March 16, 2003
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Of Split Rolls, Delaware Subs, and Other Food for Thought

Now that the legislative session is approaching the halfway mark, the competing ideologies of the new regime are clearly emerging around the issue of tax policy. And what is being revealed is far from comforting to the business community, which had perhaps too blithely assumed that a more Republican legislature necessarily means a more pro-business one.

Nowhere is this more evident than in the so-called “split tax roll” debate, which played out in predictably histrionic fashion on Thursday of last week before the House Local Ways and Means Committee. At issue are several bills by various Harris County Republican legislators, primarily H.B. 474 by former Houston City Council member Martha Wong. H.B. 474 slices in half the current 10% cap on the maximum annual increase in the appraised value of a residence homestead. Although this measure would cost local and state governments hundreds of millions of dollars in the middle of a budget crisis, it is nevertheless receiving serious consideration. How could this be so, in light of the draconian budget cutting currently going on down the hall in the House Appropriations Committee?

The answer is undoubtedly multifarious, but it lies somewhere in the priorities of legislators being elected in increasing numbers from the fast-growing suburbs that ring the state’s metro areas. That growth, which has driven residential property values through the ceiling in those areas, has been accompanied by a narrowing in political perspective. As suburban areas have become more homogenized, so has their political representation. Dominated by attention to a relatively small number of issues—property taxes, school finance, and transportation chief among them—some suburban legislators have tied their political futures to two things: reducing residential property taxes and getting rid of Robin Hood. How both can be done without a state income tax, which they vociferously oppose, or some other massive state revenue infusion is unclear at best.

The problem with the so-called split roll—placing an arbitrary value cap on one category of property but not others—is that is merely shifts the tax burden somewhere else while narrowing the total tax base even further. It thus achieves exactly the opposite of what is intended: it raises, not reduces, property taxes and exacerbates the state’s already too-heavy dependence on ad valorem taxation. However, the split roll has become a fixation among some, a quick political fix to a complex and multi-layered tax policy dilemma.

At the same time the split roll is touching off residential taxpayer demonstrations in Capitol hearing rooms, to the dismay of Texas businesses, the effort to bring more Texas businesses under the state’s franchise tax quietly got under way last week. Lieutenant Governor David Dewhurst laid out a variety of “non-tax” revenue alternatives, including closing the so-called Delaware sub loophole. On the heels of his announcement, the chair of the House Ways and Means Committee, Ron Wilson (D-Houston), filed H.B. 3146, which expands the franchise tax in an effort to tax the infamous Delware subs (i.e., SBC and Dell Computer, to name a couple of major examples). The problem is, H.B. 3146, though we had not seen it at press time, probably taxes some innocent bystanders who have been doing business in partnership form for years and don’t realize they are about to be hit with a major tax increase.

While prior Texas Legislatures have solved fiscal crises without much concern for tax equity, the current occupants of the Capitol seem to be going the extra mile carefully to select their tax victims. Residential value caps and extending the franchise tax to some but not all partnerships are definitively anti-business, not the “we’re all in the barrel together” tax policy decisions of the past. In those years, the Legislature may not have acted completely rationally, but it did attempt to spread the additional burden more or less among different groups of taxpayers. The current effort, in contrast, while employing the rhetoric of tax fairness, is deliberately aimed at loading as much of the tax burden as possible on the narrowest possible base. It is not only unfair; it borders on punitive.

There is time to reverse the trend. The split roll, as demonstrated at Thursday’s hearing, will not roll through the Legislature unhindered by vehement and united business opposition. The Delaware sub issue is still in its formative stages and may yet, when legislators realize who these partnerships really are, give way to a broader tax reform initiative. However, the pressure of GOP party politics, already showing a tendency to the cannibalistic, may foreclose rational policymaking for some time to come.