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Senate Narrows Gap with House on School Tax Plan
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May 13, 2005
The Senate’s school finance bills moved a lot closer to their House counterparts this week.
Earlier in the week, there was some question as to whether enough votes were there in the Senate to pass the tax bill. But after lots of negotiation, removal of a state property tax, and a business tax compromise proposed by Sen. Kim Brimer (R-Arlington), the full Senate has now passed both the education bill and the tax bill, and the conference committees will soon begin work.
A deal is not done, yet. There are still plenty of differences between the House and the Senate bills. But they are at least now in the same neighborhood.
Abolishing the state property tax is the most significant change. It appears the state property tax is not nearly as popular in the Senate as was once believed. The key, however, is that removing the state property tax means the bill does not need 100 votes in the House. It has been obvious for quite some time that a two-thirds vote will not materialize this session on any controversial issues except the gay marriage ban.
The Senate proposed a local property tax capped at $1.15 per $100 of property value in the first year of the upcoming biennium and $1.10 cap in the second year. Local districts can also request voter approval for an additional enrichment tax with a phased-in 15 cent cap.
While the Senate’s plan has a few more similarities to its House counterpart, there remain some significant differences. Here’s how the Senate’s revised tax plan works. Every business with gross receipts over $150,000 must pay a business tax. To ensure the bill balances, there is a minimum tax in the bill of at least one-quarter of one percent on gross receipts. Like the House, the Senate plan offers businesses a choice between two options — a payroll tax and something that looks like the existing franchise tax.
The payroll tax is a flat 1.75 percent tax, with a cap of $1,500 per worker.
Unlike the House plan, the franchise option is not the existing franchise tax. First, the earned surplus rate is lowered to 2.5 percent. (It is currently at 4.5 percent.) But the base is expanded. The existing base is basically net income of a business plus compensation of directors and officers. The Senate plan expands the compensation add-back to include all wages. But there is a deduction available of $30,000 per employee, up to half of total payroll. In other words, both options have a payroll component. The payroll tax is simply calculated differently depending upon which option the business chooses.
The tax on capital (which operates like a floor) in the existing franchise tax stays in the bill. By contrast, the House plan offers a choice between a 1.25 percent payroll tax with no per-employee cap and the existing payroll tax. There is no gross receipts floor in the House plan.
The Senate plan still relies more on the business tax than its House counterpart. The Senate plan raises more revenue overall than the House plan does. It also raises more from business than the House plan. The House goes up a full cent on sales tax, includes a surtax on junk food, and goes up a full $1 a pack on cigarette taxes.
The Senate, by contrast, does not rely nearly as much on the sales tax. It only goes up only a half-cent and has no snack-tax. The cigarette tax is only raised 75 cents in the Senate’s version. And holders of the Lone Star Card (poor people on government assistance) get a rebate equal to 20 percent of the average sales tax paid by people in their income bracket.
As a result, the Senate’s business tax has a gross receipts floor and the franchise option includes a payroll tax.
Lt. Gov. David Dewhurst has repeatedly told reporters he’s not surprised there are many businesses that prefer the House plan. “I’m not at all surprised to hear some people say they prefer the House bill … It’s $2.5 billion out of balance, according to Comptroller [Carole Keeton] Strayhorn,” he said.
One feature of the Senate plan that could draw the most complaints is the gross receipts floor. A gross receipts tax has a “cascading” effect. A chair manufacturer that buys wood from a lumber yard in East Texas, for example, would be double-taxed on the chair. The lumber yard would have to pay the tax on the money it gets from selling the wood, and the furniture company would pay the same tax on the money it gets from selling the chair.
Brimer, however, discounted the complaints on the gross receipts floor, noting that the rate is extremely low. “The feedback I’ve gotten from fellow Senators and some of my local businesses is they are very receptive to it. The only area I’ve heard some concern with is the oil and gas people out of Midland, but if they only want one plan, they ought to submit their plan and we’ll vote it up or down too.”
The tax equity note on the Senate’s plan is still politically dicey. The Legislative Budget Board released a tax equity note on the Senate bill that was voted out of committee (which is significantly different from what was finally adopted on the Senate floor). Like the House plan, the equity note showed that upper income Texans making six-figure incomes get a tax cut, while those making less than $100,000 per year pay more in taxes.
The bill’s author, Sen. Steve Ogden (R-Bryan), attributed much of the equity note to the tax on cigarettes, which he called one of the most regressive taxes. Ogden said he has requested an equity note without the cigarette tax included. We will write about this as soon as we get it.
Another item in the tax equity note argued that the Senate’s plan is a net tax increase in fiscal year 2007. Senators say they have fixed this problem on the Senate floor.
Many conservatives still can’t stand the bill. Outside the Capitol, this bill doesn’t have much of a constituency. Sure, some in the real estate community like lower property taxes. And there are some businesses breathing a sigh of relief that they didn’t get hit harder.
But most of the public education groups are not on board with either HB 2 or HB 3. And conservative opposition to HB 3, if anything, has intensified.
Grover Norquist, president of Americans for Tax Reform, was seen at the Texas Capitol this week talking to senators about the bill and why raising taxes is a bad idea. Norquist had previously planned a visit to Austin for a fundraiser.
“If there’s going to be any shift from property taxes to sales or whatever, that tax is of questionable value,” Norquist said. “It sidesteps the key question, which is how much is government going to take … Take a look at New Jersey, which years ago had the highest property taxes in the Northeast and they put in an income tax, which the state didn’t have until the mid-1970s, to cut the property tax. Today New Jersey has the highest property taxes and the highest income taxes [in the Northeast]. There was no constitutional guarantee that that cut in property taxes was permanent.”
Even more noteworthy, however, was an editorial in the May 10 edition of The Wall Street Journal savaging HB 3 and Lt. Gov. David Dewhurst. The Journal’s comments echo the critiques many conservative organizations, including the Young Conservatives of Texas and the Texas Public Policy Foundation, have made.
“Capital, jobs and economic development in America are migrating from high-tax states to low, and from blue states to red. Why would fast-growing Texas want to imitate New York and Massachusetts?” the Journal asked.
Even more troublesome for the leadership is the Journal’s statement about the payroll tax. “A wage tax is of course a fancy disguise for a personal income tax, and imposing one is a sure way to put a state on the path to slower growth,” the Journal wrote.
When asked about this, Dewhurst slammed the bill’s conservative critics, including the Journal’s editorial board. “They had better get a copy of the bill and read it because they are working off of old information or inaccurate information ... We [senators] want to raise standards, increase accountability, lower local school property taxes, and that’s what we’re doing today with a reduction of almost 25 percent in our local school property taxes, and we want to pay for it without raising overall tax, and that’s what people either haven’t understood or don’t want to admit.”
The Senate’s tax bill contains gambling. Sen. Ken Armbrister (D-Victoria) added an amendment to HB 3 that authorized electronic pull tab bingo in Texas. Armbrister said this is not expanded gambling. He also argued it will not lead to slot machines.
But gambling opponents beg to differ.
The House’s version of HB 3 just barely passed. There are a sizeable group of anti-gambling Republicans in the House, whose arms cannot be twisted to support a bill with gambling in it. Leaving the electronic pull tabs in the bill could risk the entire bill.
Reprinted with permission by the author.
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William Lutz is managing editor of the Lone Star Report.
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