Texas-Style Tax Cut: A Commission, with Business Support, Was Able to Do What the Legislature Couldn't-Change the Tax Structure in Texas

By McNeely, Dave | State Legislatures, April 2007 | Go to article overview

Texas-Style Tax Cut: A Commission, with Business Support, Was Able to Do What the Legislature Couldn't-Change the Tax Structure in Texas


McNeely, Dave, State Legislatures


After years of backing and filling, Texas lawmakers finally cut the state's over-extended local property tax last year. The Texas Supreme Court made them.

In a spring special session, legislators reduced the school property tax rate by a third, and made up the difference by replacing the outmoded and often-ignored state franchise tax with a broad-based business tax.

Even then, it wasn't simple. The courts and the Legislature have haggled over the Texas school finance system for years.

After watching the Legislature go through one regular 140-day session, and four special sessions that he called, and still not come up with any solution to the property tax dilemma, Republican Governor Rick Perry did something desperate. He called on John Sharp, the former Democratic state comptroller and his former friend from student days at Texas A&M University, to chair an advisory panel called the Texas Tax Reform Commission.

The reason Sharp is described as a "former friend" is that he and Perry had squared off in the 1998 race for lieutenant governor. Perry, with the enormous help of then-Governor George W. Bush's re-election coattails, was elected.

What caused Perry to turn to his Democratic rival? Partly desperation. But Perry also realized, after a chance meeting at a skeet shoot where the two re-established their friendship, that Sharp--a legislator for eight years, member of the Texas Railroad Commission for four years, and the state's tax collector for another eight years--is one of the brightest experts on both tax policy and politics in Texas. The tax problem was tied in such a convoluted knot that it required a Houdini dealmaker--whom business folks and politicians alike respected to untie it.

EQUALIZE SPENDING

For several years, Texas courts had ruled that public school per pupil spending should be equal, no matter whether the school district is rich or poor.

Most other states use a three-legged taxing system, collecting levies on property, sales and income. But Texas is one of a handful of states with no income tax. Even though one has been suggested from time to time, most officeholders would rather handle rattlesnakes than vote for an income tax.

In 1993, under an earlier order from the Texas Supreme Court to equalize per-student spending, legislators turned to a system that quickly was nicknamed "Robin Hood." That's because the state required richer districts, with greater property wealth, to share their funds with poorer districts.

Legislators also set a lid on the tax of $1.50 per $100 of taxable property. That worked for a while, but in recent years, more and more school districts reached the maximum. As they did, their abilities to spend what they felt was necessary for adequate education was hamstrung.

Richer districts, in particular, hated the system. A few school boards were shipping out millions of dollars to other school districts, while having to cut teachers and extra-curricular activities to keep spending per student equal.

Efforts to do away with Robin Hood always ran into a major problem: About nine-tenths of the public school students were in districts that received rather than sent out property tax money. If Robin Hood were to be banished, replacement money had to be found.

SHRINKING STATE SHARE

Over the years, the state's share of funding public schools had dropped from 80 percent in 1949, when a new financing system was established, to 38 percent by 2004. Clearly, school officials around the state thought the state isn't doing its share, and the Legislature and governor are to blame.

In 1997, then-Governor Bush sought to increase the state's contribution to school costs, and move away from dependence on property taxes to fund schools. But the alternative tax package passed by the Democratled House with Bush's backing was killed by the Republicans in the Senate. …

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