Everybody in School Finance Land seems to agree the state needs a new "broad-based business tax" to help buy down local property taxes. You can hear those four words from Gov. Rick Perry, Lt. Gov. David Dewhurst, and from House Speaker Tom Craddick. You'll hear them a lot more over the next six months.But before you grab the leftover holiday champagne, see what they say about the details. Dewhurst has been most forthcoming, and most likely to say he's closest to a deal that his half of the Legislature would approve. At a pre-session lunch with reporters, he says he's looking at a "bold" plan that would lower property taxes to $1 -- from a maximum of $1.50 now. That $1 could be in the form of a statewide property tax or a local property tax, depending on what lawmakers and voters will swallow. Local schools would be allowed to raise some local money, something between a dime and a quarter for every $100 in property value.
One math-equipped lobbyist we know points out that lowering it to a $1 and then allowing local enrichment is a lot like lowering taxes to $1.15 or $1.25. But when you put it that way, many lawmakers tell you it's not a big enough cut to sell voters on the state taxes needed to pay for it -- they like calling it a one-third cut.
The ratio of state to local funding would flip; where the state now pays slightly less than 40 percent of the costs of public schools, it would pay "north of 60 percent" under the plan Dewhurst is talking about. If you're looking for a number to stick on here, that's about a $7 billion to $8 billion increase in state funding. The math isn't as tricky as the politics: the policymakers' hope is that voters would look at it as a swap instead of a tax hike. Craddick, in a separate interview, heard former Michigan Gov. John Engler say his state used state taxes to knock down some local property taxes, without costing any lawmaker at the ballot box.
Dewhurst says he would raise cigarette taxes. He's open to video lottery terminals (slot machines), and in code, he says they'd have to be at existing racetracks (what he actually said was that he's against expanding gambling in Texas beyond its current "footprint" and that VLTs could have a surprisingly positive impact on agriculture in Texas; we translate that to mean he'd support slot machines at racetracks that are already in business and if we hear different we'll return to this).
He says the school finance plan would leave the current balance of business and personal taxes more or less in place, but says more businesses would be paying taxes after the reforms. This is where you get the "broad-based business tax," and the story is similar from all corners. Current franchise taxes hit only one business in six. More businesses are figuring out legal ways not to pay those taxes, and the state needs more money and needs a fairer tax. Several flavors of broad-based business taxes have been examined here over the last few years: general taxes on gross receipts -- the top line on a business income statement -- on income, the bottom line -- or on business activity, a tax on the overall proceeds of commerce. Most folks in the Pink Building are talking about business activity taxes. Within that are many variations: Dewhurst is apparently talking about a low-rate tax applied to business profits and employee compensation. Another variation adds in capital spending and subtracts depreciation. They're trying to raise somewhere between $3.5 billion and $5.5 billion a year with whatever variant they end up liking.
One version of the plan -- we've seen several -- includes a half-cent increase in taxes on sales and motor vehicle sales, and a 1.5 percent tax on real estate transactions. Some have suggested cutouts for "passive income," which would protect investment companies and venture capitalists and others from any "broad-based business tax." But you have to watch those exemptions: Dewhurst says he'll avoid a tax bill that would generate "intra-fraternal genocide," his term for what happens if one group has to pay a tax while another group escapes. Such arguments kill bills.
Craddick is also talking about knocking property taxes to $1, with room for local enrichment, and he says he's for a broad-based business tax. But he says he hasn't seen any consensus on the issue either inside the House or outside. Everybody's working together and playing nice, he says, but no deal is evident. Craddick says "most members think the system is broken," but is also aware of the Legislature's history of not solving problems like this one until the courts have had their say. The school finance system was ruled unconstitutional late last year, and the appeals to the Texas Supreme Court are less than two weeks old. It could be a while before the Supremes have loaded the gun that is pointed at the Lege's head.
Craddick's attention has been on what he calls the "reform side" of education, and he says the House leadership is pretty close -- one or two issues remain -- to having a bill ready for mass consumption.
It's the Senate's turn to start the budget and Dewhurst says it'll be done with the first round in early to mid-March. Sounding a little wary of the comptroller's pending revenue forecast, he says the Senate is assuming her numbers will be in line with estimates of personal income growth over the next two years -- estimates issued late last year by the comptroller herself. When she speaks and the Legislative Budget Board lets loose its first draft of a spending plan, he thinks the shortfall will be between $1 billion and $2 billion. Craddick came up with the same numbers, and both men cautioned that they don't have a clue what Carole Keeton Strayhorn will say when she presents the biennial revenue estimate next week.
Dewhurst says he thinks state employees deserve a pay raise, particularly those in law enforcement. He says teacher pay is a problem, with young teachers leaving for other professions, and older teachers retiring earlier -- at an average age of 56. He says he wants to restore cuts made to children's health insurance, reverting to 12-month application periods from six-month periods, reinstating coverage for vision, mental health and possibly extending dental benefits to beneficiaries.
Both he and Craddick say worker's compensation insurance is in for a fix, and both cited rates that are higher in Texas than in other states. The Senate will lay out a plan next week, and the House will work from the Sunset Committee's report.
Two more from Craddick. He says, first, that the two remaining election challenges in the House won't be a distraction from other business. And he shrugs off a question about distractions from the Travis County courthouse, where prosecutors and grand jurors continue to grind away on a two-year-old investigation of campaign finance in the 2002 House elections. "Nobody's talking to me about it," Craddick says. "The only people talking to me about it are the press."