A week after the Texas House passed the largest tax bill it has ever considered -- a measure intended to replace some local school property taxes with new state taxes -- Comptroller Carole Keeton Strayhorn stunned lawmakers by saying the bill spends three dollars for every two it raises.Her analysis of House Bill 3 is that it would lose more than $2 billion per year after it's up and running. And getting to that point is bumpy: The legislation would raise $2.8 billion in new taxes the first year -- before property tax relief kicked in. In fiscal year 2007, property tax relief would outrun the new tax revenue by $1.8 billion. That gap would grow annually, reaching $2.3 billion by 2009. The biggest problem, she said, is that the House gave businesses the choice of paying the lesser of two taxes without setting a minimum amount each business must pay. Lots of companies would pay little or nothing. And the bill leaves open the hole we wrote about last week, allowing companies with large payrolls to "move" their workers to employee leasing companies and avoiding payroll taxes.
House Speaker Tom Craddick and Ways & Means Chairman Jim Keffer said the comptroller's chief revenue estimator signed off on changes to business taxes that went on to win House approval. But the comptroller's new analysis of those changes -- giving businesses a choice between paying something like the current franchise tax or a payroll-based tax -- concludes they won't raise the money needed to pay for a one-third cut in local school property taxes.
Strayhorn sent staffers to tell Craddick and Keffer about the numbers and also sent copies of her cover letter and fiscal note to legislators. A copy of Strayhorn's letter and the fiscal note can be downloaded here:
www.texasweekly.com/documents/CKSonHB3.pdf
Word moved fast and some lawmakers found out about the trouble from reporters. They really, really hate that. Craddick, who held a press conference with lawmakers who fashioned the tax bill, didn't mince words. And he didn't leave open any possibility that the House had botched its tax bill: "Maybe she [Strayhorn] is playing politics or maybe she and her staff are inept. Either way, I assure you that we stand by this bill. The Comptroller's office certified it and we are going forward with HB 3 as is."
The comptroller wasn't shy, either, when she talked with reporters shortly after the House leaders tried to shame her: "I just watched the House news conference and my heart goes out to them. They just passed the largest tax bill in history and it does not balance. They thought they were raising $12 billion in revenue. I ran the numbers, and it raises about $8 billion in revenue."
Most of the argument is a he said, she said affair. They can't possibly all be telling the truth and it's impossible to figure out just who's lying.
Strayhorn said House leaders didn't check with her staff over the last weekend before taking the bill to the floor of the House and said her aides never signed off on the 20 or so amendments eventually added to the bill. She said Craddick told her staff that he didn't need help or a fiscal note on the bill until the House had passed it.
Keffer said the opposite: "The comptroller's office spent the entire weekend with the speaker's staff, members of the committee on Ways & Means and LBB working on and improving amendments to House Bill 3, specifically Article 2, which is the business tax section of the bill."
He said "no less than a dozen" people were on hand when the revenue wizards signed off on the provisions that went into the final bill. "They assured us it was balanced. Here we are a week later and suddenly the bill is not balanced. How can that be?" Keffer said.
Told that House leaders had said her staff "certified" -- with witnesses -- the provisions that eventually wrecked the bill, she came close to calling them liars: "That is absolute hogwash."
She said she's not trying to snipe and insisted that she's not playing politics with the numbers: "I'm not going to tell any lawmaker what they can and cannot do. I will tell you that this bill does not do what they said it will do. I am keeping the legislators and the people of Texas informed at every step of the way. That is my job."
She said she sent her staff to brief Craddick and Keffer and then delivered her letter and her fiscal note to the rest of the House.
Strayhorn said her staff ran the numbers for the 100 biggest corporate franchise taxpayers -- she didn't release names -- and said two-thirds of them would see a cut in state taxes (not counting local school tax reductions) if the House bill took effect.
Neither of them talked about getting the tax bill back on track, either by patching the holes the comptroller pointed out or by arguing over the mechanics of the bill.
And the political scuffle doesn't mean much to the process itself. HB 3 is on its way to the state Senate, and it doesn't truly matter at this point whether it balances or not. The last time the House sent a big tax bill to the state Senate, in 1991, what started as a $3.3 billion measure was drained during an all-night debate, and the shell that crawled across the rotunda was worth less than $35 million. The Senate pumped it back up to full size and the tax bill came back to life.
The Senate is planning a similar remodeling project this time around. Lt. Gov. David Dewhurst and Senate leaders said last week that key provisions of the House plan won't fly in the upper chamber, including the business tax and a full one-cent increase in the state's sales tax. They plan to spend the next month hearing ideas and drafting a tax bill of their own to send back to the West end of the building. For those purposes, it doesn't matter whether the House bill balances or not.
And oddly enough, Strayhorn's harpoon didn't take away all of the House's negotiating power on the tax bill.
What attracted business to the House bill was the "choose your poison" option that would have allowed each business taxpayer to choose which of two taxes they'd rather pay -- one based on payroll or something similar to the current franchise tax, which includes an income component in its calculations and weighs heavily on capital-intensive corporations. That was also the bill's undoing: The comptroller's number-crunchers assume, for estimating purposes, that every business will take the cheaper of the two options. The House bill didn't include a minimum tax amount, and that opens the door to the sort of loopholes that have made the current franchise tax easy for most Texas businesses to avoid.
Business like the choice idea, and the House can go to the inevitable conference committee defending the structure of its bill, if not the exact rates or particular provisions. If they can make that work, it may yet turn out to be more palatable than whatever the Senate proposes.
Although it wouldn't raise enough to replace a third of local school property taxes, the House bill, according to Strayhorn, would actually stay in the black during the next budget cycle. That's because the state taxes would be starting up before the school taxes would be dropping. The comptroller said the first year would see income of $2.8 billion with no school taxes to replace. In the second year, school taxes would cost $1.8 billion more than the new tax bill would produce, but that first-year buffer would keep the state's cash flow positive. After that year, the numbers would start running red, in amounts starting around $2 billion annually and growing each year after that. In the five-year fiscal note, the bill ends up $4 billion in the red. In the context of that initial two-year budget, however, the thing would actually have a positive impact on state spending of about $1 billion.