By Jennifer Bendery, GalleryWatch.com
Austin, TX –
Charged with the daunting task of reforming the state's tax structure and reducing property taxes, the 24-member Texas Tax Reform Commission today held its first hearing and began discussions on how to achieve the chairman's stated goal for the panel: to produce "a tax system that is the envy of the other 49 states."
Gov. Rick Perry sat in on today's meeting to thank members for agreeing to serve on the commission and to propose general principles to keep in mind when considering changes to the state's tax structure. He noted the "extraordinary breadth of knowledge" offered by commission members who represent various industries from different regions of the state. Their diversity provides Texas taxpayers with the opportunity to "let their voices be heard through you, so they can have a greater say over their taxpaying destiny," said Perry.
The governor said commission members will hear "a singular message on the issue of property taxes: bring them down. I encourage you to take that message to heart." He outlined five principles that the panel should incorporate into their ultimate tax proposal: a system that is fair, broad-based, modern, understandable and competitive.
Chairman John Sharp, who formerly served as State Comptroller, asked each of the panel's 24 members to introduce themselves and then welcomed invited testimony. James LeBas, former revenue estimator for the Comptroller's Office who is currently chief financial officer for the Texas Water Development Board, serves as the research director for the commission. He provided an overview of Texas' major tax reform proposals throughout the last 20 years.
In 1986, Texas' tax system did not reflect the Texas economy, said LeBas. In response, then-governor Bob Bullock proposed his Time of Change, Time of Choice plan, he said, which resulted in the largest tax bill in the history of any state: a $5.7 billion tax bill. But while the plan contained base-broadening provisions, LeBas said it did not address that the economy had changed fundamentally. "The tax structure remains tied to the past," which includes ties to hard products and assets tied to the ground, he said. Soon after, the legislature created the Select Committee on Texas Equity (SCOTE), which "remains the underlying scripture for today's tax analysis," said the research director.
A tax revenue shortfall in 1991 indicated that "the time was right for tax reform in Texas," said LeBas. The result was a "patchwork" of taxes, including a franchise tax expanded to include profits versus just a capital-based tax, he said. Ultimately, however, this just resulted in another set of hikes on existing tax bases, said LeBas, noting that the next several years resulted in repeated attempts to address the school finance issue. By 1996, there was a "sea change in the way we began to look at tax reform," he said, which reflected a change in focus from the state needing more money to a need for lower property taxes. Then-governor George W. Bush called for a business activity tax, which resulted in no substantive tax reform and an exchange in the legislature that was so bitter that no similar initiatives emerged for another four years, said LeBas. Proposals were put forward in the 2003 and 2005 state legislatures, but did not stick.
LeBas said he is not trying to "paint a bleak picture of tax reform," but wants commission members to realize "the depth and extent of the resistance that you are likely to encounter when proposing any sort of changes to the tax system." The status quo "can look pretty darn good to some people" in the face of major changes, he said, and to others, it is like "an opiate."
On the question if Texas is a high-tax state, LeBas said the latest Census ranks Texas as 49th in state taxes per capita but 13th in local taxes per capita. If you combine the two, Texas ranks at "a nice moderate 33rd, a little below the median," he said. The research director added that it is difficult to identify who the average taxpayer is in Texas. "I don't really know if he exists," said LeBas.
The theme of Texas' tax system from an individual's standpoint is that it is "sort of a lifestyle tax," said LeBas, citing the proportionate taxes a person would pay relative to the price of his or her house. But the business "has no real unifying theme" when it comes to funding schools, he said. When dividing up the amount of taxes and fees that end up in public schools from businesses, the result is an average of $1,658 per employee, said the research director. But the amount ranges greatly across different sectors, said LeBas, pointing to an $11,000 per employee average in the oil and gas industry compared to a $400 per employee average in the services sector.
The fact that Texas' service sector is growing while the oil and gas sector is shrinking reflects the imbalanced nature of the state's tax system, he said, not only with regard to how much people pay but with to the direction the economy keeps taking us. "It explains why we are unable to grow our way out of this fiscal problem," said LeBas. "The more we grow, the more pronounced these imbalances become." When commission member Wendy Lee Gramm asked if high taxes in a sector mean that sector is not going to produce jobs and vice versa, LeBas replied, "Yes. Taxes matter."
Economist Ray Perryman provided some economic perspective on Texas' tax system. He applauded the five general principles laid out by Perry, noting that the state's current tax system "is none of those." While it may be somewhat competitive, the current tax structure "fails miserably on the other ones," said Perryman. This is because "our system doesn't reflect our economy," said the economist. "The property tax does not tax most of the growth that we see in the economy today." The result is that the tax base does not grow as much as other bases and is not as stable, he said.
From a business perspective, the Robin Hood tax property tax structure is bad for the economy because 60 percent of taxes are paid for by businesses, said Perryman, noting that this is in comparison to a 50 percent national average. The key issue is distribution, he said, because manufacturers looking to relocate "a big, capital-intensive plant" in Texas know they are going to pay a significant chunk of money in franchise taxes as well as property taxes.
Franchise taxes and property taxes don't grow in line with the economy, said Perryman, which reflects "the fundamental imbalance in the system." They prevent Texas from being competitive for business locations in the future, he said, noting a strong correlation between where manufacturers locate facilities and the state's tax systems. A tax structure based on a low-rate, broad-based tax is a system that would be "very well perceived" by a manufacturer's site selection committee, said Perryman. Citing potential problems within state government, the economist asked commission members to aim for a transitional plan instead of revamping the state's tax structure all at once.
State Demographer Dr. Steve Murdock gave a presentation on population and socioeconomic changes in Texas. He highlighted three critical trends affecting the future of the state: changes in population growth, increases in the non-Anglo population and the aging of the population. Texas is growing more rapidly than the country, he said, pointing out that the state grew by 7.9 percent in 2004 while the nation grew 4.3 percent. Still, Murdock said Texas' future is most shaped by changes in racial and ethnic populations. If the state doesn't make changes to its educational differentials between racial and ethnic groups, he said Texas' workforce is going to be less educated and poorer.
Karey Barton, former Director of Tax Policy for Sharp when he was comptroller, gave an overview of the latest plans explored by the Texas Legislature. In comparing a summary of the House and Senate versions of HB 3, the property tax reduction bill, he noted that the House version targeted $5.7 billion in property tax reductions while the Senate version targeted $3.9 billion. While major components are similar, one major difference between the two versions is the sales tax rate, said Barton. The House version called for a 1 percent increase while the Senate version called for a 1/2 percent increase. In the governor's compromise plan, property tax reductions were scaled back to $4 billion.
Sharp concluded today's meeting by stating that the commission's goal is not to figure out whether to fund schools via the ADA or vouchers since "you can't even have a discussion" about education reforms within the current tax system. Considering that 65 percent of school districts are already maxed out on property taxes, he said there cannot be a "meaningful debate in this state" on the public education or Medicaid or other public services until "you build the platform that is going to fund it. Our job is to build that platform."