May 9, 2005

Senate Delays School Finance Debate
Amid Latest Projections and Tax Note

LBB Analysis Shows Middle-Income Paying More
while Construction and Services See Big Tax Hit

By Mike Hailey
Capitol Inside Editor

The Texas Senate - thrown off by conflicting projections, a surprising tax equity note and a disagreement on whether to move first on education or tax reform - put off debate on a school finance plan Monday despite a prediction by its leader that it has the votes to pass.

Senators are now planning to move the related tax legislation in House Bill 3 to the top of the batting order ahead of the school bill when they convene again Tuesday night following funeral and burial services for the late State Rep. Joe Moreno, who died in a highway accident last week.

The delay means that the House and the Senate will have less than three weeks to negotiate a compromise school finance and tax plan before the regular session ends at midnight May 30 - assuming that the package of legislation can win the necessary two-thirds support required in the upper chamber before going to conference committee. The House approved the school finance and tax bills in early March.

The Senate was on the verge of launching debate on the school reforms penned into HB 2 when its members received new projections from Comptroller Carole Keeton Strayhorn on how individual school districts would be affected under various assumptions. Lieutenant Governor David Dewhurst said later that the comptroller "historically" doesn't make such projections - even though he acknowledged that she did so during the special school finance session last year. Dewhurst said that State Senators Mario Gallegos and Royce West had asked to see a financial impact analysis on districts. The lieutenant governor said that a follow-up letter from the comptroller later in the day cleared up earlier confusion over whether the Senate's plans are balanced.

Senators made the decision to debate the tax plan first despite a new tax equity note that shows the Senate bill raising almost $500 million more in new taxes than the amount of property tax relief it would provide. According to the Legislative Budget Board document, the Senate tax proposal would raise taxes on middle-income Texans by 3.7 percent while providing a 1.5 percent tax cut for taxpayers who make more than $140,000 per year. Taxes would be 0.4 percent higher for low-income residents, according to the tax equity note. The Senate tax bill proposes a half-penny increase in taxes on general sales and motor vehicle sales and rentals along with higher taxes on cigarettes and alcoholic beverages and an extension of the franchise tax to partnerships and corporations that are currently ducking the levy. The plan would also impose a 25 percent payroll tax on some businesses. Property would be subject to a statewide tax of $1.10 per $100 valuation.

The LBB projects that the services and construction industries would see initial tax liability jump the most while the financial, insurance and real estate industries would receive the most relief. Families with annual income between $23,000 and $32,000 would see taxes go up more than 4 percent - the largest percentage increase among individual taxpayers, the equity note has determined.

State Senator Steve Ogden, the Senate tax bill sponsor, said the disparities between income levels could be corrected by removing the proposed 75-cent increase on a pack of cigarettes from the plan. Without the cigarette tax hike, Ogden suggested that the plan would balance.

The House voted to increase the current 41-cent tax per pack on cigarettes by a dollar. The House also backed a full penny sales tax hike and a business tax that could be paid on payroll or capital.

Amid the crossfire of projections, more than a dozen senators appeared to insist on debating the tax bill before turning to the school measure. But State Senator Florence Shapiro, the school bill's sponsor, said it really doesn't matter which bill goes first because the two are "inextricably linked." Shapiro, a Plano Republican, said the Senate from the outset wanted to debate the school and tax changes together as one bill.

While the bills are separate, the failure of one would essentially invalidate the other. But Dewhurst indicated that Senate leaders have sufficient support in the upper chamber to pass both bills.

The statewide property tax proposal is contained in a separate proposed constitutional amendment - SJR 38. If the joint resolution were to be rejected by voters, most of the planned tax relief for homeowners would be wiped out.