April 27, 2003
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Doing the Dew

Lieutenant Governor David Dewhurst’s plan to overhaul the school finance system by cutting school M&O taxes in half and replacing them with a statewide property tax and expanded sales tax has many virtues, not the least of which is that it’s the only one on the table that looks remotely doable in the Legislature. Given the fate of past schemes, that’s saying a lot.

The fact that Dewhurst chose the last six weeks of the session to float this gigantic trial balloon is yet another indication that the Lieutenant Governor is cultivating his image as the only GOP statewide officeholder with the wherewithal to solve tough and intractable problems. Indeed, after last November’s election, most people assumed that Governor Perry would stand head and shoulders above the pack, but this has not been the case. Perry has been all but invisible this session, as Dewhurst and Speaker Tom Craddick have jockeyed for control of the legislative agenda. With his bold school finance gambit, which the Speaker has already pronounced DOA in the House, Dewhurst appears to have edged ahead in the race for credibility.

Speaking candidly, no one really expects a school finance overhaul to pass the Legislature in the waning weeks of a session that still has not produced a budget. Even more fundamentally, the Senate cannot constitutionally originate a general tax bill, which Dewhurst’s sales tax plan certainly is. The argument that a constitutional amendment authorizing a dedicated sales tax for public education is not a “revenue” measure is ingenious, but in all likelihood unsustainable if a point or order is raised in the House. And, of course, that is assuming that the plan could get the votes to clear the Senate in the first place.

Is there support in the Senate replacing $8 billion in local tax revenue with a statewide property tax of 75 cents, a 1.6 cent increase in the state sales tax, and a 3.6 percent increase in the motor vehicle sales tax? The Lieutenant Governor insists that there is, but we may not know for certain until hearings begin at the end of this week or the beginning of next week. Senator Florence Shapiro (R-Plano) will apparently carry the bill and chair a Senate committee of the whole to hear it. She is a natural choice, given her outspoken criticism of the current Robin Hood system and her well-known desire to get rid of it.

However, her Senate district is also home to a heavy concentration of the very service businesses that will bear a large burden of the taxes upon which the plan depends. Part of the Lieutenant Governor’s strategy is to spring the plan, hold quick hearings, and try to get it out of the Senate before the opposition can mobilize. Only by quick and decisive action can enough momentum build behind the plan in the media to give it some chance of success in the House. But the real purpose of running the plan out right now is to force business groups to decide whether to embrace change or risk what may left of their legislative programs this session. In this regard, the Lieutenant Governor’s tactics are reminiscent of those of former Lieutenant Governor Bob Bullock, who used to enjoy summoning lobbyists to his office en masse and presenting them with an offer they could not refuse.

And chances are that many business groups will sign on, at least in concept. Dewhurst’s plan has real advantages for some segments of the economy. It purports to cut school property taxes to 75 cents statewide. It shifts the responsibility for funding a basic education (about $4,200 per student in the Senate plan) from local taxpayers to the state. It brings professional services into the tax system in a way that franchise tax reform has been unable to do, although simply tacking on 9 or 10 percent to the cost of legal, accounting, engineering, or new construction is arguably not a very effective way of taxing services.

Some business sectors may well save more in property tax relief than they will pay in increases sales taxes, although a tax incidence study done by the Legislative Budget Board on the plan indicates that for capital intensive industries, at least, the trade-off is not a positive one. The technical issues involved in expanding the sales tax to services are likewise immense. The few states that have tried to do it, most notably Massachusetts and Florida, had to repeal the tax because it could not be implemented.

Despite the problems, there is no denying that the sales tax is still a relatively popular tax, if one can say that about taxes. And consumers are not likely to notice a sales tax rate increase in the same way that they see property taxes go up every year. Ultimately, what businesses think may be immaterial if the Lieutenant Governor is successful in his appeal to Republican suburban voters who are sick of both property taxes and Robin Hood. To them, anything that is not a personal income tax looks pretty good. That’s why business groups will think twice before rejecting the plan out of hand.

Finally, business has to look at the alternatives. If signing on to the Dewhurst plan will avoid a split roll property tax, then business might be able to buy into it, even if it costs more money in the short run. The split roll, in which business property is taxed at differential and higher property tax rates than residential property, would do more to kill capital investment in Texas than any single tax. If a sales tax on services is a way to lower property tax rates and maintain a unified roll, it might well be worth the risk.

Whatever one may think about this plan, it should be clear by now that the Lieutenant Governor is no longer a political novice trying to learn on the job (if he ever was one, which is debatable). He may not look like Bill Hobby or Bob Bullock, but he’s beginning to act like them.