Somebody's Lying

A week after the Texas House passed the largest tax bill it has ever considered -- a measure intended to replace some local school property taxes with new state taxes -- Comptroller Carole Keeton Strayhorn stunned lawmakers by saying the bill spends three dollars for every two it raises.

Her analysis of House Bill 3 is that it would lose more than $2 billion per year after it's up and running. And getting to that point is bumpy: The legislation would raise $2.8 billion in new taxes the first year — before property tax relief kicked in. In fiscal year 2007, property tax relief would outrun the new tax revenue by $1.8 billion. That gap would grow annually, reaching $2.3 billion by 2009. The biggest problem, she said, is that the House gave businesses the choice of paying the lesser of two taxes without setting a minimum amount each business must pay. Lots of companies would pay little or nothing. And the bill leaves open the hole we wrote about last week, allowing companies with large payrolls to "move" their workers to employee leasing companies and avoiding payroll taxes.

House Speaker Tom Craddick and Ways & Means Chairman Jim Keffer said the comptroller's chief revenue estimator signed off on changes to business taxes that went on to win House approval. But the comptroller's new analysis of those changes — giving businesses a choice between paying something like the current franchise tax or a payroll-based tax — concludes they won't raise the money needed to pay for a one-third cut in local school property taxes.

Strayhorn sent staffers to tell Craddick and Keffer about the numbers and also sent copies of her cover letter and fiscal note to legislators. A copy of Strayhorn's letter and the fiscal note can be downloaded here:

www.texasweekly.com/documents/CKSonHB3.pdf

Word moved fast and some lawmakers found out about the trouble from reporters. They really, really hate that. Craddick, who held a press conference with lawmakers who fashioned the tax bill, didn't mince words. And he didn't leave open any possibility that the House had botched its tax bill: "Maybe she [Strayhorn] is playing politics or maybe she and her staff are inept. Either way, I assure you that we stand by this bill. The Comptroller's office certified it and we are going forward with HB 3 as is."

The comptroller wasn't shy, either, when she talked with reporters shortly after the House leaders tried to shame her: "I just watched the House news conference and my heart goes out to them. They just passed the largest tax bill in history and it does not balance. They thought they were raising $12 billion in revenue. I ran the numbers, and it raises about $8 billion in revenue."

It is a he-said-she-said arrangement. They can't possibly all be telling the truth and it's impossible to figure out just who's lying.

Strayhorn said House leaders didn't check with her staff over the last weekend before taking the bill to the floor of the House and said her aides never signed off on the 20 or so amendments eventually added to the bill. She said Craddick told her staff that he didn't need help or a fiscal note on the bill until the House had passed it.

Keffer said the opposite: "The comptroller's office spent the entire weekend with the speaker's staff, members of the committee on Ways & Means and LBB working on and improving amendments to House Bill 3, specifically Article 2, which is the business tax section of the bill."

He said "no less than a dozen" people were on hand when the revenue wizards signed off on the provisions that went into the final bill. "They assured us it was balanced. Here we are a week later and suddenly the bill is not balanced. How can that be?" Keffer said.

Told that House leaders had said her staff "certified" — with witnesses — the provisions that eventually wrecked the bill, she came close to calling them liars: "That is absolute hogwash."

She said she's not trying to snipe and insisted that she's not playing politics with the numbers: "I'm not going to tell any lawmaker what they can and cannot do. I will tell you that this bill does not do what they said it will do. I am keeping the legislators and the people of Texas informed at every step of the way. That is my job."

She said she sent her staff to brief Craddick and Keffer and then delivered her letter and her fiscal note to the rest of the House.

Strayhorn said her staff ran the numbers for the 100 biggest corporate franchise taxpayers — she didn't release names — and said two-thirds of them would see a cut in state taxes (not counting local school tax reductions) if the House bill took effect.

Neither gang talked about getting the tax bill back on track, either by patching the holes the comptroller has pointed out or by arguing over the mechanics of the bill. It was liking calling from Apollo 11 to say, "Houston, you've got a problem." Put the party of your choice in the command module.

For all the noise, the political scuffle doesn't mean much to the legislative process itself. HB 3 is on its way to the state Senate, and it doesn't truly matter at this point whether it balances or not. The last time the House sent a big tax bill to the state Senate, in 1991, what started as a $3.3 billion measure was drained during an all-night debate, and the shell that crawled across the rotunda was worth less than $35 million. The Senate pumped it back up to full size and the tax bill came back to life. Both houses passed it (and a state lottery), the school finance crisis of that particular moment was averted and that was that.

The Senate is planning a similar remodeling project this time around. Lt. Gov. David Dewhurst and Senate leaders said last week that key provisions of the House plan won't fly in the upper chamber, including the business tax and a full one-cent increase in the state's sales tax. They plan to spend the next month hearing ideas and drafting a tax bill of their own to send back to the West end of the building. For those purposes, it doesn't matter whether the House bill balances or not.

And oddly enough, Strayhorn's harpoon didn't take away all of the House's negotiating power on the tax bill.

What attracted business to the House bill was the "choose your poison" option that would have allowed each business taxpayer to choose which of two taxes they'd rather pay — one based on payroll or something similar to the current franchise tax, which includes an income component in its calculations and weighs heavily on capital-intensive corporations. That was also the bill's undoing: The comptroller's number-crunchers assume, for estimating purposes, that every business will take the cheaper of the two options. The House bill didn't include a minimum tax amount, and that opens the door to the sort of loopholes that have made the current franchise tax easy for most Texas businesses to avoid.

Business like the choice idea, and the House can go to the inevitable conference committee defending the structure of its bill, if not the exact rates or particular provisions. If they can make that work, it may yet turn out to be more palatable than whatever the Senate proposes.

Although it wouldn't raise enough to replace a third of local school property taxes, the House bill, according to Strayhorn, would actually stay in the black during the next budget cycle. That's because the state taxes would be starting up before the school taxes would be dropping. The comptroller said the first year would see income of $2.8 billion with no school taxes to replace. In the second year, school taxes would cost $1.8 billion more than the new tax bill would produce, but that first-year buffer would keep the state's cash flow positive. After that year, the numbers would start running red, in amounts starting around $2 billion annually and growing each year after that. In the five-year fiscal note, the bill ends up $4 billion in the red. In the context of that initial two-year budget, however, the thing would actually have a positive impact on state spending of about $1 billion.

A Matter of Presentation

This tax thing could have blown up quietly. Comptroller Carole Keeton Strayhorn's decision to widely distribute the fiscal note undermining the bill -- instead of working out problems behind the scenes with House leaders -- turned a nasty glitch in a tax bill into a public firestorm that angered lawmakers without directly boosting the comptroller's prospects.

Think how it would have been handled if allies had discovered they'd made a mistake. But House Speaker Tom Craddick chewed out the comptroller's top revenue estimator on the Friday before the bill came up and then, according to the comptroller and her aides, didn't ask for help over the weekend. Ill will was in the wind before the number-crunchers sat down after the House vote to see what the approved bill would actually do.

Whatever her motivation, Strayhorn's ambush on the House contributed to a growing problem: A lot of people in the Pink Building don't trust her agency. Historically, the agency's reputation was, "Those people sure know their numbers, but they might be might be messing in your business." Now it's flipped: "Those people are messing with you, but they might be right about the numbers." That's a significant change, moving the state's finance officer to a position of suspicion from one of trust. Everyone assumes there's a sniper somewhere in the trees whenever she's in the mix.

Before her staff finished calculating the tax bill, lawmakers and their aides were passing along rumors that she planned to short-sheet the tax bill and that she would say the related school finance bill was out of balance in the other direction. The rumored numbers were off, and the rumor itself was only half-correct, but lawmakers expected a shot and they got one. Relations began cracking two years ago, and reached a peak when, at the end of the last legislative session, Strayhorn momentarily refused to sign off on a state budget she said was out of balance. She backed off, but lawmakers were incensed enough to strip her office of its high-visibility performance reviews and to begin laying the legal groundwork to diminish her influence on budget numbers.

Now she's got the House worked up, and some political types came out of the turmoil saying she had effectively assured financing for any Republican who wants to challenge her in next year's elections. Agriculture Commissioner Susan Combs wants to run but has stopped well short of challenging the incumbent, saying she thinks the seat will be open. Strayhorn has all but said she'll be running for governor and not for reelection. And a challenge would be tough: Strayhorn is a strong campaigner — even her enemies think so — and she's already got $5.7 million in her campaign treasury.

Blue Moon

The House passed its version of telecommunications reform legislation — there's more fighting left in that one on the Senate side and, later, in conference committee — but killed a tax while they were at it. The Telecommunications Infrastructure Fund was set up during a reform effort years ago. It added a fee to phone bills to pay for improved telecom and Internet lines and equipment for schools, libraries, hospitals and such. And it was supposed to end when that purpose was served. But it's hard to kill taxes once they're in place, and lawmakers working on school finance had their eye on the so-called TIF money.

But the House, led by Rep. Senfronia Thompson, D-Houston, voted overwhelmingly to kill the tax. After she took to the microphone to "keep the promise" of killing the tax when it wasn't needed, the House voted 99-36 to support her. Unless they vote to put it back in — an idea that would require a bunch of people to change their votes on a tax bill — that one's cooked. The TIF brings in about $200 million annually, according to the comptroller's office. It's one of the components of HB 3, the tax bill that's supposed to finance a cut in local school property taxes.

• The House was all set to vote on a constitutional amendment capping growth in property values, but mistakes — and doubts among members about their votes — pushed the issue back a week. The legislation would cap annual growth in the taxable value of a residential or business property at 5 percent. Current law caps that kind of growth at ten percent.

Cities, counties and other local entities that depend on property taxes have been loud in their opposition to new caps. The legislation by Rep. Dwayne Bohac, R-Houston, sets up a constitutional amendment, which needs a two-thirds majority from both the House and the Senate. He'll find out next week whether he's got the support. Meanwhile, an alternative idea — capping growth in revenues collected from property taxes — is gathering steam. It wouldn't require a constitutional amendment.

Living Large

Talk to budget wonks about the Senate's proposed spending plan and you get this: "Well, it's big." And it is big, recommending a bottom line increase of nearly $13 billion, to $139.3 billion from $126.6 billion two years ago.

Before you spit up your breakfast cereal, add some caveats: The numbers in the old budget are understated; $3.9 billion of the increase is in federal and not in state funds; and the Senate tried to restore many of the items cut from the budget two years ago when budgeteers started the game $10 billion in the red.

And remember: At this stage, it's only a bargaining document. The senators and staffers who did all the work weren't wasting time, but the real budget will come out of the May mash-up between the House and Senate budgets in particular, and the school finance and tax bills, too, should those measures make it to the finish line during the regular session.

The state's supplemental appropriations bill hasn't been finalized or much detailed yet, but it could top $2 billion. That mini-budget covers the difference between current spending and the budget passed two years ago, covering increases in spending that weren't in that original blueprint. Like the objects in your car's rearview mirror, the budget behind us — the old budget — is larger than it appears after you add in the supplemental numbers.

If you watch the state budget, you know what's driving this thing: Education would get a $2.7 billion increase in general revenue (state money) in the Senate plan and another $2.7 billion increase would go into various health and human services programs, primarily health. The $6.5 billion overall increase in GR is dominated by those two areas.

Some points of interest in the Senate plan: It would increase state employee pay by 4.5 percent annually, including extra money to get state peace officers at or above what they'd make working for urban police departments; a mess of health and human services programs would be fully or partially restored and waiting lists would be reduced by five percent over two years; textbook programs that were slashed two years ago would be ramped back up; four student aid programs would be combined, including B-On-Time, college work study and both Texas Grants programs. The bill passed unanimously, but some senators complained that the growth in the budget, while it restores some programs to 2003 levels, doesn't cover inflation or the growth in the state's population.

It includes a $746 million with list that would cut waiting lists for HHS programs, move eligibility renewals from the current six months to every 12 months for CHIP recipients, add $80 million to college financial aid, put $100 million more into tuition revenue bonds, add $175 million to the higher education fund, among other things.

Hope on Hold

Rep. Ruben Hope has to sit on the runway for a little while longer. The Conroe Republican is in line for a district judgeship that would open up because of a widely rumored but as yet announced resignation. Judge Olen Underwood has let the governor and others know he'll give up his spot on the bench but will stay on as presiding judge of the state's 2nd judicial administrative district. Hope would get the robes and the 284th court, and his seat would open up for a special election. That started its own round of speculation about who might and might not run.

Hope, in an effort to cork the talk, sent a letter to Gov. Rick Perry and House Speaker Tom Craddick, copied to everyone in the House, saying he's not ready to leave. "It is my intention to complete this session," he wrote. He didn't say whether he'd stick around for a special session, but then nobody has officially said there will be such a thing.

Among other things, that means Hope will remain the chairman of the House Republican Caucus for the rest of the regular session, and with big bills passing with one- and two-vote majorities in place, it means Craddick and other Republican leaders will hang onto a much-needed likely vote for the next nine weeks.

Absence Makes the Quorum Grow Smaller

The redistricting session and the walkouts to Oklahoma and New Mexico inspired Rep. Dan Branch, R-Dallas, to file legislation that would make such out-of-state experiences pointless. He's got two proposals.

One is similar to legislation he proposed two years ago and would allow the Legislature to meet so long as two-third of the members currently in the state were present. The key phrase there is in the state. If 51 members left and only 99 were still in Texas, the House could meet and do business with as few as 66 members in the building. It currently takes 11 absences to bust the Senate; under this plan, the upper chamber could lose 11 senators to the charms of Albuquerque and meet with just 14 on hand.

Branch's alternative proposal would allow the Lege to meet so long as a simple majority was present. That's 76 in the House and 16 in the Senate. Both would require constitutional amendments, and thus, a public vote. That only requires a majority of the voters who show up.

Politics as Sport

A Missouri political firm put together a "presidential March Madness" game on the Internet that lets you vote in brackets to see which of 64 Republican politicians ought to advance, round by round, to be the GOP nominee in 2006. U.S. Sen. Kay Bailey Hutchison and Gov. Rick Perry are among the possibles, though both lost in the first round. He was a 13-seed, facing Sam Brownback of Kansas; she began as an 11-seed facing Bill Owens of Colorado. You can look, or vote, or both, at this website:

www.surveysaintlouis.com/marchmadness/Bracket.php

The two Texas officeholders in those presidential brackets didn't get out of their first-round matchups. Perry got 36.1 percent against Brownback; 836 votes were cast. Hutchison got 46.6 percent against Owens; 928 votes were cast. They would have to have survived until the fourth round before going head-to-head in the online game. They shouldn't feel bad: The mouse-pushers who voted against them also favored commentator and former presidential candidate Pat Buchanan. He beat Arnold Schwarzenegger.

Panning, or Mousing, for Gold

For a while there, cool Internet names were bringing in piles of money. George Strong is about to find out if that's still the case. The semi-retired Houston political consultant, now luxuriating somewhere around Crystal Beach, is ready to sell off the web domain name political.com if the market it hot enough. He says he's "considering offers" for it, and he's hired a firm to broker the deal if there's a deal to be brokered. He wants to see if there's anything to stories of good web names bringing big bucks. If the prices aren't any good, he says, he'll just keep the website — where he still posts political gossip every week or so — and hope it appreciates. Find the details at:

www.adastro.com/political.html

Political People and Their Moves

Who's the star here? U.S. Sen. John Cornyn plans a Dallas fundraiser after the Easter break that features guest of honor George P. Bush (nephew of George W., son of Jeb). And the invite includes a tidbit about federal campaign finance law, where contribution limits now move from year to year. "Cornyn Circle" members are being asked to give $8,000 per couple to the senator's campaign; the limits now are $2,100 per election per person. That translates to $4,200 per person for each election cycle: $2,100 for the primary election, and $2,100 for the general election. 

Carl Reynolds, the general counsel for the Texas Department of Corrections, is leaving that gig for the smoother waters at the Office of Court Administration, where he'll work for Wallace Jefferson, chief justice of the Texas Supreme Court. Reynolds has worked for the prison system for 11 years.

Marc Levin is taking a part-time gig — in real life, he's a lawyer — setting up the "Center for Effective Justice" at the Texas Public Policy Institute. That Austin-based think tank is moving into criminal justice issues and Levin will be executive director of that operation.

Gov. Rick Perry appointed three to the Texas Tech University System's board of regents: Larry Anders of Plano, Mark Griffin of Lubbock, and Dan Serna of Arlington. Anders is the top guy at Summit Alliance Companies, an insurance concern, and a Tech graduate.  Griffin is president and general counsel of Rip Griffin Truck Service Center, L.P., serves as president of Pro Petroleum, Inc., and is president of the Lubbock ISD board. He got his law degree at Tech. Serna, a former Arlington city council member, founded and now heads Serna & Company, a CPA firm. He's an alum.

The U.S. Senate okayed Jeffrey "Clay" Sell of Amarillo as deputy secretary of the U.S. Department of Energy. Sell, who was chief of staff to U.S. Rep. Mac Thornberry, R-Clarendon, for four years, moved to DOE from the White House, where he was working in legislative affairs.

Quotes of the Week

Cardinal Theodore McCarrick, the archbishop of Washington, D.C., quoted in The New York Times as he and other bishops start a campaign against the death penalty: "We cannot teach killing is wrong by killing. We cannot defend life by taking life."

Paul Weyrich, chairman of the Free Congress Foundation, defending U.S. House Majority Leader Tom DeLay in a commentary quoted by The New York Times: "If we let him hang out to dry, how many others in leadership will ever risk trying to accomplish bold objectives?"

Deputy Comptroller Billy Hamilton, after House changes to business taxes threw the school finance bill out of balance: "People have been struggling with how to reform this tax for an entire decade... you have problems when you're trying to do something people haven't done in 10 years in two days."

Rep. Dwayne Bohac, R-Houston, fighting back an amendment that would have changed his legislation naming a road for Ronald Reagan Highway to one naming it for George W. Bush: "President Bush is still with us, and history is out, somewhat, on his success."

Frank Sturzl, executive director of the Texas Municipal League, quoted by the San Antonio Express-News on appraisal tax caps: "We're going to continue to oppose them until the last dog is dead."

Smith County Constable Dennis Taylor, in an Associated Press story about two men who dismantled a house over several weeks and sold it for drugs: "Everybody drove by and waved at them."

Texas Weekly: Volume 21, Issue 39, 28 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.