March 12, 2004
More school finance stuff

If you had any optimism about the potential of a special session on school finance reform to actually improve schools and funding for them, Governor Perry was in town to kill all hope of that.

Perry wants to limit home appraisal increases to 3 percent a year, make elected officials responsible for appraisal values and cap local government tax collections unless voters approve additional taxes.

Perry also promised to decrease school taxes and get rid of the "Robin Hood" system of school tax distribution, which shifts money from rich districts to poor ones. He offered no specifics on how much taxes would be cut or where he would get funding to replace the money lost in the cuts. He said his plan will be "revenue neutral."

"We need more education for our money, not just more money for our education," he told a crowd of hundreds that spilled out of an auditorium at Bayland Community Center in southwest Houston.


Perry's plan was immediately attacked by local government groups, who called it "potentially dangerous."

Donald Lee, executive director of the Texas Conference of Urban Counties, said the governor's plan "fails to address the root causes behind high property taxes and instead paints all local elected officials as irresponsible. The proposal ignores the fact that tax increases at the local level have been driven by decisions at the state level."

Lee added that a particularly expensive natural disaster could force a city to wait until the next election before having enough money to proceed with recovery plans.

Frank Sturzl, executive director of the Texas Municipal League, urged legislators to avoid hurting city finances as they try to solve the school finance problem.

"Cities collect only 15 percent of property taxes in Texas while schools collect more than 60 percent. The municipal share of all property taxes fell from 20.3 percent to 15.3 percent from 1985 to 2002," he said. "Texas cities hope that lawmakers won't confuse Robin Hood with the folks that fix your potholes."

Houston Mayor Bill White, who faces a budget shortfall and is considering employee layoffs, bristled at Perry's approach and said local governments should have more control over revenues, not less.

"The biggest help we can get out of Austin is fair reallocation of the funds that go from this area to Austin," he said, adding that transportation money is sent to Austin and divvied up.

"If we didn't have that gap ... we could have significant (decrease) of property tax rates," White said.

The mayor did not offer any figures to prove his claim, and a spokesman for the state comptroller said he is not aware of any figures that support White's position.

Perry scoffed at his critics, calling them proponents of big government.

"They're not just thumbing their nose at me," he said. "They're thumbing their nose at you and millions of Texans."

Under Perry's plan, local governments would not be able to collect taxes that exceeded a certain amount based on inflation and population growth unless voters approved higher taxes. The formula for determining the cap has yet to be worked out. If revenues were higher than the allowed amount, the tax rate would automatically be rolled back.

It amazes me that as Houston is in the midst of a fiscal crisis brought on by the artificial statewide imposition of a constraint on its ability to control costs, Perry is proposing the artificial statewide imposition of a constraint on cities' abilities to control revenues. I know what happens to those who forget the past, but what about those who forget current events? Make no mistake, the cities themselves understand what Perry is doing, and what the effect will be on their finances.

Meanwhile, back at the Capital, those who will have to do Perry's dirty work listened to some expert testimony about the actual effects of property tax caps.

Precise elements of tax and funding ideas being mulled by the 14-member Select Committee on Public School Finance remain unresolved — including projected costs.

Once fiscal details are known, "it'll be a rude awakening, I'm afraid," said Sen. Florence Shapiro, R-Plano, who leads the panel with Rep. Kent Grusendorf, R-Arlington.


Rice University economist George Zodrow presented the cost of replacing school and other revenue based on a state estimate of $7.1 billion to cut the 2002 average school M&O tax rate of $1.46 per $100 valuation to 75 cents per $100 valuation and $1.9 billion to eliminate the corporate franchise tax.

Zodrow rated the efficiency, equity, simplicity, stability and deductibility of 10 tax options for the committee, which has a goal of completing its suggestions to lawmakers by next week.

You can read Zodrow's report here (PDF). It's long but readable. I'm about halfway through.

He did not spell out a favored mix of taxes, but Zodrow indicated the economy would benefit from broadening the sales tax to more items purchased by consumers and said that a value-added tax applied to business would be simpler to administer than the franchise tax.

Conceding that creation of a state personal income tax is "anathema to many Texans and to virtually all Texas politicians," Zodrow said it would still prove easy to collect and give taxpayers a deduction on federal income taxes—unlike sales taxes.

Citing research by the Comptroller's Office, Zodrow said a flat personal income tax, including all deductions and exemptions allowed under federal tax law, would yield $3 billion a year for each percentage point of tax. A tax rate of 2.75 percent would raise $8.1 billion a year.

That's a point I've raised before. All academic, of course, but hey, you gotta do what you gotta do.

Shapiro said the final version also should suggest creation of a statewide property tax for education, one element in a Senate-approved plan last year.

She said she would favor expanding the sales tax to consumer services such as haircuts or manicures, but would oppose expanding the sales tax to legal fees and real estate because such changes would "hurt business."

I think that's exactly backwards, but until someone does a price-elasticity study it's just my opinion and hers. I will point out, though, that according to the Comptroller's office, taxing legal services would generate $806 million for 2004-05, taxing new residential construction another $513 million, non-residential construction $310 million, and residential repair and remodeling $158 million. On the other hand, taxing barber and beauty services would generate just $113 million. Seems to me you'd want to go where the money is, but what do I know. See page 22 of this report (PDF - page 15 of the PDF file) for the chart.

More analysis from the Center for Public Policy Priorities can be found here and here. Agendas and meeting handouts from the Joint Select Committee on Public School Finance are here. Major thanks to my friend Brandy, who's been sitting in on these hearings, for the links.

Posted by Charles Kuffner on March 12, 2004 to Budget ballyhoo | TrackBack

|| It amazes me that as Houston is in the midst of a fiscal crisis brought on by the artificial statewide imposition of a constraint on its ability to control costs ||

You are unfairly putting all of the blame on voters.

The last administration approved pension promises made to municipal employees, and those promises were subsequently enshrined in state law. If the city couldn't afford those promises, they never should have made them in the first place. That's entirely separate from the issue of the constitutional amendment that took place later.

That's why winning the opt-out vote is only the first step in fixing this mess. Furthermore, it may not even be a necessary step, but it certainly gives the mayor the upper hand when it comes to negotiating with local employees after the May 15 vote. One might even say it gives him a hammer.

Voters shouldn't be blamed for their sense of fairness because they overwhelmingly voted to say that municipalities shouldn't be able to renege on promises made to certain vested employees. The budget crisis in Houston is a direct product of the last administration's financial ineptitude (and maybe even chicanery on the part of certain members of that administration, but I'm not ready to go that far just yet), not of Texas voters.

Posted by: kevin whited on March 12, 2004 10:39 AM

It's still the case that were it not for a statewide law, Houston would have more options available to it right now. What happens if the opt-out ballot fails? I don't think it will, given the publicity surrounding the issue, but who knows what can happen in a special one-issue election that may have a galvanized opposition? We're then completely cut off from our most viable option.

I agree that incompetence is the proximate cause, but we're ass-deep in alligators right now. Fixing blame for who didn't drain the swamp isn't helping that problem. I see this proposal as essentially an unfunded mandate, and I think it will cause the kind of no-one-saw-it-coming problems that Prop 15 did.

Posted by: Charles Kuffner on March 12, 2004 11:14 AM

When California passed Proposition 13 in the late 1970's and capped propoerty taxes, it had a state-wide set of school systems that were in the top five in the nation. Since then, the quality of education across the state has plummeted, as first the state tried to offset the loss of local revenue with state revenue-sharing to localities and school districts, and then the state ran short of money. Texas can cap property taxes if it wishes...hard to know where educational performance will go after that. We in Mississippi are planning to hold the next set of state elections on the slogan that "Being fiftieth in every quality of life indicator is good enough." Y'all can join us if you want to.


Posted by: charles on March 12, 2004 11:56 AM

A quick follow-up: is the Texas Supreme Court a factor in th on-going school finance war? After all, it was in response to the Court that the Robin Hood plan was finally adopted. What will the Court do this time?


Posted by: charles on March 12, 2004 11:58 AM

Good question. They've already reinstated a lawsuit that challenges Robin Hood, meaning that the Lege has a court case that will force its hand in a few months. In theory, the Lege would like to have a replacement plan in place rather than risk the Court throwing out the existing system without a backup. Doesn't mean they'll come to an agreement, and as this history of Robin Hood notes, they may not be done after one session.

Posted by: Charles Kuffner on March 12, 2004 12:42 PM

Regarding California's Prop 13, I lived in California virtually all my life until last May. The general concept was good, but the implementation flawed and a bit extreme.

Because of caps, I paid twice as much in property tax on my 700-square-foot, one-bedroom condo as my parents paid on a 4-bed, 2-bath, 2000 square-foot house. This is an extreme inequity that should be avoided in any reform.

But blaming caps in general for reduced-quality education is missing the boat, at least partially. If money is the answer to all education woes, it seems that schools should be improving greatly in recent years, with annual 6-10% assessment increases being the norm. I doubt many Texas education crusaders would say they have, yet more money continues to be their answer for all that ails the schools?

Yes, California's 1% rate and 2% annual maximum increase was too low and was a legitimate drag on state revenue. But I see nothing unreasonable about a cap of, say, 3-5% as long as there was flexibility in times of high inflation.

Posted by: Tim on March 12, 2004 2:00 PM

Florence Shapiro should talk to my manicurist before she decides it's time to impose sales tax on manicures. She'd get a talking-to about small business owners and the hell of taxes and fees the state is already putting them through.

I sure did when I brought this topic up during my manicure this morning.

Posted by: Ginger on March 12, 2004 2:19 PM