Under partly sunny skies last Thursday, a few dozen Texas businesspeople gathered on the front stoop of the Governor’s Mansion to show their support for a new tax proposal that lawmakers will begin considering on Monday, the first day of a special session on school finance.
The long-anticipated, and much-delayed tax-swap plan would buy down property taxes with money from an expanded business tax and a $1-per-pack hike on cigarettes (see box). The latest proposal comes on the heels of several failed legislative attempts to resolve the school-finance conundrum, which has wandered in the Capitol wilderness for the last two regular sessions and a couple of specials. This time around, there’s a crucial difference: Lawmakers face a June 1 deadline set by the Texas Supreme Court, which in November ruled that the state’s education funding system had evolved into an unconstitutional statewide property tax.
So last week’s gathering of business people – a phalanx of dark suits speckled with jeans and boots – was designed to show the broad cross-section of industry groups that endorse the Perry-Sharp plan. All the deep pockets had to do was show up for the noonday press conference, leaving the talking to Gov. Rick Perry and former Comptroller (and former Dem lieutenant governor candidate) John Sharp, who had led the 24-member commission charged with holding hearings across the state and drafting the new proposal. Perry, marveling over the mixture of business reps at his side, said, “I never thought I would see the day when members of the service sector joined members of the manufacturing community in support of the same tax reform plan.” (Perry tactfully did not mention that two key professional groups remain opposed to the plan: the Texas Medical Association and several large corporate law firms.) Sharp, for his part, joked that he had spoken the night before with Bob Bullock – the late and legendary former lieutenant governor – and he had given the plan his blessing. “Bipartisanship” was very much in the air.
Still, no matter how much fanfare Perry manages to drum up down the street, the fate of the proposal rests inside the Capitol, where thus far lawmakers have not demonstrated any groundswell of support for the plan. Most telling is that neither Lt. Gov. David Dewhurst nor House Speaker Tom Craddick has yet endorsed the proposal, and their initial response might be described as lukewarm at best. Craddick did, however, ask Sharp to address the Legislature on Monday, and he has suggested taking up the plan in piecemeal legislation, rather than risk loading down an omnibus bill with amendments.
Local Discretion?
The proposal has raised a number of concerns, of course. Senate leaders don’t like the idea of drawing about $1 billion from the state surplus to help buy down property taxes, while conservatives on the House side would prefer to use nearly all of the $4.3 billion surplus to pay for property tax relief, and also freeze property taxes to prevent school districts from using their discretion to raise the tax rate, as the Perry-Sharp plan allows (and in theory, at least, as the Supreme Court ordered). That rate flexibility was a key selling point for superintendents from the state’s larger school districts, including AISD, in order to persuade them to support the proposal.
Public school advocates and many legislators say the plan doesn’t go far enough because it lacks teacher pay raises and other education initiatives. And while the arguments on both sides of school finance remain essentially unchanged, the political dynamics have changed dramatically since last year’s debates. What makes this session particularly tricky is that it comes in an election year, with Perry running for another term against a host of challengers – Democrat Chris Bell, indie candidates Carole Keeton Strayhorn and Kinky Friedman, and Libertarian James Werner. Additionally, several lawmakers return to the Capitol as lame ducks, after grueling primary races that not all of them survived. And a fair number of incumbents will face opposition in November – a context that tends to make legislative fingers hesitate over their voting buttons.
Many lawmakers are particularly squeamish about “raising taxes” when the state is officially sitting on a “surplus” – tax revenue in excess of projections – that could reach nearly $7 billion. Strayhorn, in her comptroller hat as the session opens, is expected to announce the addition of $2 billion to $2.5 billion. “Why would lawmakers in an election year vote for the biggest tax bill in Texas history, while the biggest surplus in Texas history is sitting in the bank?” asks Kelly Fero, a Democratic political strategist and longtime Sharp ally, who believes even this plan is far from a sure thing. “Don’t get me wrong. I think Sharp did a remarkable job with the tax panel. But the distrust around the Capitol is just too deep. It’s the culmination of the ultra-partisanship and heavy-handed leadership style of the past several years. There’s too many hard feelings over past battles and not enough energy back in the districts for a property tax cut.”
Democratic leaders were quick to criticize the proposal for its lack of additional funding and school initiatives, but it’s not clear whether party members will form as united a front against this plan as they did in the regular and special sessions of 2005. Earlier this month, Perry singled out freshman Rep. Mark Strama, D-Austin, who represents the swing District 50, as a potential “yes” vote on the plan.
But, like the weather at Perry’s press conference, Strama’s outlook is only partly sunny. “Nobody on my side of this issue is saying the Sharp plan is everything we need for education; it’s not,” he said. “But it is a way to solve the court problem while preserving us some flexibility to find more money for education by not raising sales taxes [to buy down property taxes].” That the plan lacks a focus on education is not necessarily a bad thing for the short term, Strama believes. “Every plan that we’ve seen before now conjoined the issues of the ideologically driven education proposals of Kent Grusendorf” – the pro-voucher House Education Committee chair who lost his primary race last month. “There was so much more baggage attached to all the previous proposals that I’ve got to think that this will be received very differently. It keeps us out of [Grusendorf’s] Education Committee, and nothing good has come out of the Education Committee any time recently.”
As Strama sees it, “There are two lines in the sand that I think Democrats need to draw – preserving local control, so that representatives from Amarillo, or Pampa, or East Texas are not telling my constituents in Pflugerville how much they can invest in children’s education, and two, fighting off a sales tax increase in the context of the property tax buy-down.”
Flies in the Buttermilk
But the local control provision may not solve every district’s problems, says Scott McCown, executive director of the Center for Public Policy Priorities, which advocates for low-income Texans. “That still leaves a lot of poor districts that aren’t going to be able to raise that property tax back up. You can say they can raise their tax, but it doesn’t bring them any money, because they don’t have any property value. Then how’s the state going to pay for equalization?”
With that issue in mind, McCown also foresees a tougher advocacy job ahead for him and others this session. “What’s going to be different this time is that we’ve been standing shoulder to shoulder with the education community [school districts], and because they’re going to see the opportunity to get some additional money by raising their tax rates back up, they may be more willing to sign on to what’s a very bad deal for everybody else.”
Little has been said about one other potential stumbling block in passing the new tax plan. Some tax analysts say that because the new business tax would be based on a company’s gross receipts, with deductions for payroll and production costs – it raises the question of whether it’s an income tax, which would violate the state constitutional prohibition of an income tax. If that indeed turns out to be the case, Bullock’s posthumous blessing of the plan (if only in spirit, privately to John Sharp), is even less likely – it was the Bullock-initiated 1993 constitutional amendment that required voters’ approval for a “tax on the net incomes of natural persons, including a person’s share of partnership and unincorporated association income.” At a minimum, that language suggests that should the plan pass in its current form, court challenges are likely.
On that question, Perry’s office has asked Attorney General Greg Abbott for an opinion before the start of Monday’s session.
Jimmy Martens, an Austin tax lawyer, agrees that there will likely be constitutional challenges if the current plan is passed. “It’s hard to say whether it is or whether it isn’t an income tax.” he said. “People recognize that our federal income tax is an income tax because it purports to measure your incremental changes in net worth. This tax really doesn’t go that far, because it considers your revenues, less some deductions. So the question is, how far can you go in allowing deductions against income before you have an income tax? From my perspective,” he added, “I don’t think this is a bad tax – it’s certainly better than what we have right now. But it’s a new type of tax that we’ve never seen before in Texas. It’s never been scrutinized.” 
This article appears in April 14 • 2006.
