March 15, 2006
No sales tax increase?

The Texas Tax Reform Commission has held its last public meeting, and their current proposal for how to abide by the Supreme Court ruling on Robin Hood does not include increasing the sales tax as a component.

[TTRC Chairman John] Sharp said that his committee will spend two weeks finishing its proposal but has a preliminary consensus that it will include:

•Reduction in local school property taxes of about one-third, which would lower the current rate of $1.50 per $100 valuation in most school districts to $1 per $100. Total tax relief would be nearly $5.9 billion.

•A revised business franchise tax on the gross receipts of most businesses – excluding sole proprietorships and companies earning less than $300,000 annually – after either employee compensation or the cost of goods are deducted, depending on the type of business. Companies and partnerships that deduct employee compensation would pay a 1 percent tax, while mass retailers, wholesalers and others that deduct the cost of goods would pay a half-percent tax. The new business tax would produce an additional $4 billion a year.

•A $1-a-pack increase in the state cigarette tax, raising the total tax to $1.41 per pack. The new levy would generate an additional $800 million a year.

•Use of $1 billion of the state's $4.3 billion surplus to help offset the reduction in school property taxes. Only about $2.2 billion of that amount was not previously committed by the Legislature, but Mr. Sharp said his advisers believe the surplus will grow an additional $2 billion to $2.5 billion in the current biennium – leaving sufficient funds for other programs such as education reform.

The tax revisions and surplus would produce about $5.8 billion to pay for the property tax cut.

I'm a little skeptical of any plan that involves the use of a surplus, because we're only three years removed from having a $10 billion deficit. Where's that billion going to come from in the next biennium? If we were talking about spending it on mostly one-time items, that would be different, but one presumes this property tax cut is intended to go forward. Obviously, we don't have the TTRC's report yet, but color me wary at the outset.

Another ponderable is whatever happened to the idea of extending the sales tax to services? When that idea first surfaced in 2003, statistics about how the goods-based sector of the economy was shrinking while the services-based sector was growing. Surely that hasn't changed since then. Is that still up for consideration?

Finally, Sharp takes aim at the snake currently lurking in the weeds:

Meanwhile, as the special session approaches, a group of House Republicans has been trying to drum up support for a temporary fix that would use more than half the budget surplus to reduce property taxes by about 20 cents per $100 of assessed valuation. Supporters say that would allow lawmakers to avoid a big tax bill in the special session and finish the job in the 2007 regular session.

Mr. Sharp, a Democrat, said that would be a big mistake and could leave the state with a deficit – especially if lawmakers can't agree on a new tax system in 2007.

"That's how you wind up getting yourself in big financial trouble," he said.

Again, any solution based on using surplus funds is questionable at best, and let's face it - the best (possibly only) reason for "finishing the job" in 2007 is that it occurs after the 2006 election. It's also not at all clear to me that such a procrastinatory fix would satisfy the court's mandate. All in all, this is an idea that should not be taken seriously.

Posted by Charles Kuffner on March 15, 2006 to Budget ballyhoo | TrackBack

One would think the Lege could simply offer slightly less "property tax relief" and eliminate any reliance on short-term surpluses. If we just settled for an average of $1.10 per $100 instead of insisting on getting all the way down to $1.00, we'd probably be in good shape.

All in all, this is a better proposal than I'd feared: no general sales tax increase, reform of the franchise tax, and a reasonable cigarette tax all make sense. Of course, I expect the Lege to do everything in their power to make it worse, but at least they'll be starting out with something I could live with.

Posted by: Mathwiz on March 15, 2006 4:31 PM

This is better than the last aborted attempt, but why is it so impossible for governments to LEAVE THE SURPLUS BE?

Don't refund it.

Don't spend it.

SAVE IT. And the next time the economy goes sour, it's that much less you have to cut spending or raise taxes at the worst time to do either one.

I agree with the note above. That "$1 per $100" has become a sacred cow. And presumably this would come with a Constitutional amendment allowing a state property tax? If they all but mandate the rate, whether $1.50 or $1 per $100, isn't that a "de facto" statewide property tax which the courts ruled against?

There's only so much room to lower property taxes when you already have a very high sales tax and a refusal to consider a personal income tax. Having said that, I think the property taxes in Texas are one of the reasons why the state is always way overrepresented in "undervalued cities for real estate" lists. With the current property tax rates. Texas housing doesn't have much of a chance to rise with much of the rest of the nation. No one can afford the taxes.

Posted by: Tim on March 15, 2006 4:42 PM

The court ruled that so many districts where up against the $1.50 that is "amounted" to a statewide property tax. If we bring revenue in another way, and property taxes are rolled back to $1.00, then districts have the wiggle room to impose higher rates.

Rep. Hochberg spoke at the Harris County Brown Bag this week and did a great job explaining the ins and outs of ed funding. His prediction: I don't have a clue what is going to happen.

What's said is that the same way Perry, Dewy, and CradDICK feel, and their in charge!

Posted by: Bill on March 15, 2006 5:48 PM

It is always interesting to hear comments such as a "reasonable tax on cigarettes". The translation is, "Since I do not smoke, I find a tax on cigarettes reasonable". The problem is, every state that taxes sinners like me ends up with less revenue than they did prior to the tax increase. So, this $800 million increase in taxes will, in all probability, not materialize.

I have a fairer proposal. Tax ALL sins. Since tithing is commonly used by preachers as a way to absolve the guilt ridden parishioners of their sins, the church donations are effectively "sin money". Tax the church donations. Since every church goer I know swears they do not drink or smoke, they are only taxed once. Since drinkers and smokers like me don't attend church, I'm only taxed once.

Everyone pays, everyone wins.

Posted by: RedScare on March 15, 2006 8:19 PM

Tithing, in almost any Christian theology, does not absolve anyone of their sins. Jesus' death on the cross did that.

Anyways, what about a state income tax of some sorts? I know its probably untouchable politically, but it could offset property tax relief, as well as spreading the tax burden around some more.

Posted by: rich on March 16, 2006 11:03 AM