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Analysis: A Sales Tax Cut, If Anybody Wants It

A little-noticed bill filed on deadline by the chairman of the House's tax-writing committee could hold the session's biggest tax cut, but only if the House and Senate decide to cut taxes on sales instead of property.

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As meaningful tax reductions go, one-one-hundredth of a percentage point doesn’t sound very promising. But pay attention: With a simple nip and tuck, that could become the biggest tax cut of this legislative session.

One clue is that the plan in question — House Bill 31 — was filed by state Rep. Dennis Bonnen, the chairman of the tax-writing House Ways and Means Committee. As written, it would cut the state’s current sales tax rate of 6.25 percent to 6.24 percent on Oct. 1.

Another one, House Bill 32, would cut business franchise tax rates by 5 percent.

Cuts like those are hardly worth the trouble. Bonnen, a Republican from Angleton serving his 10th term in the House, clearly has something bigger in mind. While he has not been specific — publicly — he has said that a combination of cuts to state sales and business taxes would be more effective than trying to cut property taxes.

Bonnen filed both bills to meet a legislative deadline, knowing that he could come back later to plug in the numbers he really wants to use. Both bills are written in a way that wards off major alteration — like adding in other types of taxes, for instance — without bending parliamentary rules.

That said, one or two changes could make them powerful pieces of legislation: The rates and the dates are all that matter.

During the next two years, the state expects to bring in $61.48 billion from sales and use taxes, according to the state comptroller. That’s around $4.9 billion per year for every penny of the tax.

A half-cent drop in the tax would cost the same amount every two years (half the tax cut, twice the length of time).

Not to put words in anyone’s mouth, but that’s about the same size as the tax cuts recently approved by the Senate Finance Committee, and it would put less strain on the state’s budget writers than the Senate proposal.

To lower property taxes, the state has to write a check to the school districts to cover the difference. In effect, the state is lowering someone else’s tax revenue and writing checks to cover the difference. That counts against the state’s spending cap — the constitutional limit on how fast the state budget can grow to keep pace with the growth of the state economy.

Cutting a state tax doesn’t count against spending; instead of writing checks, the state is cutting its own income. The same size tax break avoids the budget limitations.

The Senate’s plan, however, addresses the two taxes Texas voters hate the most — the property tax and the franchise tax, which businesses pay on their operating income.

Bonnen’s notion might die without generating another headline. Lawmakers have pretty much agreed that there will be some tax cuts this session, but have not agreed on which tax cuts would best suit the state economy and their own politics. Importantly, their disagreements echo differences among outside groups that represent various political ideologies, businesses large and small, and cities, counties and school districts.

Small businesses generally support cuts to the state’s business margins tax. The Senate’s package would do that, and Bonnen would, too. The amounts are still in play, but that cut seems likely.

Big businesses, largely left out of the Senate’s tax package, want sales tax cuts. Homeowners, on the other hand, would get bigger exemptions from property taxes under the Senate plan: about $206 per year, on average.

A sales tax cut has the advantage of benefiting all of those groups, but it would also have to be spread across more taxpayers, cutting the size of the average benefit. That said, it is a tax break that wouldn’t erode over time, as property tax cuts tend to do.

The property tax cuts engineered by the Legislature in 2006 were supposed to save the average taxpayer $2,000, but because of increasing property values and the state’s own education funding cuts, it’s hard to find property owners who remember seeing that money. And it’s hard to find politicians who remember getting any credit for the gut-wrenching votes they took on taxes.

On top of that, those cuts come at the expense of schools and local governments. Their officials and lobbyists are pushing hard against legislative efforts to mess with property taxes — which are actually local, not state, taxes.

Lawmakers want to find something palpable, both economically and politically. Cutting taxes is unexpectedly contentious, and they want a trophy for their trouble.

Lobbyists for almost everyone with a financial stake are trying to steer the debate away from whatever their clients fear the most.

Taxpayers might be paying less attention than anyone right now, but they have some insurance: If legislators don’t find a tax cut that voters notice — and appreciate — they might as well leave Bonnen’s 0.01 percentage point cut right where it is.

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State government 84th Legislative Session Budget Dennis Bonnen Texas House of Representatives Texas Legislature Texas Senate