Who'd Have Thunk It?

If tax bills were lions and senators were acrobats, that would have been a helluva circus.

Play it back: The Texas Legislature, in just 29 days, passed the biggest tax bill in state history, talked and spent away the largest budget surplus in state history, unknotted (for now) a school finance problem that has bedeviled them for years, cut local school property taxes by as much as a third, increased teacher pay for the first time in six years, and did it all without inciting the sort of mob action that often attends these things.

It didn't seem possible a couple of months ago. Conservatives began this exercise saying they weren't interested in raising taxes, especially when the comptroller said the state had $8.2 billion on hand. Actually, they were raising those objections when the estimate of extra money was merely $4.3 billion. Rep. Warren Chisum, R-Pampa, originally gave voice to that idea. And he was the sponsor, ultimately, of the bill that used the surplus for the first part of the local tax cuts and for the first round of teacher pay raises. Democrats were opposed to the idea of focusing on property tax cuts instead of increasing education spending, but most came on board when a $2,000 teacher pay raise was added. Business groups complained at the size of the tax bills, but ultimately put a sock in it and played along.

The tax bills that passed — three of them, which will bring in $4.7 billion a year in new money when they're up and running — will fund some of those costs in future years. And there's argument over whether the money raised during the session will match up with what was spent. Time will tell. But it's worth noting that state lawmakers, faced with court deadlines, election threats, a business tax proposal that didn't arouse significant opposition, got the job done.

Some program notes are in order.

House Speaker Tom Craddick led the House without bossing it this time, setting up the five bills in the package so that nobody on his side was forced to make a "gut" vote of the type that marred previous sessions. The legislation was arranged so that the mostly Republican House members could vote with management and without voting against their local interests.

The Texas Senate, either by design or accident, is starting to see the rise of strong senators after a few sessions where they often acted as middle managers under Lt. Gov. David Dewhurst. That's closer to the upper chamber's tradition, where a group of strong personalities sometimes stampedes, but it's new for this bunch. They still ended up with a 31-0 vote somehow, but there were more hands in the pie, on all sides.

Gov. Rick Perry finally got a win, after breaking off his long estrangement from former Comptroller John Sharp and combining his own public skills with Sharp's inside skills. Perry's tax reform commission came up with a business tax that raises almost $6 billion a year (that number gets reduced by $2 billion because of the repeal of the current corporate franchise tax that raised that amount). And they got it passed with almost unanimous support from business groups that usually fill the Capitol to kill new taxes.

Some questions remain.

• Don't be surprised if there's a lawsuit challenging the new business tax on the grounds that, for some people in partnerships, it looks and feels a lot like a personal income tax. If courts agree, that would make the tax unconstitutional.

• It's hard to tell for sure how much the new business tax will raise. Several thousand big businesses have to file informational returns at the end of the year so state tax experts can get a peek at real numbers.

• Lots of businesses stayed quiet during the special session so they wouldn't get chewed up in the politics of this thing and because they have plenty of time to ask for changes before the tax comes due. The first tax returns aren't due for almost two years — May 2008 — and there's a regular legislative session between now and then. A Senate bill that was supposed to carry loads of fixes died under its own weight, but watch for "corrections" next January.

• There's an election in November. Sometimes, those things change people's minds about what ought to be in the law. For instance, at least gubernatorial candidate wants to repeal the new tax law. At least two of the five candidates want a bigger pay raise for teachers. And so on.

Good Enough?

The new setup for school finance would be familiar to any sharecropper, but lawyers on both sides think it might suit the courts, for now. Local school districts are the farmers. The state owns the land. And the state gets 97 percent of the crops.

That's not a made-up number: The state is putting up enough money to lower local school property tax rates to $1.33 the first year, and telling districts they can raise 4 more cents locally for local spending. Anything above the four cents would require voter approval. If it stays at four, the state would get $1.33 out of every $1.37, or 97.1 percent.

That's skinny, and lawyers for the school districts will be watching those numbers for a couple of years to see whether this new setup works. The courts, you'll remember, said the old system was out of whack because the state's requirements of schools used all the local money and forced districts to raise taxes. That, in effect, turned the local school taxes into an unconstitutional state property tax. The districts have to have what the courts call "meaningful discretion" over their own taxes for the system to be legal.

The state is hoping the infusion of new state money to lower local property taxes, and the freedom to add on four cents for local spending, will give the districts enough say over the taxes they levy.

Early reviews from the school lawyers — they're still talking to the districts they represent and this could change — is that the legislative fixes should be okay for now.

As this evolves, one of their attorneys, J. David Thompson, says they'll be watching two things. First, whether the state lays on any new education requirements without funding them. Once the districts have their rates down to $1 — the legislative target for January 2008 — that's supposed to match the state's requirements. If it takes more than $1 to do in schools what the state requires, then districts will have to return to raising local "enrichment" money to pay for what are supposed to be basic expenses.

Thing two is related. As costs rise from inflation or enrollment or whatever, will the state fund the increases or force districts to get into their local enrichment funds for basics? That's part of what got the state into its current fix in court. Thompson and others say it'll be one of the indicators of whether this is working over the next few years.

Those lawyers are also meeting later this week with lawyers for the state to talk about whether the legislation takes care of the courts for now or whether there's something more to debate. Dallas lawyer George Bramblett Jr., whose West Orange-Cove group actually won the injunction forcing the Legislature to do something, says he thinks the Legislature's fix is both commendable and short of a real resolution. But, he says, it might do for now. "This is still temporary... in the long term, it's still not a comprehensive review and change of the school finance system. All they did was take an old structure and tweak it around," he says.

Bramblett points to the adequacy of the state's funding for schools as a possible issue of future contention. The state argued that the courts should stay out of whether the schools do an adequate job of educating Texans and how much that should cost; the Texas Supreme Court, among others, rejected that idea. If state funding in the future doesn't measure up to that standard, Bramblett and others say the fight could be rejoined.

He's not for suing again — he says he had hoped to get this far without a lawsuit — but he says only two things drove lawmakers to act this time: The June 1 deadline imposed by the courts and, to a lesser extent, the fact that the Public Education Chairman in the House, Rep. Kent Grusendorf, R-Arlington, lost a Republican primary election where school finance was part of the argument. That's never happened before, and he thinks it helped focus lawmakers.

Sticks and Stones, and Numbers

Your state comptroller, who wants to be living in the Governor's Mansion a year from now, says she will repeal the new business tax if she gets that job.

Carole Keeton Strayhorn's state office hasn't officially scored the bill yet, but she's blasting at it from her campaign headquarters, saying it will be $23 billion out of balance after five years and that it doesn't put any new money into education.

Gov. Rick Perry characterizes the five-bill school finance package as a net tax cut — one that spends more than it raises. And he and former Comptroller John Sharp, who helped devise the new business tax, say the state's economy will get a boost that will produce enough business and enough new state revenue to cover that difference.

Those are the bones of the stories the two candidates will be telling during the coming campaign for governor. Perry will tout lower property taxes, fairer business taxes and a solution to school finance. Strayhorn will stress the increase in business taxes, the lack of new money for schools, and the relatively skimpy pay raise for teachers who she says deserve more.

Strayhorn disagrees with Perry's optimism that the new tax rig will boost the economy, as does the Legislative Budget Board analysis of the plan; both say the bills cost $3 billion to $5 billion more than they brings in each year. The difference, she says, will have to be raised in other taxes, from an expansion of legalized gambling and/or other sources, or would have to be saved with cuts to other programs. Neither she nor the LBB tried to predict whether the economy will surge as a result of the change in taxes.

Perry cited studies from three different economists who contend the legislation will boost the economy and will, in spite of the "snapshot" numbers from the LBB and the comptroller, become a net plus to the economy. The state numbers don't include the impact of lower property taxes, and the politicos and the economists working for them say that'll make all the difference.

The raw numbers from the LBB, taken from the fiscal notes of four of the five bills (HB 2 directs the use of money, but doesn't actually raise or spend any, according to the analysts), show a net deficit to the state of $25.1 billion over five years. The first couple of years of that rely on the state surplus — also not included in the revenue numbers — but two thirds of the negative numbers are in years three, four and five. If the economists are right, no problem. But it's safe to say some of the number crunchers are anxious about the "out years."

Nearly all of the spending happens in HB 1, where the property tax buy downs are spelled out. The annual numbers top $10 billion after a few years, while income from the new business tax and from increased taxes on used cars and cigarettes bring in just under $5 billion annually.

An analysis of the LBB numbers by an outside group — the Texas Taxpayers and Research Association — concluded the package will cost $3.5 billion in the current budget, $10.8 billion in the next, and $11.5 billion in the two-year budget after that one.

Actual mileage may vary. You can find arguments all over Austin about how much the new business tax will bring in. The LBB's estimate, based on numbers from the comptroller's office where the tax will be collected, is that the new tax will bring in almost $4 billion annually when it's up and running (that's after the current franchise taxes revenues are subtracted out). Some business people we know — and some of their lobbyists — think that number is low.

For now, this is what the official numbers look like, and these figures are what lawmakers had in hand when they voted.

Grassroots Politics

From the back, it sounded like a question hatched after Democrats waylaid the school finance/tax reform package. The question itself was half-audible, but Gov. Rick Perry's answer was clear: "I'll be signing that piece of legislation gladly and with great joy." But the question wasn't about criticism from the Democrats — it was about the Harris County GOP's vote demanding that Perry veto a central portion of his legislation.

The executive board of the governor's party in the biggest county in the state is against his tax plan. That's not necessarily meaningful; opposition from conservatives didn't do much to slow the passage of the five-bill legislative package through the Legislature during the special session.

But it's a pesky noisemaker inside the tent, and Perry is busy trying to gather his base together to fend off challenges from four candidates. One of those wannabes, Comptroller Carole Keeton Strayhorn, is running as an independent but holds office because of the support of some or all of the same people who put Perry in office. The Perry spin is that Strayhorn has lost all Republican support and won't profit from this. Strayhorn's is that Republicans and others looking for an alternative to Perry will look first to her. Democrat Chris Bell will tell you a split on the elephant side looks good to a donkey.

The Harris County resolution didn't even make the Harris County GOP's website, at least not immediately. But anti-tax activists Steven Hotze and Norman Adams, who couldn't find any traction in the Legislature, is having more success at home ginning up the ire of reflexively anti-tax activists.

Meanwhile, in Your Other Pocket

School tax cuts will cost cities and counties some money.

Budgets for county appraisal districts are funded with money from the cities, counties, school and other districts that levy property taxes. Each local government's share of the costs is related to its relative size on people's property tax bills. The drop in school property taxes brought on by the Lege's new school finance package will cut what schools have to pay the CADs, but will increase the amounts paid by the cities, counties, hospital districts and others that aren't lowering their rates. The CADs don't save any money, so their budgets won't drop. But the price will shift from the schools (which will still likely pay the most) to the others. The Texas Municipal League estimates the average city will see a 6.7 percent increase in its CAD funding in year one of the tax cuts, and another 16.5 percent in year two. That's an average increase of 24 percent by 2008.

It's not a huge amount of money, in most cases; TML officials say the increase will be $10 million to $15 million statewide. And it'll be about the same for counties. Right now, cities pay about 15 percent of the CAD costs, and counties pay about 14 percent. School districts pay about 60 percent, and special districts pick up the rest.

This Will Be on the Test

Republican comptroller nominee Susan Combs says she'll review any rules on the new tax bill that are cooked up by the current comptroller. The tax wonks who work for Carole Keeton Strayhorn started working on rules and collection and startup issues before the tax bill was even out of the Legislature. That's their job, but it made some political brows furrow at the idea that one of Gov. Rick Perry'schallengers was tinkering with his new business tax. Combs isn't saying she'll change anything if she's elected to succeed Strayhorn, just that she might.

• Only eight lawmakers voted against HB 1 after teacher pay raises were added to the property tax relief and other provisions in that legislation. All are Democrats: Lon Burnam of Fort Worth; Garnet Coleman of Houston; Jessica Farrar of Houston; Rick Noriega of Houston; Rene Oliveira of Brownsville; Eddie Rodriguez of Austin; Marc Veasey of Fort Worth; and Mike Villarreal of San Antonio.

Political People and Their Moves

Kent Sullivan is giving up his robes to be first assistant to Texas Attorney General Greg Abbott. Sullivan, a state District Judge in Houston, was a private practice attorney for 21 years before that. He'll replace Barry McBee, who's leaving to join the University of Texas System.

Edward Johnson, at the tender age of 29, is the new executive director of the Texas Building and Procurement Commission. A former House aide, he's been at that agency for three years. He's been the interim ED since January, and the board made it official this week.

ERCOT chief Thomas Schrader is leaving that agency. He came on in the wake of a scandal that ended with criminal charges against several ERCOT execs. He'll be replaced in the short term by Sam Jones, who'll be in the top spot until the board finds a new CEO for the power agency.

Former state Rep. Patricia Gray, D-Galveston, is joining the University of Houston's Law Center as director of research and external relations; she'll also teach a course there on legislating health policy.

 Steve Robinson, the former head of the Texas Youth Commission, is joining the Austin office of MGT of America. That consulting firm also employs former Texas prison chief Wayne Scott in its criminal justice practice.

Maybe you didn't about the Advisory Board of Athletic Trainers, but the state has one, and it has two new members. Gov. Rick Perry appointed Dr. David Schmidt of San Antonio and David Weir of College Station to that panel. Schmidt has a sports medicine practice and is the team doctor for the Spurs; Weir is a trainer at Texas A&M University.

Perry named Dr. Mark Mayberry of Abilene to the Texas Medical Board's district three review committee, and Noe Fernandez of McAllen to the district four panel. Those committees make recommendations on investigations of medical practice and competency.

David Allex of Harlingen will stay on the Cameron County Regional Mobility Authority; Perry reappointed him.

Perry reappointed Samuel Loyd Neal of Corpus Christi and James Maloney of El Paso to the Texas Military Preparedness Commission.

And Perry named McKinney attorney Michael Puhl to the Texas State Board of Examiners of Marriage and Family Therapists.

Quotes of the Week

Rep. Suzanna Gratia Hupp, R-Lampasas, telling other lawmakers she'll remember them when her term is up at the end of the year: "When I'm cleaning my horses' stalls, I'll be thinking of you."

House Speaker Tom Craddick, adjourning sine die: "It is the chair's hope that we do not see you in session again for the rest of the year."

Rep. Carter Casteel, R-New Braunfels, telling the San Antonio Express-News that the new school finance package doesn't balance over time: "We are just so lied to. We're being told, 'I'm going to fill your left pocket' and while you're sitting there asleep, they're going to take it out of your right pocket."

Comptroller Carole Keeton Strayhorn, saying the new school tax package doesn't balance: "Rick Perry's so-called property tax cuts are going to go poof."

Gov. Rick Perry, on criticism from his gubernatorial rivals: "When you talk about leadership, you don't just sit around on the sidelines and criticize. You come up with a plan, you lay that plan out and you work diligently to see that plan pass. You don't just sit around and complain and gripe and bellyache without laying a plan out of your own."

Democratic consultant Mike Lavigne, on the tax plan's effect on Strayhorn, quoted by the Associated Press: "Strayhorn was definitely banking on nothing passing the Legislature and was hoping to run on a train wreck. She's in a tough spot."

House Speaker Tom Craddick, telling the Midland Reporter-Telegram he thinks the courts will approve of what lawmakers did in special session and let the state out of the school finance lawsuit: "If it doesn't pass, we need a new attorney general because he told us this would work."

Rep. Scott Hochberg, D-Houston, on the special session: "We have not changed anything in that regard except to take the promise of a long-term funding source and dedicate it to tax relief in a way that prevents it from being used for schools."

Beaumont Mayor Guy Goodson, talking in the San Antonio Express-News about gasoline-boom-fueled construction there: "People in Southeast Texas want these plants. They want these expansions. This is not the Silicon Valley. I won't be able to get Microsoft to move here. We need to work with what we've got, and we've got refineries."

Steve Buser, CEO of the Partnership of Southeast Texas, in that same story: "If you can walk and chew gum at the same time, you can get a job at $12 to $15 an hour in Southeast Texas."

Max Shumake, part of a family that owns farmland in Red River County that would be flooded by the proposed Marvin Nichols reservoir, in the Houston Chronicle: "I don't know why I should lose my heritage so Dallas can have St. Augustine lawns."

Texas Weekly: Volume 22, Issue 46, 22 May 2006. Ross Ramsey, Editor. 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 (512) 302-5703 or email biz@texasweekly.com. For news, email ramsey@texasweekly.com, or call (512) 288-6598.