LBB analysis of TTRC plan

The Texas Tax Reform Commission (TTRC) plan is set to be unveiled today, and it starts with a shot of good publicity thanks to a Legislative Budget Board analysis that paints it as a tax cut for all income levels.

The analysis represents a dramatic change from last year, when the budget board reported that other tax-swap proposals floated in the Legislature would impose tax increases on all but those Texans at the highest income levels.

Lawmakers blamed the disparity in those plans on hefty cigarette-tax increases, as well as increases in the the general sales tax. People who earn less generally spend a larger percentage of their money on those taxes. Perry's panel will not recommend a sales-tax increase.

"Our committee spent a heck of a lot of time trying to make sure that the tax was not regressive, and so far we're pleased with what we see," former Comptroller John Sharp, chairman of Perry's tax commission, told the American-Statesman this afternoon.

The plan would put the largest tax cuts at the top of the income scale, with households making more than $146,804 seeing a 3.3 percent tax cut and those making between $104,865 and $146,804 seeing a 2.8 percent tax cut.

Households making less than $14,042 would see a 1.4 percent tax cut, and those between $14,042 and $23,872 would see a 0.9 percent cut.

That certainly is a world better than last year's debacle. I've got some concerns, which I'll address in a minute, but first, bear in mind that the LBB analysis is not for everyone.

Smokers would be net losers under the proposal, but Perry has said, in recent speeches, that a higher cigarette tax could encourage a healthier lifestyle.

The tobacco tax increase, which would hit poorer smokers harder, was omitted from the analysis, because it would have had a negative impact on the overall projected savings.

The tax equity note also doesn't differentiate between homeowners and renters, many of whom are in the lowest income categories and may or may not receive pass-throughs of property tax savings from their landlords.

Yes, if you smoke, all we can say is thanks for shouldering a bigger part of the burden. I'd be very interested to see what the analysis would look like without this omission. You'd have to make assumptions about how much an individual smoked, but surely it would be easy enough to factor it for (say) one pack a day smokers versus two pack a day smokers.

And of course, the problem with depending on a higher tobacco tax is right there in Rick Perry's words: This tax will provide an incentive for people to quit, or at least cut back on, their cigarette habits. That's good news for them, and good news overall for the state of Texas, but bad news for the budget. It's folly to depend on such a volatile revenue source for anything other than activities directly related to that source. We're in denial if we think that a dollar increase in the tobacco tax will be a stable part of the school finance picture.

As for the point about renters, that was the reason why the previous year's tax-swap plan was such a loser for lower-income folks. Their main burden is the sales tax, so reductions to other taxes won't affect them as much. The only real way to give those folks tax relief is to lower the sales tax rate, which some people still want to do:

Sen. Kyle Janek, R-Houston, said he was "dubious" of the business tax proposal.

Janek, a physician who would have to pay a business tax for the first time under the commission's proposal, said he would prefer to expand the sales tax to business services instead and possibly lower the sales tax rate.

Janek said he prefers sales taxes because they are consumption-based.

I'm still a little mystified as to why there hasn't been more support for expanding the sales tax to business services. In theory, at least, it would have the same political pros and cons as the TTRC business tax; certainly, the opposition it got from various service industries and the resultant Swiss cheese proposal that died with all the other plans testify to that. If someone like Sen. Janek really pushes for that idea in April, it will be interesting to see who lines up behind what plan.

An article forwarded to me from the Quorum Report indicates that the main stakeholders of the tax plan - the business lobby, school districts and poverty advocates - are still in wait-and-see mode right now. Look for an analysis by the Center for Public Policy Priorities on Friday to see where they stand. One point about the schools:

School districts are looking at portion of the bill on meaningful discretion. Lynn Moak of Moak Casey & Associates says the 6 cents per-year discretion is generous given previous offers made in prior legislation. Rollbacks appear to be calculated on last year's tax rate, plus 6 cents, rather than last year's revenue-per-student, plus 6 cents, which gives fast-growth school districts a bit more room for tax rate growth. That kind of latitude is going to be considered a plus by the school districts.

The immediate revenue generated under the bill, minus the business tax, would give school districts the chance to roll back to $1.33 per hundred dollar valuation the first year. Once the business tax kicks in, it would be $1 the second year. That could be a short-term fix. Long term, Moak says that inflation is likely to eat up a significant portion of the new tax capacity, which is likely to put school districts back at the $1.50 cap. To fully address the Supreme Court's mandate for meaningful discretion -- and, more specifically, long-term meaningful discretion --
will mean adjustments to the finance formula, Moak said. Tinkering with the formula would mean opening up the call on the session. That's not likely to happen, if Perry can help it.

At least two more actions are necessary to get long-term relief from this court challenge, Moak said. First, the Legislature needs to define and fund a "general diffusion of knowledge," as stated in the state Constitution. And, second, the funding formula must account for inflation. Otherwise, any gains will be eaten away by increased costs.

Remember that things like rising gasoline prices hit schools in the pocketbook, too, and they have less flexibility to react to such unaccounted for cost increases thanks to various mandates like NCLB. Remember too that the public school system grows by something like 75,000 students a year in Texas, and that any viable school funding plan has to plan for that. The plan that Governor Perry has in mind is revenue-neutral, which does not do that. The TTRC plan is a good start, but we're still a long way from done.

Posted by Charles Kuffner on March 29, 2006 to Budget ballyhoo | TrackBack