A week into the special session on school finance, the House countered Gov. Rick Perry's revenue proposals with a combination of state property taxes, new and higher sales taxes, a new tax on payrolls and a $1 dollar surcharge on tickets for movies, sporting events, concerts and other amusements. In return, school property taxes that now average about $1.47 would be capped at $1, and the increasingly unworkable business franchise tax would be eliminated altogether. They raised the estimate of what they think they could raise from new gambling, even as support for slot machines — video lottery terminals, if you prefer — came under fire.
Less than two days later, that had morphed into a local property tax with a rate capped at $1.05 by the state. About 20 school districts would still be in what's become known as the "Robin Hood" system, sending money to the state for redistribution to districts whose local taxes don't raise enough money to educate their children. Many, but not all, of the new sales tax expansions were out. The quarter-percent increase in the sales tax had doubled. The payroll tax had jumped to a maximum of $500 per head from $300 (after a brief jump to $600). And that proposal was left to hang in the wind for more than two days before a House committee convened (the meet was set for Saturday afternoon as we went to press) to vote on new school finance formulas and all those taxes.
The proposals were worked out in meetings between House Speaker Tom Craddick, several House members, and a steady parade of visitors from business, the governor's office, the Senate and elsewhere, and unveiled by the same committee that's been working on school finance formulas. Various House members proposed pieces of the initial version, but the overall plan was presented by Rep. Talmadge Heflin, R-Houston, the chairman of the House Appropriations Committee. We'll tell you about it because everything is still open —any of these things could come right back to life.
The version with the state property tax totals $17.95 billion a year (and unless we say so, the numbers we're using are annual and not biennial). Of that, $1 billion would be new money for schools, and another $751.1 million would be available to districts for local enrichment — money they could raise locally and spend locally above and beyond what's required and provided by the state. The remaining $16.2 billion would be used to replace almost all local school property taxes with a state school property tax, and to replace the $1.9 billion that comes in each year from the corporate franchise tax. To accomplish that, the state would create a new property tax to raise $10.9 billion for public education. Appraisal increases would be capped at 5 percent, but limits on local government spending aren't included in the most recent versions of the House legislation.
From a taxpayer's standpoint, all that would change is the name — Local would become State — and the rate would be set at $1. But lots of Republican House members objected, saying a statewide property tax would leave the components of Robin Hood in place, disguising them by making it unclear that School District A was raising money that was being sent to School District B. Everybody would pay into the state, which would distribute the money, and richer districts would get back less than they put in. Their reps squawked, and the local tax is back. With a little bit of Robin Hood.
About 20 districts would still raise local taxes and ship them elsewhere. All districts would be able to raise 10 cents in local taxes for local enrichment — a balm for richer districts that must still share local money. The 5 percent limit on appraisal growth for homesteads would slow regeneration of the current system, as values rise and push more districts into the sharing category.
Up for Grabs
It would take a mess of other taxes to make up the difference between what's raised by the new tax and what local property taxes currently bring in. Using a $1 statewide property tax to replace local property taxes — an idea that still has some support in the Senate — would boost the state costs to over $17 billion, while lowering local property taxes by almost that much (remember to add back money for new education spending. Using a local property tax with the top rate set by the state at $1.05 changes the numbers a bit, but both programs require the state to look for new money. Lawmakers are looking at various combinations of sales taxes, payroll taxes and sin taxes:
• Raising existing state sales taxes to 6.5 percent from 6.25 percent would bring in $480.8 million. Local governments add up to 2 percent to the total, meaning the highest rate would be 8.5 percent. As of a year ago, Texas was one of two states charging 6.25 percent; three states were at 6.5 and three more were tacking 7 percent onto sales of certain items, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution that tracks this stuff. When state and local taxes are considered, Texas ranked 12th then, and would move into a three-way tie for ninth with the increase. In the later version, the sales tax rate would be raised half a penny, to 6.75 percent, which would bring in $961.5 million.
There's a stinger in here for the cities and other local governments that rely on sales taxes. The state would add a long list of services to the sales tax rolls, but the 2 percent tax that would normally be added on by and for local governments on those items would instead be swept up by the state and used for public education. Under the first House proposal, the total amount swept would be $639.5 million. Under a second plan that's up for a vote over the weekend, it would be $123.4 million
• Increasing the motor vehicle sales tax to 7.5 percent from 6.25 percent would bring the state $491.3 million. It would add $250 to the price of a $20,000 car, for example, and that amount could be folded into a car loan. Boats and boat motors would come under the sales tax at that same rate, bringing in $53.9 million. In the later version, motor vehicle sales taxes would rise to 7.75 percent, bringing in $589.5 million. Sales of boats and boat motors would all be taxed at that same rate, bringing in $55.7 million.
• Cigarette taxes would increase by $1, to $1.41 per pack, bringing in $707 million. Increasing the tax on smokeless tobacco to 40 percent from 35.21 percent would raise another $20 million. (This one will slide: Revenue estimates from the comptroller's staff assume the initial impact of the higher price would be a 20 percent drop in tobacco sales, followed by a 4 percent drop each year after that.) The tax increases on cigarettes and smokeless tobacco are still in the current version, joined now by a tax on cigars that would add $5.7 million to the pot.
• Video Lottery Terminals — a fancy name for slot machines — would be allowed at race tracks and Indian reservations to bring in $1.5 billion a year. There's a dispute over that number; Heflin says he's more optimistic about the numbers than the comptroller, who doesn't think the slots will produce that much revenue. It depends on the number of machines, how quickly they're installed, and where they're located, among other things. VLTs are in both versions of the bill.
• A $1 surcharge on "amusement tickets," and we're not talking about beefcake and cheesecake joints here. Heflin wants to add a buck to the price of tickets for movies, sporting events, concerts and other such things. College sporting events are not included in versions we've seen.
• The House proposes to keep collecting a tax on your phone bill, although the original purpose for it has long since expired. The Telecommunications Infrastructure tax was supposed to feed a fund set up to wire schools, hospitals and other facilities. The agency that administers the fund was wiped out by Perry's pen last year — he crossed out the agency's budget and said it should die — and the Sunset Advisory Commission's staff has recommended killing the agency officially. But the tax is still on the books and the House aims to use the $125 million it brings in each year.
A Tax Based on Income — Not an Income Tax
The corporate franchise tax is slipping, and income taxes are politically unpalatable. So, several representatives have been toying with payroll taxes to help carry the school finance changes, and/or to replace the state's leaky business tax. Businesses have been reorganizing to get out of the franchise tax and it brings in less each year.
Taxes on payroll come close to one of the traditional land mines in Texas politics — the income tax. But the House proposal includes a payroll tax cooked up by Rep. Jim Keffer, R-Eastland, would put a 1 percent tax on what businesses pay their workers. It would be capped at $400 per year per fulltime employee. Because the businesses and not the employees would pay it, supporters say it's not technically an income tax, though the amount paid is based on the income of the employee, up to $40,000. Unlike the franchise tax, it would apply to sole proprietorships and partnerships, and it would bring in $2.4 billion annually. This got up to 1.5 percent of payroll with a $600 cap in one iteration, but settled at 1.25 percent and $500 in the latest version. That would bring in $3.4 billion, more than offsetting the corporate franchise tax, which would still be eliminated at a cost to the state (and a savings to businesses) of $1.9 billion.
The sales tax brings in more money than any other state levy, and Democrats will tell you the state is too reliant on it. But it's in place, voters are accustomed to it, and some of the alternatives, like the personal income tax, are suspected of carrying a deadly political virus:
Killing some exemptions from the current sales tax would bring in $144.5 million to $150.3 million, depending on the rate, but it'll probably be noisy. Newspaper advertising inserts — the junk that cascades out of your Sunday paper — aren't taxed if they're provided by the advertisers instead of printed at the papers. That's $30.7 million, at 6.75 percent, the rate in the latest version. Magazines are taxed at stores, but not for subscribers; a change there would net $9.3 million. A sales tax on newspapers (unlike newsletters, they're tax-free) would bring in $22.9 million. Internet services aren't taxed on the first $25, but would be in this proposal, bringing in $21.2 million. A semi-related exemption on data processing and information services, which are taxed at 80 percent of the sales price (our online subscriptions are one example), would produce $22.7 million if eliminated. Ending a sales tax exemption on food and candy from coin-operated machines would net $43.5 million.
Exemptions are different from exclusions, if you're a lawyer, accountant, legislator or tax collector and make such distinctions. Some items have been excluded from the state sales tax, but could be added to bring in money. They produce squeals at different volumes, and bring in varying amounts of money. The House talked about raising $2.22 billion by extending sales taxes to: Legal services, $428 million; Architectural and engineering services, $303 million; Automotive maintenance and repair, $272 million; Accounting and audit services, $208 million; Real estate brokerage and agency (on the commissions, not on the full home price; it would add roughly $500 to the price of a $100,000 home, assuming a $6,000 commission), $191.8 million; Financial services brokerage, $139.4 million; Contract computer programming, $110.6 million; Management consulting and public relations, $107.5 million;
• Other financial, $100.4 million; Residential repair and remodeling, $81.4 million; Barber and beauty services, $63.8 million; Research and development lab services, $45.4 million; Testing labs (non-medical), $45.3 million; Veterinary services (not including large animals), $37.2 million; Car washes, $23.4 million; Travel arrangement, $22.3 million; Economic and sociological research, $19 million; Miscellaneous personal services, $18.2 million; and Interior design, $7.3 million. That list would be cut to just two in the new plan; the House would extend the higher 6.75 percent sales tax to automotive maintenance and repair, for $282.4 million, and to car washes, for $24.3 million.
The Mob Chasing Frankenstein's Monster
When legislators cobbled together a $3.1 billion tax bill in 1991, a pressing budget crunch gave them a choice: They could pass a smaller tax bill, but only if they got the 100 votes needed to give it immediate effect. So they built a tax bill that would raise more money with a simple majority vote than it would raise with a supermajority vote. And they structured it so that a few choice groups — all with powerful lobbies — would go untaxed if the smaller bill passed with immediate effect. As a result, car dealers and insurance agents and others all swarmed the Pink Building to push for 100 votes, immediate effect, and an escape for themselves.
The trick was that they could assemble packs of people who could do hand-to-hand combat in the halls of the Capitol. It was easier for some lawmakers to vote for the tax bill they disliked than to anger people who could directly assist them out of office.
Now look at who would has an incentive to fight the first plan pulled together by Speaker Tom Craddick and his lieutenants in the House: lawyers, real estate agents, accountants, engineers, public relations people, architects, barbers and beauticians, veterinarians, mechanics, interior designers, travel agents, newspaper executives, and a loud group of Internet geeks who've been known to flame an enemy or two. With a higher sales tax increase — 6.75 percent — and slot machines, taxes on those services probably would be unnecessary. Squint at it, and you can see the formation of the group that might end up lobbying lawmakers in favor of new gambling.
The professionals would get hit twice in the process of lowering local school property taxes. They'd have to figure out the effect of a sales price on their services, either lowering prices to make the change transparent to customers, raising the end price to those customers, or doing something in between.
And for people rendering services that aren't necessarily local — who cares if your lawyer is in Houston or New Orleans if there's an 8.5 percent difference in price? — the sales tax is a new puzzle. A Texas client with a Louisiana lawyer would still be subject to sales taxes, in the same way they are now: If you buy a taxable item in another state for use here, you're supposed to pay a use tax on it. For instance, a California mail order firm won't add sales taxes to the price of the computer you order, but you're supposed to. And that would go for services purchased for Texas use from out-of-state firms; they wouldn't have to collect and remit the tax if they didn't want to, but the buyer would be liable for it. Those same businesses would be hit with the payroll tax proposed as a replacement for corporate franchise taxes. Same kinds of questions: Cut pay? Cut the workforce? Eat it? Pass the cost along?
The same crowd, with some additions, might have assembled in Austin a year ago if the Senate's proposal for school finance had gained favor. Senators unanimously passed a bill that would have extended taxes to those services and then some, while also raising the rates. When it came time for the House to do a version, they left out some of the Senate's less popular sales tax candidates, like day care centers and funeral homes. But they also had to settle for less tax relief. The Senate was trying to cut local school property taxes in half, to 75 cents per $100 valuation. The House version would cut it to $1.
That's less than what the Senate was trying to do, but it's more than Gov. Rick Perry's plan does. Perry would split the tax rolls (and the cost of a tax cut) to bring residential property tax rates down 25 cents from wherever they are now (each school district would end up with its own rate) while putting business property into a statewide roll taxed at $1.40.
The Perry plan doesn't cut as much, but also doesn't cost as much. He'd get his big money from slot machines, from closing a much-used loophole in the state franchise tax, by increasing taxes on cigarettes, and by accelerating some tax collections. One legislator put it this way: The Guv's plan was unattractive, but had the advantage of lowering property taxes without requiring lawmakers to vote on the sort of tax bill that makes voters mad. Some businesses were underwhelmed by the split roll, but homeowners outvote them. Some Perry supporters are turning their optimism to the House plan, on the theory that lawmakers will dislike it so much it'll make the governor's plan look good. It's early yet, and the Senate hasn't spoken, but it's an interesting theory.
The Man in the Middle
Thomas Phillips, chief justice of the Texas Supreme Court, will leave the court at the beginning of September, and plans to teach for at least the first few months. Phillips, appointed to the court in 1988 by then-Gov. Bill Clements, had been a state district judge in Houston since 1981 (appointed to that job by Clements, then in his first gubernatorial term) and, before that, an attorney with Baker & Botts.
Phillips (and the other justices) will spend the next four months trying to clear the largest backlog of cases the court has faced, according to Phillips, since the end of World War II. He'll leave as the court's new term begins, on September 3, and as the new term at South Texas College of Law in Houston begins. He's taking a one-year appointment as the Spurgeon Bell Distinguished Visiting Chair, and says that'll give him time to figure out his next move. That move could put him into a law practice or something else; Phillips says he's interested in public affairs if not public service (though he didn't completely rule out a future run for office).
The resignation allows Gov. Rick Perry to be the first chief exec since Clements to name a new chief justice. His appointee will be on the ballot in November 2006, running for what will then be the last two years of Phillips' six-year term. If Phillips were to resign five days earlier — on Monday, August 30, instead of on Friday, September 3 — the appointee would be on the ballot this November. His timing gives his replacement more time to prepare for an election contest, and puts them on the ballot when Perry will be up for reelection himself.
The chief justice was on the leading edge of Republican efforts to wrest the state's highest civil court from Democratic control in the late 1980s and early 1990s, winning his first challenge (Ted Robertson) by 674,660 votes, his second (Oscar Mauzy, a fellow justice) by 679,996, and his third, in 1996, by 826,641. The first two were expensive grapples, but the wind came out of the Democrats and the plaintiff's lawyers who had been their primary financiers as the court swung to the Republicans and Phillips came to represent the moderate wing of on that nine-member panel. In his last election, in 2002, Phillips said he wouldn't raise or spend any serious money, as a kind of comment on the practice of raising money for partisan judicial contests from people who potentially would have interests before the judges who won. With no serious financing, his winning margin rose to 751,339 votes.
He said as he resigned that he sought election that year to seek "real changes in the way we select our judges and organize our courts." He's been an advocate of judicial selection reform and wants the state to take on a long-delayed redistricting of the courts to even out workloads, add new courts where they're needed, and weed out courts in areas that don't need so many. Those efforts fell short during last year's regular legislative session, and Phillips, who toyed with resigning three years ago, decided it's time to move on.
Phillips was, in addition to being chief, the longest-serving member of the current court. Next is Nathan Hecht, who came in almost exactly a year later, in January 1989. Priscilla Owen, nominated by President George W. Bush to a spot on the 5th U.S. Circuit Court of Appeals, is third, having joined the court at the beginning of 1995. Harriet O'Neill has been on the court for five years and everybody else got on after 2001.
Last Year's Fight
Texas Democrats wanted the courts to agree that the Republicans broke the rules when they put aside the Texas Senate's two-thirds rule to make it easier to force a vote on redistricting. Lower courts had said Lt. Gov. David Dewhurst was within his rights when he suspended the rule without first getting clearance from the feds, and now, the U.S. Supreme Court has refused the Democrats' appeal. Still pending: The Democrats' main appeal, challenging the legality of the congressional redistricting maps completed last fall, after three special legislative sessions. And on another front, the Democrats got another bad sign: The U.S. Supreme Court ruled with Republicans who redistricted Pennsylvania's congressional delegation, saying their new lines didn't overstep the legal lines. Texas Democrats had been holding out some hope that that ruling would go against the GOP and influence the Texas case.
Rep. Kent Grusendorf, R-Arlington, told members of his select committee that the constitutional amendment they're looking at will have not one but three elements: Cap local property taxes for school maintenance and operations at $1.05, allow slot machines at racetracks and on Indian lands, and cap increases in local government spending from property tax revenues at 5 percent. It does not include a brake on spending by local governments. Gov. Rick Perry wants a 3 percent cap on appraisal increases, and to require a public vote if spending outruns inflation and population growth.
• Rep. Linda Harper-Brown, R-Irving, is gathering signatures against slot machines — she's got 25 on paper, 10 more committed, and is trying to get 51, the number needed to kill a constitutional amendment. Other members are telling Perry they'd rather see surcharges on junk food and alcohol to raise $1.2 billion. VLTs aren't out of the House yet, but Sen. Jane Nelson, R-Flower Mound, promises a filibuster if that one gets to the Senate.
Political People and Their Moves
Raymund Paredes is the state's new commissioner of higher education, named to the post by the Texas Higher Education Coordinating Board. He's from El Paso, and has taught and administered at the college level; his latest posting was at the Hispanic Scholarship Fund in San Francisco...
James Wilson, the former director of the state police, is about to become the sheriff in Williamson County, north of Austin. Wilson was director of the Texas Department of Public Safety, and ran for sheriff after he retired. He's got no opposition in November, but will have to wait until January for his term to start...
Just a few months after jumping from the attorney general's communications office to the comptroller's, Mark Heckmann is leaving. Heckmann, who left a job at UT Tyler to work for former AG John Cornyn, told colleagues he's ready to try something new.
Quotes of the Week
Kenneth Hall, president of the Baptist General Convention of Texas, quoted in the Dallas Morning News, on Gov. Rick Perry's proposal to legalize slot machines (AKA video lottery terminals): "For 20 years we have had equalized funding for public education in this state, and now our governor is proposing replacing that with slots for tots. This is shameful to say we are going to educate children by increasing the number of gamblers."
Dallas lawyer Mike Boone, quoted in the Houston Chronicle: "Either do something big and bold that really fixes this system long-term for Texas, or do nothing. I wouldn't be in between. That would be a disaster. The public would be misled. This is all going to boil down to leadership and courage."
Perry, indicating some negotiating room on proposed increases in sales tax rates: "It would depend on the level. I'm not going to be pinned down here at this early stage in the process and tell you what that level is, but a minor increase is not going to have much impact."
House Speaker Tom Craddick, after he and other House leaders decided to suggest extending sales taxes to some services: "The idea of broadening it, that's where the growth in the economy is. If you broaden it, you pick up that growth."
Rep. Dan Gattis, R-Georgetown, at a hearing on medical malpractice insurance rates, which haven't dropped in spite of state limits on lawsuit awards: "My doctors weren't coming and screaming to me and asking for House Bill 4 because they were saying current rates are fine."
U.S. Rep. Ciro Rodriguez, D-San Antonio, after a Catholic cardinal said priests should deny communion to Catholic politicians like him who support abortion rights, wondering whether the same standard applies to all of the church's positions: "Does that also apply to people who favor the death penalty?" [He does; the church does not.]
Texas political consultant Jason Stanford, quoted in the Seattle Times: "You don't really want to point at a guy and say, 'He had sex with livestock.' You want to say you're troubled by the reports that he may have had sex with livestock."
Texas Weekly: Volume 20, Issue 44, 3 May 2004. Ross Ramsey, Editor. George Phenix, Publisher. Copyright 2004 by Printing Production Systems, Inc. All Rights Reserved. Reproduction in whole or in part without written permission from the publisher is prohibited. One-year online subscription: $250. For information about your subscription, call (800) 611-4980 or email biz@ texasweekly.com. For news, email ramsey@ texasweekly.com, or call (512) 288-6598.