March 3, 2003
60th Day of the 78th Legislative Session (last day bills can be filed)
This section will no longer list all committee meetings for the week. You will receive a separate email that details ONLY the committee meetings where you have bills being heard. This email will give you information on when and where the meeting will take place and list the bill numbers and captions of the bills we are watching on your behalf. If you do not receive such an email, then you have no bills being heard in committees for the coming week.
The Tax Man Cometh

Despite Governor Perry's continuing insistence that the Legislature won't raise taxes to overcome a steadily worsening budget shortfall, legislators on both sides of the Capitol are beginning to explore revenue options that look a lot like "new taxes."

While talk of taxes has been circulating since the session began, Health and Human Services Commissioner Albert Hawkins' revelations regarding the impact of a 12 percent budget cut in Medicaid and the Children's Health Insurance Program probably made a tax bill inevitable. In testimony before the Senate Finance Committee, Hawkins laid out a series of proposed reductions that would remove up to 250,000 kids from the CHIP rolls, slash physician and hospital Medicaid reimbursements by up to one-third, eliminate funding for 41,000 elderly Texans in nursing homes, cut services to 13,000 pregnant women and 5,000 medically needy, and make deep cuts in the state's Medicaid drug program.

Turning old people out of nursing homes and pregnant women out of hospitals is not the way the new Republican majority hoped that things would go in its first session. What makes matters worse is the GOP's insistence that school finance must be overhauled at the same time the state is fighting for its fiscal life. To eliminate Robin Hood and keep school funding at its present level will cost the state at least $2.5 billion on top of the $4 billion or so necessary to keep health and human services funding at or near current levels.

Hopes that the economy will improve and incoming state revenues will pick up are still alive, but barely. Both sales tax and motor vehicle sales tax receipts, the staples of state government, continue to lag behind estimates. Business purchases of taxable items went on the fritz after September 11, 2001, and have not yet begun to recover. While consumer spending remained fairly consistent through much of last year, it, too, has weakened significantly. The drop in sales tax revenues have not only put a big hole in the state purse, but has left cities with gaping budget shortfalls. This has had the effect to of putting even more pressure on local property taxes.

Speaking of property taxes, a big part of the campaign agenda of numerous suburban Republicans, especially those from Harris County, was to lower the cap on annual increases in residential property values from its current 10 percent level. Legislation has been filed to lower the cap to 5, 2, and 1 percent. The cost of such a reduction could run into the hundreds of millions for local governments, but the incidental effect on state expenditures because of the school finance formulas is not inconsiderable. While business groups are banding together to fight this "split roll" property tax proposal, it is gaining momentum among a large group of House Republicans who see the split roll as the salvation of the upper middle-income homeowner.

The split roll property tax idea goes deeper than the residential homestead cap. Some prominent legislators, particularly in the Senate, favor removing business property from the local property tax base and taxing it at the state level. Other proposals would increase the amount of the residential homestead exemption to higher and higher levels, resulting in a de facto split roll. Policy issues aside, the problem with any split roll idea is that it merely shifts property taxes from a privileged group of residential taxpayers to other taxpayers: renters, people who live in lower value homes, farmers and ranchers, and business owners. Moreover, split roll tax schemes don't raise a dime more for public services, and further allow some of the primary recipients of public services --suburban homeowners-- to avoid paying a proportionate share of the cost of governmental services. Yet this inequitable scheme remains a frontrunner if tax "reform" becomes inevitable.

As sales tax revenues go south, some legislators are thinking about expanding the sales tax base to bring more payers into the system. Taxing professional services, such as legal and accounting services, under the sales tax is a favorite idea of the Center for Public Policy Priorities, a liberal think-tank based in Austin. The problem with this idea is that no one seems to be interested in taxing by far the biggest contributors to the service economy: physicians, hospitals, and other health care providers. If one leaves out sick people, one can't find very much left to tax in the way of professional services. And does the Legislature really want to tax access to the courts? Despite these concerns, expanding the sales tax base and raising the tax rate --perhaps as much as doubling it-- is preferred by some GOP Republicans, who see the sales tax as an acceptable public policy alternative to the school property tax.

So what about the famous Delaware sub "loophole" in the franchise tax? While something addressing the Delaware sub situation might have looked inevitable before the session began, it may be less so than previously believed. No one --not the Comptroller's office nor the Legislature-- has yet devised a clean way to tax corporately-owned limited partnerships without a lot of unintended consequences. One proposal on the table would tax any limited partnership that is treated as a corporation for federal tax purposes. Painting with a brush this broad would not only pick up the classic Delaware sub, but a lot of traditional partnership structures as well. Other ideas are equally problematic, either because they too could be easily planned around or because they would be too expansive for the Legislature's taste. It may be that the difficult of "fixing" the Delaware sub problem will raise awareness in the Legislature that the problem isn't a so-called loophole, but a tax that has far outlived its relevancy to modern business organizations.

Finally, it is ironic that in the very session that the GOP finally gained its coveted legislative majority, the GOP is confronted with the biggest political bugbear of them all: the personal income tax. One prominent Republican donor from Highland Park has hired his own lobbyist to peddle a 2.5% personal income tax for public education. Other Republican lawmakers are considering the conditions under which the income tax might be traded for abolishing the despised Robin Hood school finance system.

From this standpoint, it looks like a perfect storm scenario is shaping up. Draconian cuts in welfare spending, higher and public education, public safety, and other parts of the budget will become politically unpalatable. Governor Perry and the legislative leadership, shying from the consequences of such cuts, will ultimately --either this year or early next year-- concede that a tax bill is necessary. At that point, all bets are off, and the state is likely to enter into a prolonged period of fiscal change.