Begin the Beguine

It takes two to tango and two to tax, and the Senate isn't dancing with the House on revenue for school finance. Their bottom line numbers are similar. Both houses started with the idea of lowering local school property taxes by 50 cents, and that sets the size of the project. But their methods of getting to the bottom line are as different as Mars and Venus.

The Senate's temperature on payroll taxes, a key component of the House plan? "Ice cold," to quote Sen. Florence Shapiro, R-Plano, chairman of the Education Committee. Senate Finance Chairman Steve Ogden, R-Bryan, was in the middle of a more measured answer, telling reporters the Senate was "cool" to the idea, when she interrupted to turn down the thermostat. Ogden, Dewhurst, and the other half-dozen senators at that press conference nodded in agreement when she did.

Sales taxes? Ogden says the Senate isn't willing to raise that consumer/business tax by a full penny, as the House did, but is looking at a half-cent increase. And where the House wants to extend the tax to some goods and services not currently taxed — bottled water, billboard advertising, and car repairs — the Senate is inclined to leave the base alone.

Snack taxes? They won't be in the Senate plan.

Businesses are split on the House plan, as are Republicans inside and outside the Pink Building. The House started with a payroll tax that would replace the current franchise tax. To get enough votes to keep the thing alive, they substituted a "pick your poison" plan that allows companies to calculate the tax both ways — payroll and franchise — and to pay the lower of the two.

Fewer than 20 percent of the state's corporations are required to pay the current franchise tax, and the state is trying to build a business tax that snags the rest of them. But companies have a responsibility to pay no more than they owe, and they're already poring over the legislation to find ways around the proposed levy.

They left at least one hole in their hurry to move a bill. Stuart Greenfield, a former analyst with the comptroller's office who now teaches at the University of Texas but who hasn't gotten out of the habit of kibitzing on state policy, found a loophole that allows existing employee leasing companies to pick their poison (new ones would apparently have to pay taxes based on payroll). That's trouble, if it allows a corporation with a lot of employees to "move" them to a leasing company but to continue their current jobs. The operating corporation could pay a payroll tax based on its newly shrunken payroll. The employee leasing company grandfathered in the tax bill could pay a franchise tax, and the state would miss its shot to collect more money from that business.

The Senate is sticking with the plan outlined — without details — by senators and Lt. Gov. David Dewhurst earlier this year. You can see the original document at:

www.texasweekly.com/ Documents/TexasChildrenFirst.pdf

And the Senate set up a website for feedback on the plan at:

www.texaschildrenfirst.com.

One big component is a business activity tax, or BAT, that would add a company's pre-tax net income to its compensation (after deducting the first $30,000 in salary for each employee) and tax that at a rate of 1.95 percent. That state tax would be paid before federal income taxes, effectively reducing the state tax rate by the corporation's marginal federal rate. Sole proprietors wouldn't pay — that'd be an income tax — nor would small outfits whose income and pay add up to less than $150,000.

The House opted for a business tax that has drawn criticism from some who say it amounts to an unconstitutional personal income tax for companies that operate as partnerships. That's a point of disagreement, but conservatives are arguing amongst themselves about the problem. The House approved it on party lines (one Democrat joined them, and several Republicans voted against it) and won support from the Texas Association of Business. But the National Federal of Independent Business and the Texas Public Policy Foundation, a think-tank based in Austin, oppose that particular tax. And the Young Conservatives of Texas started a firefight with an editorial

Another key component of the Senate plan is a statewide property tax, which would require both a constitutional amendment and some kind of salve for school trustees and superintendents who think it would cost them local control over taxes. The Senate would set that property tax at no more than $1, and would let school districts add their own local taxes of up to 15 cents (phased in a nickel at a time). The House version leaves the local school property tax in place, but would cap it at $1 and allow districts to add a dime in local taxes for local programs (phased in two cents at a time).

Shapiro contends that there is no functional difference on the local level, and says the Senate's version — since it would require a constitutional amendment — would be closed to a court challenge. It would also require voter approval; House leaders have said their plan is constitutional and would take effect faster than one that requires an election. House Speaker Tom Craddick likes the idea of a state property tax — he said earlier this year it's the only surefire way to end the Robin Hood system that has some voters riled up — but says he's not sure the House would support it. Constitutional amendments require two-thirds approval, and some rural members in particular don't like the idea of a statewide property tax.

Both the House and the Senate have talked about higher sales taxes, but the Senate is more sensitive to regressive tax increases. The House would increase the sales tax to 7.25 percent; the Senate has talked about a half-cent increase, to 6.75 percent. Both would add a buck (the House went a silly millimeter longer, to $1.01) to cigarette taxes. The Senate would raise taxes on alcoholic beverages, but not snacks; the House goes for the peanuts on the bar but not the drink. Bottled water and billboard advertising and car repairs would be taxed by the House. The Senate's initial plans — we've seen nothing newer — included a 1.5 percent tax on real estate transactions, like home, land and commercial building sales.

Will it Sell?

Leaders in both chambers insist their tax increases would be exactly offset by local school property tax cuts and, for that reason, say they are shifting taxes and not raising them. Overall, that's right, but it's like a college statistics joke about averages: If you have one foot in hot water and the other foot on ice, then on average, you're comfortable.

SCENE: A town hall meeting somewhere in Texas in January 2006.

DRAMATIC PERSONAE: A, an incumbent Texas officeholder, and B, the challenger in the March elections.

A: I cut your school property taxes and made business taxes in the state fairer.

B: Would everybody in the audience who's paying higher taxes please raise your hand?

The political questions behind efforts to replace local taxes with state taxes: Will voters hot about tax increases be cooled by tax cuts? Will businesses and consumers who end up paying higher overall taxes care that, on a statewide basis, the tax bill was a wash?

E.T.A.

The most interesting school finance news out of the Senate might be the timetable they laid out. A newspaper editor of our acquaintance used to stand behind reporters at deadline and whisper, "Tick, tock, tick, tock." The legislative equivalent is only one notch more subtle. The Senate's timing will put the final talks over school finance and taxes and all in the month of May, the last month of the legislative session. It's not a "take it or leave it" schedule, but it doesn't leave time for a lot of creative writing on deadline.

Earlier plans to combine the Education and Finance committees for school finance hearings have been put aside. Shapiro said her committee will begin its slog through HB 2 — the education bill — after the Easter break. After hearings and such, she hopes to have that bill before the full Senate in late April. Ogden hopes his Finance Committee will send a state budget to the full Senate early next week for consideration right after Easter. Finance will start working on HB 3 — the tax bill — while the House is digesting the budget, and hopes to have its version ready for a full Senate vote in early May. Conference committees to reconcile differences between what the House has already approved and what the Senate wants will meet then, followed by final votes in both chambers.

May is the last month of the session, and with rules that progressively limit legislative action at the end of a session, that means the tax bill will be one of the last things under consideration as the deadline approaches. Tick, tock, tick, tock.

Got a Chair?

One provision of the House tax bill would give the Texas Supreme Court original jurisdiction in school finance cases, meaning lower courts wouldn't be hearing and ruling on those issues before the state's highest civil court gets involved. That'd be unique — no other cases go directly to the court for arguments and facts, and there's not even a witness chair in the courtroom where the Supremes do business. Right now, the cases are generally heard by district judges in Austin and then appealed to the Supremes, directly or eventually.

For the Record

The House's vote on HB 3 — the tax bill — was 78-70. That tally was on party lines, with a few exceptions. One Democrat, Al Edwards of Houston, voted for the bill. Nine Republicans — Pat Haggerty of El Paso, Glenn Hegar of Katy, Delwin Jones of Lubbock, Terry Keel of Austin, Jodie Laubenberg of Parker, Brian McCall of Plano, Tommy Merritt of Longview, Ken Paxton of McKinney, and Elvira Reyna of Mesquite — voted against it. Two members — Craig Eiland, D-Galveston, and Bryan Hughes, R-Mineola — were absent.

Arithmetic, From Our Department of Corrections

We mentioned a study on appraisal caps last week without mentioning two of the sponsors. In addition to the Texas Association of Counties, the Texas Municipal League and the Texas Conference of Urban Counties paid Perryman & Associates for the work. That report describes the hazards of limiting — for tax purposes — growth in property values.

Legislators have proposed lowering the growth limit on residential properties from the current 10 percent, and possibly adding caps on tax valuations of commercial properties. A version on its way to the full House would cap appraisal growth on all properties at five percent. A Senate version, backed by Lt. Gov. David Dewhurst, would further split the tax rolls, lowering the cap on homesteads to five percent while leaving commercial property uncapped. And local governments, who've loudly complained about the state-imposed caps, would be allowed to opt out and let property values do what they do. Gov. Rick Perry supported a similar "split-roll" cap two years ago, and business groups howled.

While we're at it, we need to clean up our math. According to the comptroller's office, which does an annual report on property values and taxation, school property taxes made up 59.8 percent of the average property tax bill in 2003, a percentage that hasn't changed significantly since the early 1990s. Cities, on average, got 15.3 percent. County governments got 14.3 percent, and special districts, on average, got 10.7 percent of the property tax dollar.

Overall property taxes rose 95.8 percent in the ten years starting in 1993, rising to $28.9 billion from $14.7 billion. School taxes rose 98.9 percent; city property taxes rose 86.9 percent, counties rose 89.3 percent, and special district property taxes rose 101.4 percent.

And finally, this: If the Legislature were to lower school property taxes by 33 percent, and if other property taxes didn't change, the average property owner would get a 19.7 percent cut in property taxes. We underestimated that amount last week, along with the portion of the property tax bill made up by school taxes, and for that we are sorry, sorry, sorry.

Bubble, Bubble

We're getting to the halfway point of the session — there will be ten weeks in front of us next Tuesday and ten behind — and other big pots are starting to boil.

• The Senate Finance Committee expects to vote out a budget on Monday. That'll be ready for a floor vote right after the Easter break.

• The Legislature's efforts to hold the line on spending two years ago are spitting back; the supplemental appropriations bill that will fill the gap between what was budgeted and what was spent (more was spent) has climbed to over $2 billion, and House Appropriations Chairman Jim Pitts, R-Waxahachie, says budgeteers will have to raid the state's Rainy Day Fund to cover that tab. His bill currently calls for $1.4 billion for services in the state Medicaid program; $195.8 million for costs related to the Children's Health Insurance Program, or CHIP; $85.8 million for health and human services; $63.8 million for the department of aging and disability services; $27.4 million for temporary capacity for the crowded state prison system; $31.8 million for managed health care in the prisons; $30.7 million for the Teacher Retirement System's payroll pass-through for teachers; $37 million for textbooks; and $97 million to cover state property sales that were expected but that didn't go through.

• The Senate has sent a workers compensation reform bill to the House. That could still turn into a fight, though it's been relatively quiet so far. The House wants to kill the agency that regulates comp insurance and fold that into the Texas Department of Insurance. The Senate leaves it separate, but moves the management chairs around. Business wants costs cut and medical providers reigned in, and labor is arguing for either a place on the board or an agency that represents people hurt on the job.

• The Senate's package of reforms for the agencies that are supposed to protect children and the elderly has gone to the House and with taxes and school finance out of the lower chamber's hair for now, that'll get some attention.

Bottom's Up

It's been a while since the comptroller's office updated its periodic comparisons of facts about Texas and other states, and Sen. Eliot Shapleigh, D-El Paso, has grabbed the idea. His "Texas on the Brink" is a downer of the first order if you're at all competitive about these things. The last update of the comptroller's "Texas: Where We Stand" is at:

www.window.state.tx.us/comptrol/ wwstand/wwstand.html.

Her office also looks at stats for counties along the state's border with Mexico. That was last updated in 2003, but a spokesman says it's being refreshed as we write:

www.window.state.tx.us/specialrpt/snapshot/< /P>

Shapleigh's various rankings are current and available on his website at:

www.shapleigh.org/files/ focus_documents3.pdf

The numbers illustrate his introduction, which calls the listings "the expected outcome of an inadequate, outdated and terribly regressive tax system..." and says the state will remain near the bottom of the state rankings as long as it "ranks near the bottom in the amount of state revenue raised and services offered." Shapleigh's staff included footnotes to back up their listings, and they concentrated their research on the state's tax system and its spending in certain areas including education, health care, children, welfare, access to capital, public safety and so on.

Whether you like each ranking can depend on your politics. For instance, Shapleigh's got the state ranked 49th in tax revenue raised per capita, and 49th in general spending per capita. Sometimes, the numbers stink regardless of philosophy: Texas is 50th in high school graduation rates, 48th in college-prep SAT scores, 1st in the percentage of uninsured children, 2nd in teenage birth rates, 45th in home ownership rates, 2nd in highway fatalities and first in flood-related deaths.

A More Appealing Job

Philip Johnson's appointment to the Texas Supreme Court — assuming he wins Senate confirmation — brings that nine-member panel to full strength. Like everyone else on that court, he is a Republican. He is replacing Michael Schneider, who came to the court in September 2002 and left for a federal judgeship last year. Johnson comes on board in time to hear the school finance case against the state; the briefing back-and-forth in that case is set to end on the day after the legislative session ends, and the court will hear the school finance arguments and make a decision some time after that.

Only two of the justices — Nathan Hecht, who came to the court in 1989, and Priscilla Owen, who joined in 1995 — were on the court the last time it opined on school finance. Harriet O'Neill joined in 1999, and the remaining six justices joined the court in 2001 or later. Put it this way to get your bearings: Gov. Rick Perry had already replaced Gov. George W. Bush when two-thirds of the current Texas Supreme Court took office. Including Johnson, five members of the court started there as Perry appointees.

Johnson, an Air Force vet, went to Texas Tech and worked for a Lubbock law firm before getting a spot on the Amarillo appeals court in 1999. He was named chief justice there in 2003.

• File this under "Membership has its privileges". Supporters of Gov. Perry get word on his major government appointments 24 hours before the rest of Texans. According to the emails sent by Theresa Spears at the campaign to the "Chairs and Steering Committee," they find out before some of the applicants. That group got word of Johnson's appointment to the Texas Supreme Court on Monday — it was announced publicly on Tuesday — and Spear's note to the campaign insiders asked them to keep the information secret from the hoi polloi for 24 hours. "In many cases, we are still in the process of notifying all of the applicants under consideration for the appointment," said the email in a caveat that apparently is included with all such early announcements. A spokesman for the campaign said the announcement was routine, and that the emails advance every such appointment.

Political People and Their Moves

Karen Hughes, the public relations wiz for the Texas GOP and then for George W. Bush, is returning to government work as an undersecretary of state assigned to improving the image of the U.S. in the Arab world. She'll report to Secretary of State Condoleeza Rice. Hughes left the Bush Administration almost three years ago to spend more time with her family and to write.

Austin school trustee John Fitzpatrick, who's been busy with workforce and job training efforts for several years, will head the Texas High School Project, the public-private effort to "redesign" 50 high schools in urban and border communities in Texas. That project is using $60 million in state funds and $60 million from several private foundations. Paula Peters, who filled in as executive director, will be the THSP's COO.

John Edwards — the one who's never been a U.S. senator — is the new executive director of the State Bar of Texas. He'll be returning to Austin; Edwards used to lobby for the Texas-New Mexico Power Co., but moved to Maine a few years ago.

Wayne James, the executive director of the Texas Lathing and Plastering Contractors Association, is retiring after 20 years in that job and 48 years working for trade associations. Rest, man, rest.

Christopher Hosek is following his boss — Elizabeth Ames Jones — a couple of blocks north. He worked for her in the House, and will be her chief of staff at the Texas Railroad Commission.

Deaths: Leroy Wieting, D-Portland, who served in the Texas House for 22 years ending in 1984 and then became a lobbyist. Wieting, who served on the Appropriations and Ways & Means committees, among others, was 78.

An Entire Feud, in Quotes

Matthew Griffing with the Young Conservatives of Texas in an op-ed article blasting House Speaker Tom Craddick for pushing through what that group calls "a virtual income tax" in HB 3: "Hopefully, the 2006 election will be a wake-up call to those Republicans who bowed to Craddick's pressure. Too many of them have forgotten that they answer to their constituents, not Craddick. In fact, as speaker, he answers to them, and it is time for him to be reined in. If that fails, then it will be time for a new speaker. Still interested in the job, Pete Laney?"

Rep. Dan Flynn, R-Van, in a reply letter signed by 36 other House Republicans: "The 'payroll tax'... is not an income tax. It is not a deduction taken from an employee's paycheck, as are the federal income tax or social security tax, and thus is not an income tax at all." ...

"Had the Democrats been in power, they would have passed a massive tax increase bill last session and would pass another one this session under the guise of being for school finance. Instead, Speaker Craddick has directed that any new education funding come from within the existing revenue levels for the state."

From Rep. Jim Dunnam, D-Waco, and other House leaders, who saw Flynn's reply: "Like most Texans, House Democrats opposed the $11 billion Republican tax bill that raises taxes on 88 percent of Texans while putting no new money into public education."

Finally, Griffing, the guy who started it all, replying to Flynn: "In regard to fiscal restraint, YCT applauds the tough budget decisions the Legislature made in 2003. It is a shame to see the positive effects of those decisions offset by poor decisions today. Cow-towing to wafer-thin political pressure, the Legislature is dumping more money into public education, which is becoming a bigger and bigger drain on the state budget."

Quotes of the Week

Rep. Jim Keffer, R-Eastland and author of the tax bill: "We wanted to make the greatest contribution to the people of Texas, and that is by cutting their property taxes by one-third."

Rep. Fred Hill, R-Richardson, telling the Austin American-Statesman that his constituents would have a hard time button-holing him before a vote on taxes: "I'm not going to be seen this weekend."

Michael Quinn Sullivan, spokesman for the Texas Public Policy Foundation, quoted in the Fort Worth Star-Telegram: "The Republican-led Texas House of Representatives accomplished something Democrats have wanted to do for decades, but could not. The state of Texas now has an income tax."

Tax-hater Grover Norquist, talking to the Fort Worth Star-Telegram about the tax bill: "As I understand it, this bill is revenue neutral and does not violate the pledge [taken by legislators in Texas and elsewhere]. But we've got to keep an eye on it."

Sen. Florence Shapiro, R-Plano, rating chances in the Senate for various provisions in the House's school finance bill: "And no snack tax, thank you very much."

Rep. Joe Pickett, D-El Paso, quoted in the El Paso Times on the tax bill, which would apply sales taxes to car repairs and raise taxes on tobacco products: "You will either have to quit smoking or quit driving. You won't be able to afford both."

Rep. Norma Chavez, D-El Paso, in that same paper, on one amendment to the tax bill: "Taxing boob jobs and face lifts over diapers for babies was an easy vote."

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Texas Weekly: Volume 21, Issue 38, 21 March 2005. Ross Ramsey, Editor. George Phenix, Publisher. Copyright 2005 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.

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