It's Not Dead Yet!

And for a tax bill that's been on the ground for 48 hours — with few surprises after all the leaks of the four months — that's remarkable. This one's going to sit out for 19 days before legislators convene to officially consider it, plenty of time for opponents to chew on it.

The tax bill assembled by two dozen business leaders and former Comptroller turned tax consultant John Sharp hasn't attracted a big cheering section yet. But passing a tax bill is more about the opposition than the support, and only a few groups have come forward to spit, including lawyers, who think it's a personal income tax and that the exemptions on pay are too low; and doctors, who say the state ought to credit them for charity care against any new taxes it imposes on their businesses.

Gov. Rick Perry and Sharp have been working up a marketing rollout to promote the tax. The details are sketchy, but they and their troops have talked about a possible run of television and radio ads, and a direct mail program that would promote the benefits of the property tax cut to homeowner/voters. They're also doing the normal things — like holding press conferences all over the state to get local coverage promoting the plan.

Their first step, partly complete, was to minimize opposition. They removed a proposal for a half-cent sales tax increase, replacing that revenue stream with surplus money already in state accounts. That removes objections to sales taxes voiced by Democrats, who think those taxes rest too heavily on lower income Texans. Realtors and construction companies won provisions that let them deduct some broker payments and payments to subcontractors as costs of goods sold. Businesses get a choice of which kinds of things they want to deduct — employee or other costs — when they're figuring their tax bills. That solved a problem balancing the worries of labor- and capital-intensive concerns. Retailers and wholesalers, which often operate at lower profit margins, would pay only half the tax rate paid by other businesses. Bankers get to count interest they pay as a cost of goods sold, deducted from the new receipts tax. And so on.

Next, Perry has to sell lawmakers on the idea. The last two big state tax increases were in 1987 and 1991. Both times, the state was strapped for cash and facing new or continuing court orders that made spending cuts impossible. This time, they're trying to pass a state tax while there's at least $4.3 billion in the state's accounts and indications that high sales tax and fuel tax revenues will add another $2 billion to $2.5 billion.

Democrats have said they want more money for public education — not just a swap of state for local property taxes. They, and some Republicans, too, have said teachers ought to get a pay raise out of this fight (for back of the envelope purposes, a $1,000 increase in pay costs the state roughly $300 million a year). Perry says he'll limit the special session agenda to the tax swap, but has also said he'll consider other items once that's done and gone. His plan leaves enough of the state surplus in place for the first year of a teacher pay raise, but using it for that (or anything else) summons the specter of a tax increase or difficult budget cuts during next year's regular session.

Meanwhile, a faction of Republicans wants to skip the tax talk and use the surplus to temporarily patch school finance. That might hold the courts at bay until a permanent solution can be worked out in January, but there's also bipartisan opposition to spending the surplus. The budgeteers from both parties say it would set the table for a tax increase in January. Because of the time it takes to get a new tax up and running, that wait could force a more expensive solution than what's available now.

And there's an argument — started by the Center for Public Policy Priorities and gaining traction at the Capitol — that all or part of the surplus is illusory (get a full copy of their report here). The money is there, but the state's growing population pushes up the cost of government even if no new programs are added. Some items in the current budget are underfunded and will force a supplemental appropriations bill — a draw on the surplus — at the beginning of next year's session, they contend. Those costs gobble up most of the surplus money and if lawmakers spend it on school finance, they'll have to find new revenues or make new cuts to bring the budget into balance.

A counter-argument comes from the Texas Conservative Coalition Research Institute, which recommends using the entire surplus for property tax relief, to dedicate future surpluses to the same sort of relief, to adopt constitutional limits on spending increases, and to continue the state's reliance on consumption taxes, like the sales tax.

The tax commission uses some surplus money — the exact amount isn't spelled out in their plan — to cover some of the costs of property tax relief between September of this year and May 2008, when the new business tax would be collected for the first time.

What's in This Thing?

Don't want to read a tax bill? We've extracted highlights from the tax legislation assembled by Gov. Rick Perry's Texas Tax Reform Commission, which included former Comptroller John Sharp and 23 business leaders from around the state. (There's a list of the whole crew on their website, at www.ttrc.state.tx.us, and you can get a copy of the legislation there as well. Also available on the commission's site: Their report, titled "Tax Fairness," which says the tax plan would increase the state's share of the cost of public education to 50 percent from the current 34 percent.  

Property tax cuts

• The cap on school property taxes would be lowered to $1.30 from $1.50. Most school district tax rates are well over $1, but not all of them. The tax bill would knock rates down 50 cents, in two whacks, but only until the rate is $1. Below that, and school districts wouldn't have to cut. And since the court said the schools have to have discretion over their rates, the state can't stop local officials who want to use some of the headroom to increase education spending in their districts.

• The tax break for homeowners wouldn't come all at once; the first year break would be 17 cents under the Sharp commission's plan, followed by another 33 cents a year later. On a $150,000 home (ignoring deductions), that would save the taxpayer $255 in year one, and a total of $750 in year two and thereafter (depending on what the local school board does with future tax rates).

• State officials on the November ballot have a sweetener built into the tax bill: Local tax officials have to mail a letter to property taxpayers telling them about their tax cuts — at the beginning of October. Those letters should land about two weeks before the start of early voting. A letter like that would generally come from the state's top tax official, the comptroller. But the legislation calls for the Secretary of State to write it and sign it for the county folks to mail. That takes Comptroller Carole Keeton Strayhorn, who's running against Perry, out of the equation and puts Roger Williams, a Perry appointee, in the position to share in the glow of the tax cut.

Business tax increases

• The current corporate franchise tax would be repealed and replaced by a new tax on adjusted gross receipts. To figure its taxes, a company would start with its gross receipts and subtract its choice of cost of goods sold or employee compensation. A company would subtract its out-of-state business. At most, a company would apply taxes to 70 percent of its gross receipts. After it computed its "margin," it would multiply that by its tax rate, and send the resulting dollar amount to the state. Some businesses own real estate, and they'll get some of the property tax break that's funded by the new business tax.

• The tax rate for retailers and wholesalers would be one-half of one percent. For everyone else in the business world, it would be one percent. Businesses would pay the tax whether they make or lose money, so long as their deductions don't outrun their gross receipts. That's also true of the current franchise tax, and it's a defense against claims that this is an income tax in disguise.

• Sole proprietors would be exempted. So would partnerships, if the partners are people (and not companies or whatever). Passive entities — businesses that make their money primarily from investments instead of from business activity — would be out.

• Businesses with total revenue under $300,000, or whose tax bill would amount to less than $100, would owe nothing. That $300,000 limit would be adjusted every two years according to the Consumer Price Index, rounded to the nearest $10,000. As with current law, that last dollar in income could prove expensive. A company with gross receipts of $300,000 would owe no tax, but a company with $300,001 in gross receipts would owe taxes on all of its business — not just that last dollar. In the worst case, that'd be $2,100, though in most cases, it would be a much smaller amount. Still, it could make for some interesting late-December prices at small businesses.

• The provisions exempting proprietors, partnerships and small businesses would keep well over half the state's businesses out of the taxpayer class.

• Businesses wouldn't be allowed to deduct more than $300,000 in compensation to one employee from their receipts when they're computing their taxes. Like the cap on small businesses, that limit would be tied to the Consumer Price Index.

• The compensation a company can deduct would include actual pay, stock options that are expensed by the company, health and retirement and other employee benefits. The $300,000-per-employee cap applies to the total of all of those things.

Miscellany

• The bill includes a $1-per-pack tax increase on cigarettes, or a nickel per cigarette; taxes on other tobacco products would rise to 40 percent from the current 35.213 percent.

• The bill has a section that requires the 1,000 biggest businesses in the state — identified by the comptroller from income and employment data — to file reports as if the new tax had been in place in 2006 and to compile a report for the Legislature from that data to show how much money would have come in. It's not supposed to identify the companies, but apparently is intended to be a guide to budgeteers who start a regular session in January.

• Another provision anticipates a challenge to the new tax on the basis of constitutionality. Read that to mean a professional suing on the grounds that this is a personal income tax. The case would go to district court and appeals would go directly — and quickly — to the Texas Supreme Court, skipping the intermediate courts that might slow things down.

• What's known as the "Liar's affidavit" is in here; it forces people selling and buying cars to use the higher of their sales price or the blue book value (maintained by the Texas Department of Transportation) as the basis for the sales tax.

• If it passes this spring, the new business tax would come due for the first time in May 2008, based on activity in 2007. If lawmakers don't do anything until January, they'll have to figure out what dates they want to use. The slow startup is one reason they're using $1 billion from the state's surplus in the tax plan. That money will be replaced, commissioners said in their report, by revenue from the new tax that will be up and running in two years.

House Starts

What happens in the special session on school finance is mainly up to the 150 people in the Texas House of Representatives. Not that the Senate's unimportant, but when the state needs to raise new money, it has to start in the lower chamber. And that's where the first signs of success or failure in a special session will appear. (It's also why the handicappers aren't paying much attention to the Senate at the moment.)

The House has to decide whether it wants to pass a tax bill, and if so, how so. A tax bill that includes a number of different taxes — what's known legally as a general tax bill — is open to big changes in the Senate and in conference committee. A narrowly defined tax bill is safer from amendment, but lacks the protection of a big bill, which lets members explain their vote for a distasteful thing by pointing to a favorable thing that was part of the overall package.

If the House doesn't pass a tax bill — if, for instance, it passes a bill appropriating some of the surplus to finance a school tax reduction — the only option open to the Senate would be to go along or pass nothing. Tax bills have to start in the House. It doesn't matter at that point what senators want to do about school finance; the House is in control.

To do what the governor is proposing will require both a tax bill and an appropriations bill. Perry's plan is out of balance without using part of the state surplus.

Reviews, Notices, Kudos, Jabs, and Even Endorsements

The state's top legislative leaders gave the release of the plan tepid receptions. Lt. Gov. David Dewhurst said he and the Senate "look forward to reviewing the recommendations." House Speaker Tom Craddick stayed out of the top of news stories with this quote: "I am happy to hear that the Texas Tax Reform Commission has released its report." He said he was looking forward to the public hearing on it. Democrat Chris Bell, who's running for governor against Perry, said the Guv's plan is flawed because it doesn't put more money into schools and because it uses money from the state surplus. Comptroller Carole Keeton Strayhorn, whose agency will be putting numbers to the bill, teed off on Gov. Perry — her target in the November gubernatorial election — saying his bill raises taxes and doesn't do anything for schools.

Perry's office touted a study from the Perryman Group that said (without the benefit of fiscal estimates from the comptroller) the tax bill would result in a $794 million increase in gross state product, an increase of $216 million in personal income for Texans (almost $10 for every human in the state), and an increase of 11,265 permanent jobs. Those changes, according to that estimate, would in turn generate an extra $301.2 million in state tax revenues.

Teacher groups like the Texas State Teachers Association and the Texas Federation of Teachers want the Legislature to put more money into schools. So do House Democrats, who objected to what they called "deficit spending" — the surplus — and the absence of new money for schools.

The lawyers who represented the school districts in court say more resources for the schools are implicitly called for in the Texas Supreme Court's decision in the case.

The Texas Association of Builders and the statewide association for Realtors endorsed the plan, as did the newly formed Texas Association of Manufacturers.

The Center for Public Policy Priorities called it the "best business tax proposed to date", but remained critical. That outfit says the proposed tax is a net tax cut (because it uses surpluses to balance). And they're not convinced revenues from the new tax will grow as quickly as revenues from the tax it's replacing, which could cut into future school spending.

From a Philip Morris spokesman on the proposed $1 increase in cigarette taxes: "Texas should not be raising taxes on consumers when the state has a budget surplus." The tobacco company calls the nickel-per-smoke increase a hit on consumers. The Texas PTA singled out the cigarette tax as their favorite provision of the bill, saying it'll cut teen smoking.

How Far is Too Far?

He won the fight and it's three weeks old now, but Rep. Tommy Merritt says he'll pursue the defamation lawsuit he filed against his opponent before the primaries.

Merritt sued Mark Williams during the campaign, alleging the level of BS dished by his fellow Republican had crossed the line between smash-mouth politics and character assassination. Williams said on Election Night that he would support the party nominee. And during the campaign, he maintained that the things he said about Merritt were true.

Williams was one of five Republicans challenging incumbents with nearly all their financing coming, via a PAC conduit, from Dr. James Leininger of San Antonio. Leininger, an advocate of publicly funded vouchers for private schools, knocked off two of his five targets. But Merritt, after filing the lawsuit and after he ran ads featuring his wife talking about how nasty the politics had become, survived the challenge. Now he'll press forward with his lawsuit.

Unsparked

U.S. District Judge Sam Sparks recused himself from Carole Keeton Strayhorn's lawsuit against the state. She went to court over Secretary of State Roger Williams' statement that he'll go over every signature on her petitions before he'll put her on the ballot as an independent candidate for governor. She's for sampling, which is faster. Williams says the presence of two or more candidates presenting petitions -- her and Kinky Friedman among them -- complicates the process since signing more than one petition disqualifies a voter. He says they've got to check them all to get it right. The courts will settle that, but Sparks is out: He said in the attached order that he and his wife signed Strayhorn's petition.

The recusal sends the case to U.S. District Judge Lee Yeakel, also of Austin, and gives Strayhorn a rare chance to list the support of a federal judge for a political campaign. Judges can't endorse candidates, but in this case, the lawsuit flushed out Sparks' preference.

Yeakel met with the lawyers for the state and for Strayhorn — Randall "Buck" Wood of Austin is arguing her side — and set a hearing for May 1. Their argument is that sampling is faster than checking every name on every petition for every candidate, and is for all practical purposes just as accurate. Waiting for two months for verification, on the other hand, would stymie campaigning and fundraising, since supporters of Strayhorn (and Friedman) wouldn't have any assurance their candidate's name would appear on the ballot.

A spokesman for Williams says it took the state two months to verify petitions for presidential candidate Pat Buchanan in 2000, and that was using sampling. Ross Perot, who got on the ballot by petition in 1992, got on a little bit faster than that. They got the two-month time frame from past experience, he said.

Report the Cracker Jacks, Hide the Prize

If you missed it, the Texas Ethics Commission has provided what some agitators say is a roadmap for funneling gratuities of any size to public officials.

Bill Ceverha, a former House member who's now on the board of the Employee Retirement System, got a check from Houston homebuilder and GOP political financier Bob Perry, and he reported it, as required by law, saying he'd received a check. He didn't say how much it was for, however, and Texans for Public Justice and Rep. Lon Burnam, D-Fort Worth, among others, complained to the Texas Ethics Commission.

That panel went into closed session to talk about the issue and while their deliberations were secret, the commission is not going to require Ceverha to say whether the check was for $1,000 or $1 million. In the eyes of the TEC, he met the legal requirement by reporting that he'd received a gift: a check. The argument on the other side was that the check was just the conveyance for the real gift of money, but that apparently didn't get any traction.

The check came into Ceverha's hands after he lost a civil suit that bankrupted him: a state district judge held him responsible — as the treasurer for Texans for a Republican Majority PAC — for money used in several campaigns in 2002 that wasn't reported legally.

The ruling appears to mean that a public official is okay if a gift goes on the books as a check even if the amount is unreported. Other laws on bribery and corruption might apply — it's still illegal to take a private paycheck for official action — but if the giver doesn't specify a purpose or a quo to go with the quid, it appears to be okay to write a check. And to take one.

Flotsam & Jetsam

Texas is one of the lowest-tax states in the country, according to the U.S. Census Bureau. That outfit says Texas collected $1,434 in taxes per capita in 2005 and reported that only South Dakota, at $1,430 per capital, was lower. The national average was $2,192. And the states on the high-tax end of the list were, in order, Vermont ($3,600), Hawaii ($3,478), Wyoming ($3,418), Connecticut, $3,300, and Delaware ($3,229).

• The counting wasn't complete when we put this issue to bed, but Rep. Carter Casteel, R-New Braunfels, hadn't gained any ground on Nathan Macias in her recount of the March primary. She lost on Election Day by 45 votes; that number has wiggled some — in Macias' favor — but the results hadn't changed. Casteel had said she was skeptical about turning around the result but felt she owed it to supporters after such a nail-biter.

• Brian Keith Walker, in a Republican runoff in HD-11 in East Texas, won endorsements from Rick Scarborough, founder of Vision America; the Texas Club for Growth and the Texas Free Enterprise Fund.

• Tan Parker, in the runoff in Denton County's HD-63, gets an endorsement from Scott O'Grady, the pilot shot down and then rescued almost a week later in Bosnia. O'Grady's now a student at the Dallas Theological Seminary.

• Former pro golfer Terry Dill, who finished out of the money in HD-47 in Austin, endorsed Alex Castano in the runoff against Bill Welch. Another first-round loser, Rich Phillips, also endorsed Castano.

• Boyd Richie picked up another endorsement in his bid for Democratic Party chairman; former House Speaker Pete Laney added his name to the list. Richie's helpers say he's already got 40 of the 62 votes he needs to win from the State Democratic Executive Committee next month.

• The Lone Star Project, a Washington-based hive of Texas Democrats, has baked up an election simulator that purports to model the gubernatorial election for you. It's an actual spin machine, if you think about it, making the case for Democrat Chris Bell against Gov. Rick Perry and showing how difficult the Democrats think it would be for Carole Keeton Strayhorn to pull off a win. It's interesting to fiddle with, and you can do it yourself on their website: www.lonestarproject.net/2006votesim.html.

Political People and Their Moves

Amarillo Mayor Debra McCartt is Gov. Rick Perry'snewest appointee to the Texas Department of Information Resources.

Perry named T. Paul Furukawa of San Antonio and Mamie Salazar-Harper of El Paso to the Family and Protective Services Council and reappointed Cristina "Ommy" Strauch of San Antonio to that panel. Furukawa is executive director of Children's Association for Maximum Potential. Salazar-Harper is president and owner of M Rentals, and Strauch is a human resources consultant.

Monica Piñon is leaving the offices of Rep. Joe Pickett, D-El Paso, for a new job at the Texas Department of Insurance.

Move Mark Moreno back to Houston and back to the UT M.D. Anderson Cancer Center, where he's the new veep for government relations. Laura Smith, previously with Texas A&M's Health Science Center, moves into Moreno's job at the UT Medical Branch.

Dick Sherron of Beaumont will get another run as president of the Texas and Southwestern Cattle Raisers Association. Jon Means of Van Horn was elected first vice president at that group's convention and G. Dave Scott of Richmond will be 2nd veep and secretary.

Quotes of the Week

John Sharp, laying out the Texas Tax Reform Commission's proposal: "My greatest hope in this is that for the next 50 days, politicians in Texas will set aside their personal and political goals on behalf of what the greater good of the state of Texas is about. My greatest fear is that that won't happen."

Former Texas Comptroller John Sharp, talking in The New York Times about some lawyers' opposition to paying a new business tax: "They think God sent them here not to pay any taxes, and by God, they want to do what God wants and that is not tax themselves."

Rep. Rob Eissler, R-The Woodlands, assessing the influence of educators in the last election, in the Fort Worth Star-Telegram: "They were pretty much opposed to everything we tried to do. But let's give them their due. They targeted Kent [Grusendorf] and they beat him. The reason you are seeing many taking a fresh approach is that we are, shall we say, acknowledging their existence."

Rep. Burt Solomons, R-Carrollton, on the mood of the House: Right now you couldn't get 76 members of the Legislature to spit in the same direction, much less pass a tax bill."

Rick Scarborough, who contends Tom DeLay's public faith has made the congressman a target and led to his political and legal troubles, quoted in the Washington Post consoling DeLay after a speech: "God always does his best work right after a crucifixion."

Democratic gubernatorial candidate Chris Bell, quoted in the Fort Worth Star-Telegram on Carole Keeton Strayhorn, a Republican officeholder running for governor as an independent: "Please don't be fooled by Mrs. Strayhorn. She can call herself an independent; I can call my dog a horse, but it's still a dog."

Texas Weekly: Volume 22, Issue 39, 3 April 2006. Ross Ramsey, Editor. George Phenix, Publisher. Copyright 2006 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 info@texasweekly.com. For news, email ramsey@texasweekly.com, or call (512) 288-6598.