income).2 While the mineral income is derived from leases on the land, the surface income comes from activities like cattle grazing or wind and solar farms. This money is disbursed to the universities from the Available University Fund (AUF). While surface income is transferred directly to the AUF, mineral income is reinvested and managed by UTIMCO, “a nonprofit corporation operating under the authority of the UT system Board of Regents.”3
Finally, local taxing entities (like counties, municipalities, and school boards) may impose property taxes on extraction equipment and mineral reserves. These reserves only become taxable when the well is completed and producing. According to the Texas Oil and Gas Association, school districts received $1.84 billion, and counties received $640 million in property tax revenue from mineral properties in FY2021.4
Why is this a problem, and what does this have to do with our current commitment to combatting climate change?
My concerns are centered around the reactionary nature of voters and how politicians might take advantage of that. Here is an example:
We are currently in a fuel crisis caused by Russia’s invasion of Ukraine and greedy oil companies refusing to reinvest their huge profits. While many Democrats believe we should respond to this crisis by increasing renewable energy production and investing more money in electric vehicles, this long-term solution is cold comfort for people choosing between a full gas tank or a refill on their prescription drugs.
Our human instincts gear us towards addressing short-term needs, and the way we address these needs can manifest in our voting behavior. This can include changing how you vote, or just not voting at all. If we fail to ameliorate people’s immediate suffering, then we shouldn’t be surprised when there are consequences.
Democrats have to be sensitive to the immediate concerns of voters if we want to make a rapid transition away from fossil fuels. Creating policies and programs that will address climate change will take time, and policy that takes time requires continuity. In a liberal democracy where power frequently changes hands, it is extremely difficult to create policy that is built to last.
If Texas Democrats are serious about addressing climate change and implementing transformative policy, we need to reduce our public schools and state colleges’ reliance on tax revenue derived from fossil fuels. The long-term decline in fossil fuel extraction will inevitably lead to declining revenues offset by higher property taxes or weakened state services. This would be devastating for Texas, and Republicans would be quick to blame Democrats for killing our once great oil and gas industry. We have to be prepared for that.
Here is my proposal.
We need to seek out more reliable streams of revenue for public and higher education and shift tax revenues derived from fossil fuels towards renewable energy infrastructure.
Beto’s gubernatorial campaign has come up with some ideas of how we can raise more money to increase the state’s share of the cost of public education:
Close corporate tax loopholes and stop corporate manipulation of the appraisal process;
Expand Medicaid5 to cover the cost of indigent care that is usually paid for by the taxpayers; and
Legalize and tax marijuana.
In addition to these new streams of revenue, organizations like the PSF and PUF can increase their surface income by adding more wind and solar production to their land. While surface income is currently a small portion of revenue derived from these lands, its future growth would be a great way to counteract the decline in revenue from fossil fuels.
As to how we spend the money generated from the production of oil and gas, I have a few ideas:
Invest in utility-scale battery storage so that we can store renewable energy for use when the sun isn’t shining and the wind isn’t blowing;
Providing low-cost financing or incentives to businesses that want to increase renewable energy production in Texas6;
Increase the number of transmission lines running across the state so that we can transport power generated in different parts of the state to where it is needed; and
Provide grants for counties, municipalities, and school districts that want to invest in behind-the-meter energy production on city rooftops or city-owned land, electric vehicles for their fleet, or public EV charging stations.
While this list is in no way exhaustive, our goal should be to reinvest revenue derived from fossil fuels into projects or initiatives that will get us closer to net-zero in Texas. Moreover, these investments in utility scale solar and wind projects will be a boon for West Texas counties and school districts that rely heavily on property taxes on fossil fuels.7 These communities stand to benefit and lose quite a bit from a transition away from fossil fuels, and it is our duty to provide them with a just transition.
This combination of new revenue sources to support our education system and reinvestment of our oil and gas revenues into renewables are vital steps that we need to take if we want to ensure a smooth transition into a carbon-free future.
Our state owes a debt of gratitude to our roughnecks and wildcatters, and it is important that our current and future political leaders remember that as we take the necessary steps away from fossil fuels. We can continue to build on our successful investments in renewable energy, while ensuring that nobody is left behind and that future generations are provided for.
The Foundation School Program was created to ensure “that all school districts, regardless of property wealth, receive ‘substantially equal access to similar revenue per student at similar tax effort.’” This general funding is provided using a complex formula based on the affluence of the district and their current tax rate.
Midland ISD was the largest recipient of property taxes on mineral reserves, receiving $134.9 million.
2/3 of the Available University Fund goes to the University of Texas System, and 1/3 goes to the Texas A&M University System. In FY2021, income distributions exceeded $1 billion. During the 2020-2021 academic year, AUF disbursements accounted for 12% of UT Austin’s $3 billion budget.
I should also mention that there are some smaller taxes on automotive oil sales, motor fuel, and off-road, heavy-duty diesel equipment.
Through Texas’ current incentive programs, the state is slated to triple its solar capacity from 2020 to the end of 2022.
Wind Power Dollars Pour Into West Texas Economy by Eileen O’Grady (Reuters)