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Texas Agriculture Archive

March 5, 2004

Speculation continues on
school finance special session...

Speculation continues on a special session to address public school finance.

Initially, Governor Perry asked for a "consensus" on a plan to "kill Robin Hood" before committing to call a special session of the Texas Legislature. However, the governor has now unveiled his plan for reform in a grandiose fashion, making it almost certain he will call a special session. Austin wisdom sets the date in April.

It doesn't appear the governor will find the consensus he sought. At a recent meeting sponsored by business interests, there was a great divide on how best to raise the revenue needed for equitable funding of Texas schools. Lt. Gov. David Dewhurst made it clear that the plan offered by the Texas Senate during the 2003 Session was still the Senate's position. That plan reduced school property taxes by half to 75 cents/$100. It made up most of the $7.5 billion in local revenue by raising the sales tax by 2 percent and taxing services. And, rather than collect property taxes on the local level, it created a state property tax to bring the money into Austin. The lieutenant governor continues to champion restructuring our tax system to represent the present economy of Texas. Our economy is more service based, while our tax system is manufacturing based. This tax system's revenue doesn't grow with the economy.

The Governor's office plan is based upon their fear that radical change may drive economic development away from Texas. They recommended reducing local school property taxes by half, but over time. One reason to phase in the reduction is to allow the economy to recover and grow. With a growing economy bringing in additional tax revenues, they believe additional money will be available without major tax restructuring. They are looking at legalizing Video Lottery Terminals and increasing the cigarette tax to raise more money. The Governor's office is also considering a plan to place residential and commercial property taxes at two different rates. This "split roll" concept would leave residential property taxes collected at the local level and phase in a rate reduction to 75 cents/$100. Commercial/business property taxes would be collected by the state and have a rate of $1.40/$100.

One of the biggest revenue generators in this mix is the franchise tax. The leadership seems to disagree on how to utilize this tax base. The franchise tax is often criticized because a business can organize as a partnership rather than a corporation, or they can establish their corporate headquarters outside of Texas, to avoid paying the tax. The lieutenant governor's office believes the legislature did its best to fix the franchise tax problem last session and could not find a good solution. Instead, the lieutenant governor's staff has been considering other taxes that could replace the franchise tax. They have hinted that a business activity tax similar to the one proposed by the legislature in 1997 may be the answer. The Governor's staff has stated that they believe the franchise tax can still be fixed. In a bombshell of sorts, they stated that if the economy continues to improve, an increase in sales tax could be used to completely eliminate business taxes.

We can only hope that the different paths being walked by the political leadership will converge somewhere down the road this Spring. In a hearing of the Select Committee on Public School Finance, the attorney representing the school districts suing the state testified that property taxes had to be reduced to 60 cents/$100 to provide equitable funding for Texas schools. Each 1 cent reduction in school property tax represents an additional $100 million in needed revenue. The question we have to ask, is, if we don't have consensus on how to get to 75 cents, then what does it take to raise an additional $1 billion to get down to 60 cents?