Is a Basic Income Right for Texas?

T he basic-income battle is heating up in Texas. Harris County wants to implement a program granting 1,500 households a direct, no-strings-attached $500 payment per month. Texas AG Ken Paxton filed suit, claiming the policy is unconstitutional because counties lack the authority to give away public revenues. The legal contest will likely be protracted and contentious. An important precedent is at stake: Is providing universal-income support a valid public purpose?

The law and politics of income transfers is one thing. The economics are something else. Let’s consider the economic arguments for and against the Harris County policy.

Economists define a universal basic income (UBI) as an income transfer whose value does not depend on the recipient’s decisions about how much to work and earn. Unlike traditional welfare payments, which phase out when recipients earn more income, a UBI is constant. Right away, we see the chief benefit of a UBI: It does not implicitly punish working and earning more.

The well-known phenomenon of the “welfare cliff” means that transfer recipients often face tax rates in excess of 100 percent — when they earn more, they lose so much welfare that on net, their incomes shrink. UBI avoids this problem. Since the payment is constant, it does not affect the payoff of working more compared to enjoying more leisure time. Hence the labor-leisure tradeoff remains the same.

Economists heavily emphasize how prices, including wages and salaries, influence behavior. Since UBI does not change the relative price of working compared to not-working, recipients have no incentive to “game the system” by purposefully working less to get a bigger check.

There’s more to the story, however.

The labor-leisure tradeoff doesn’t just depend on how valuable the next hour’s worth of income is. It also depends on the worker’s overall income level. Typically, we want to work more when wages and salaries rise. But wages and salaries can rise so much that we would rather work less, using our high-enough income to “purchase” more leisure. In theory, a UBI could cause recipients to work fewer hours because their non-market (UBI) income is large enough to afford not working as much. Providing a handout can increase the demand for leisure, enjoyed at the expense of labor.

How likely is this in the Harris County case? The program provides $6,000 per year. Most of the households receiving the transfer will have much lower incomes than the county median of $70,800. The program details reveal that one of the recipient cohorts “includes residents who live within the top 10 high-poverty zip codes in Harris County.” Importantly, eligible households must have incomes below 200 percent of the federal poverty line. A hypothetical family of four that takes in $30,000 per year would qualify. That’s a boost of 20 percent — a significant windfall. Based on the size of the Harris County program relative to recipient incomes, we can’t rule out a measurable labor-reduction effect.

Also relevant is the cost to taxpayers. The Harris County proposal is a pilot program. $6,000 per year for 1,500 households means the tab is $9 million per year. County tax revenues are more than $3 billion per year, making the additional spending 0.3 percent of revenues — a drop in the bucket. But suppose the county wanted to expand the program to cover 100,000 households. (For comparison, Harris County has 1.70 million households in total.) Then the program would cost $6 billion, nearly twice what Harris County takes in. This suggests a major problem with UBI: Once it operates at scale, it’s enormously costly for taxpayers. To say Texans would oppose the tax rates necessary to fund a scalable UBI is an understatement.

Policy experimentation is good. State and local governments should be “laboratories of democracy,” discovering the right mix of public spending and public revenue through trial and error. That said, we know citizens demand good value for their tax dollars. It’s highly unlikely that the majority of working Texans will find the idea of UBI attractive. Perhaps it would look better if we completely replaced all welfare programs and income supports with a UBI. But given what we know about politics, how likely is that to happen? As Milton Friedman pithily noted, “Nothing is so permanent as a temporary government program.” The most probable outcome is adding a UBI on top of the byzantine welfare system. That hardly seems appropriate.

Harris County and the State of Texas will have their day in court — in all likelihood, quite a few days. The constitutional issues are important. But so too are the economics. Sober analysis tells us that the upside of a UBI is limited, whereas the downside is precipitous. Let’s think twice before we embrace another uncertain and costly program for giving away public money.