March 29, 2003
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Budget Battle Another Test for House Leadership

After two weeks of divisive, partisan debate over liability reform, the Texas House this week turns its attention to a more urgent and potentially more contentious task: writing a state budget. With the state’s economy balanced on the edge of the knife, and Comptroller Carole Strayhorn holding out the possibility of another cut in the revenue estimate, the House Appropriations Committee is a week away from completing mark-up on the appropriations bill. Full House debate will probably be scheduled in the second week of April.

But unlike the prior five state budgets, this one will be argued in the shadow of a $10 billion gap between available revenue ($54.1 billion) and what the Legislative Budget Board considers a “current services” general revenue budget ($64 billion). House budget writers have pledged to produce a bill within available revenue, which will result in dramatic reductions in funding for health care, welfare, and higher education. At the same time, pressure to give some relief to suburban school districts is leading the House Public Education Committee on a hunt for about $1.2 billion more for public schools. This search for dollars has delayed House consideration of H.B. 5, the legislation that sunsets the current school finance system in 2005 and sets the stage for a special session to rewrite funding formulas next spring. Without the extra money, H.B. 5 could be a dead letter.

House budget writers are also looking askance at a recent letter signed by Senate Finance Committee Chair Teel Bivins and Vice Chair Judith Zaffirini, which promises Lt. Governor Dewhurst that a sizable majority of senators will support $5.8 billion in non-tax revenue increases. Included on that list are items such as spending $1.3 billion out of the Rainy Day Fund (which both the Comptroller and Governor oppose), selling off part of the tobacco settlement, resorting to creative accounting measures, changing the point of collection of motor fuel taxes, and other budget maneuvers. Notably absent from that list is any mention of closing the Delaware sub loophole, although this idea is alive, well, and picking up steam among the House and Senate leadership and in the Governor’s office.

Members of the Appropriations Committee, as well as House members at large, are understandably anxious about the prospect of voting out a $54 billion budget, when the Senate has already committed itself to a number almost $6 billion higher than that. Rumors abound that there will be more than 1,000 amendments offered to put money back into the House committee’s bill, putting Appropriations Chair Talmadge Heflin and his committee members in an indefensible political posture. How can they defend the committee’s work when everyone knows the “real” numbers are substantially higher? If even a single amendment adding money to the bill is accepted, the floodgates will be opened wide, and the whole process could collapse. Not a pretty prospect for a House still licking its wounds over H.B. 4.

One possible solution to this problem is a contingency article that would prioritize additions to the bill in some kind of hierarchy of need. But agreeing on which programs should get first call on new money isn’t as easy as it seems. And assigning places in that hierarchy on the House floor could be just as bitterly contested as playing with real money would be. GOP leaders in the House, all pledged against any new taxes, will also have to keep a tight rein on their own ranks, most of whom have enormous stakes in one or more spending programs, be they colleges and universities, state schools and hospitals, prisons, highways, or public schools. If the money starts pouring into the bill without restraint, the House leadership could find itself in the position of having to defend a substantial revenue bill that goes far beyond the $5.8 billion offered up by the Senate.

Ultimately, that discussion will lead to where no one wants to go: the need for new tax revenue. House Ways and Means Committee Chair Ron Wilson has introduced a franchise tax reform bill that will broadly expand the tax to include partnership interests owned not only by corporations, but by other business entities as well. The bill also taxes intangible income previously untaxed under the franchise tax, which has nothing to do with the Delaware sub issue and everything to do with enhancing revenue. This aggressive expansion of the franchise tax marks a new stage in the debate, which has up until now been centered on entities that have recently reorganized to avoid tax. Now we’re talking about a general business tax that taxes partnerships generally, but still allows professional partnerships such as law firms and physician groups to escape taxation. When the GOP rank and file on the House floor figure out just how broad the Governor’s franchise tax proposal (the bill came from the Governor’s office) actually is, just watch the stampede to the exits.

The next four weeks or go should tell us whether we can expect a special session this summer to produce a budget document, or whether the whole mess will be deferred until next year (post election filing date). One thing is becoming apparent, however. The cherished hope of the GOP to resolve the school finance issue and rid the world of Robin Hood is being swallowed up in a more general budget crisis of unprecedented dimensions. It may well be that school finance reform is simply impossible to achieve within the current constraints of GOP policy on new taxes.