April 28, 2004
House unveils its proposal

The state House has released a new plan to overhaul state tax collections as part of school finance reform, and to say the least, it's not timid. It's also not likely to survive in its present form. I think the Statesman summed up reaction to it pretty well:

The initial reviews: reserved kudos from the Senate, studied neutrality from the governor and a scramble by lobbyists to divine the plan's ramifications.

Here's a basic outline of the plan, as reported in the Morning News.

• A slight increase in the state sales tax rate, raising it from 6.25 percent to 6.5 percent. In Dallas, the rate would be 8.5 percent including the local levy. Also, a larger increase in the motor vehicle sales tax would boost the rate from 6.25 percent to 7.5 percent.

• Expansion of the sales tax to include a host of services and items. That would include auto repairs, barber and beauty services, residential repairs, legal and accounting services, real estate services and financial services.

• A state payroll tax that would replace the business franchise tax. All for-profit employers would be charged either $400 or 1 percent of annual wages per employee – whichever is less. A similar proposal with a 2.5 percent rate is also under consideration.

• A $1 increase in the state cigarette tax to $1.41 per pack and a slight increase in the state tax on smokeless tobacco. The cigarette tax increase would raise about $700 million a year.

• Legalization of video gambling machines at seven dog and horse tracks and on three American Indian reservations. The maximum 40,000 slot machines that would be authorized would generate $1.5 billion a year.

Other tax and fee increases include a $1 surcharge on all amusement tickets and expansion of the state sales tax to include Internet access services and newspapers and magazines.

Most of the new revenue – $5.2 billion – would be used to offset the property tax reduction of 50 cents per $100 of value. The remainder would provide $1 billion in new money for schools and $750 million to equalize the 10 cent levy that school districts could collect for enrichment.

The payroll tax would generate about $2.4 billion a year, but the net gain to the state would be $600 million after the business franchise tax is abolished. The franchise tax, paid by about one in six businesses because of loopholes and exemptions, generates about $1.8 billion a year.

A constitutional amendment would be required for the state property tax and the legalization of video gambling. A constitutional amendment requires a two-thirds vote of the House and Senate as well as voter approval.

Not explicitly mentioned there but noted by the Star Telegram is that this plan does not include the infamous stripper tax. That $1 surcharge on amusement tickets apparently includes movie tickets, though. The Chron has some more details on the new tax proposals:

The plan introduced by Rep. Talmadge Heflin, R-Houston, also eliminates the corporate franchise tax and imposes a new business tax based on payroll. Businesses would pay 1 percent of their payroll or $400 per employee, whichever is lower.

Heflin's proposal also includes higher sales taxes on motor vehicle and boat sales, a $1 cigarette tax hike, and video lottery machines at racetracks. Among the services that would be taxed are home remodeling, barber and beauty, legal, accounting, architectural, public relations, testing labs, financial, real estate brokerage, veterinary, and automotive maintenance and repair.


Heflin, chairman of the House Appropriations Committee, said the proposal tried to reach a balance between business and consumer taxes.

"We tried to be sensitive to the business community when they said, `We don't mind paying our share if it's fair and uniform,' " Heflin said.

Businesses would pay some of the new sales taxes on services such as management consulting, research and development, and computer programming. But other new sales taxes, including on coin-operated laundry machines and car washes, will fall heavily on consumers.

The plan also includes a state property tax set at $1 per $100 assessed valuation to replace local school property taxes now capped at $1.50. However, Heflin said he is considering allowing the $1 tax to remain at the local level, a priority of school districts.


Craddick said he thinks the business community may accept the new taxes because of the reduction in property taxes and elimination of the franchise tax.

"The franchise tax is in decline anyway; more and more companies are converting out of it. You're having fewer and fewer businesses pay," said Craddick. "You need to look at a base where everybody pays on an equal basis."

The expansion of the sales tax is designed to tap into the growth in the service sector of the Texas economy.

"The idea of broadening it, that's where the growth in the economy is," said Craddick. "If you broaden it, you pick up that growth."


The House committee also heard about a separate plan for a 2.5 percent payroll tax offered by Rep. Dan Branch, R-Dallas. Branch said his plan would replace most of the franchise tax and would raise $5 billion, enough for a 33 percent property tax cut.

In addition, Rep. Fred Hill, R-Richardson, offered an amendment capping property appraisal growth at 5 percent.

There's a lot to digest here, and it's probably a fool's errand to pick out any aspect for detailed inspection. For one thing, as the Statesman notes, there's something in there for pretty much everyone to love and to hate.

Sen. John Whitmire, D-Houston, said almost any omnibus proposal, though it may have bits and pieces included to appeal to various lawmakers, will inevitably include over-my-dead-body elements for other legislators.

Sen. Jane Nelson, R-Lewisville, said she is implacably opposed to any gambling elements. Tuesday, she was already talking about a filibuster and pondering medical procedures to allow her to spend hours on the Senate floor without going to the restroom.

If a video lottery bill reaches the Senate floor, Nelson said, "I plan to call a doctor down and be catheterized."

I believe that's my Too Much Information nominee for the session, but it does demonstrate the degree of opposition that certain aspects will face. Another part that will be fought tooth and nail is the proposed change of the property tax to be collected statewide, as noted in the Express News.

[S]chool groups have long opposed replacing local school taxes with a statewide levy, contending such a move would diminish the connection between taxpayers and local schools while giving legislators the green light to meddle more in how schools are managed.

The Texas Association of School Administrators asked its members this week to contact House members and urge a "no" vote on the expected $1 per $100 valuation state property tax.

"It is advantageous to public schools to maintain a strong and direct connection between the local taxpayer and the public schools that benefit from their taxes," its Monday alert states.

Bill Ratliff, who proposed a statewide property tax as an education funding source while serving as an East Texas senator, newly lobbies for the Texas Association of School Boards.

Ratliff said today: "The fear all along was that if there is no significant local (school) tax, you know the old saying: 'He that has the gold makes the rules.' If all the money is coming from the state, the Legislature will not be able to resist calling all the shots. Schools will have less local control."

Ratliff said he has been told there are more than 50 pending amendments that amount to legislative efforts to dictate how school districts operate—ranging from directives affecting teacher contracts to one setting school board election dates.

To school districts, Ratliff said, "that's usurpation of local control—and they don't even have any extra money yet."

All along, I've been trying to figure out the political implications of this change or that, and I suspect the reason that reaction outside the House, especially from Rick Perry, has been so muted is that right now everyone else is making the same calculations. The House plan as it is right now would be a victory for Perry for property tax reductions (whether or not a separate appraisal cap is included, though to not have a cap would be a loss for him), but such broad expansions and increases in other taxes might be hard for him to swallow, and if the gambling proposals go down in flames, thus eliminating a potentially big source of extra revenue for the schools, then all bets are off (sorry about that).

I must say, I continue to remain puzzled about the whole property tax versus other tax issues. I'm a homeowner, and I know fully well that I pay a lot of property tax, but I also know that I get a decent sized piece of that back in April when I file my federal tax return. I just can't quite understand the appeal or logic of using an increase in a non-deductible tax to subsidize a cut in one you can write off. I can only presume that it's analogous to security by obscurity - everyone knows what their property taxes are, but no one has a clear handle on how much they shell out in sales tax, so cutting the former is always appealing even if the corresponding rise in the latter overcompensates for it in the long run.

Finally, whether slot machines are in our future or not, the House heard testimony yesterday that its current plan to license the machines is too generous to the licensees.

Jeff Hooke, an investment banker and consultant from Maryland, said a plan being considered by a House committee would charge racetracks only a "nominal fee" for licenses worth many millions of dollars.

"The governor and the Texas Legislature have a fiduciary obligation to get the taxpayers a fair deal," Hooke said in testimony prepared for the Senate Finance Committee.


Hooke, whose travel expenses to Texas were paid by the Baptist General Convention of Texas, which opposes gambling, said that making track owners bid against competitors for the licenses could generate almost $4 billion in licensing fees alone for the state.

Hooke said the state could auction the licenses for cash to the highest qualified bidders or auction licenses to bidders offering to take the lowest percentage of revenue from the machines.

He said the state of Illinois auctioned a casino license in suburban Chicago last month for $518 million. He said a video lottery terminal license is comparable in value to a casino license because slot machines provide 75 percent of casino profits.

Hooke said an Indian tribe in Michigan paid $265 million for a 40 percent interest in a Detroit casino license in 2000, indicating a total license value of $663 million.

As with yesterday's stuff, this evidence is not coming from a disinterested party, so take it with whatever level of skepticism you feel is warranted. As a matter of theory, though, I like the idea of making potential slot machine sites bid for their licenses. They know how much they think the licenses are worth to them, and it's in the state's interest to adjust their fees accordingly.

Posted by Charles Kuffner on April 28, 2004 to Budget ballyhoo | TrackBack

Taxes are going up. But at least we don't have a state income tax! (Ugh.)

Posted by: omit on April 28, 2004 2:40 PM