Texas Taxes and the White House

An Observer Editorial

Texas Observer; January 17, 1997

The crude political dynamics of the tax-reform fight about to consume the 75th Legislature are easy to understand. If Governor Bush prevails, he can run for governor in 1998 and the Republican presidential nomination in 2000--claiming to have reformed the state's burdensome tax system and lowered taxes at the same time. If Bush's tax reform initiative fails, Democratic Comptroller John Sharp, whose office is expected to provide the numbers by which Bush will fix the tax system and who is also interested in running for governor in 1998, wins. Lieutenant Governor Bob Bullock, presiding over the first Republican Senate since Reconstruction, doesn't believe there is a property tax crisis and coyly asks why he is expected to sell the Governor's proposal to a Republican Senate majority. House Speaker Pete Laney, who was enraged in mid-November when Bush failed to consult him before publicly promising a billion dollars from surplus funds for tax relief--and is still angry because Republicans went out of their way to recruit a challenger for him in the last election--lacks enthusiasm for the issue and says he's more concerned that the State of Texas is about to put eighty-year-olds out on the street because of new welfare funding formulas. Many legislators don't like the Governor's package because if it passes he gets the credit, and if it fails they get the blame. The legislation must be passed early, because the entire budget process will be put on hold until it is complete. Several tax-reform components are constitutional amendments, which require a two-thirds majority in both houses. Whatever passes is certain to result in a court challenge. And House Public Education Committee Chair Paul Sadler warns that even a slight change in property tax rates will drastically alter the delicate (Supreme-Court-mandated) equations that equalize school funding. It's that simple. The only reason legislators are not already extending their Austin condo leases through August, in anticipation of a special session that would follow the May adjournment of the regular session, is that a special session on school taxes would also be a special session on the budget. Democratic State Party Chair Bill White doesn't think the Governor has the backbone (or the cartilage) for a special session that would hold the state's budget hostage. "I predict he'll get weak at the knees," White has said of the Governor on several occasions. Recent statements by Bullock and Laney suggest the Democrats might be testing Bush's knees. "He doesn't have a plan," Bullock told Texas Monthly in early December. "He just has ideas. He says he'll give us an outline. When you pass a tax bill, you better know what you're doing because Texas is stuck with it for a long, long time." Laney, according to one Capitol staffer, was "so angry he was shaking" when he learned from news sources that Bush had pledged a billion dollars for tax relief after maintaining for months that his proposal would be "revenue neutral." So the Speaker went after Bush--in private and in the press. In November, he told the Governor to stop listening to his political advisers and start listening to his legislative advisers. In December told the Houston Chronicle there might not be enough surplus funds to cut school taxes by $1 billion. And in early January he told the Dallas Morning News that he'd like to see the Governor's plan "in written form." "We'd like to see something in writing rather than in concepts. We've worked with him in the past on concepts. We've said we'll try to work this one out; we'll go forward with you. But taxes are a little more critical deal," Laney said. I if the Governor is to make himself presentable for the Republican nomination in 2000--and almost all the handicappers have him in the top five--he has got to deliver a tax cut. All the other Republican governors mentioned--Christine Todd Whitman of New Jersey, John Engler of Michigan, Tommy Thompson of Wisconsin--have proved their manhood by cutting taxes. At a Republican Governor's conference in Michigan, Thompson even warned Bush not try to replace money lost in property tax reform by raising taxes elsewhere. "I cut every state agency, every program, 5 percent the first year and 10 percent the second year," Thompson said. "I would suggest that instead of raising taxes, that he cut state agencies." But Governor Thompson does his budget cutting in Wisconsin, where government programs are more generous than in the state Molly Ivins describes as "Mississippi with good roads." To provide for a tax cut here, Governor Bush grabbed for the budget surplus--and shattered any illusion that he, Laney, and Bullock are collaborating on tax reform. Bush's decision that presidential politics are more important than bipartisan collaboration might serve both the political interests of the Democrats and the public interest. Local property taxes provide $9.1 billion (53 percent) of the funding for the state's public schools. State taxes and revenues provide $8.1 billion (only 47 percent), in a system that each year grows more dependent on property tax. But the great public uproar the Governor claims to hear might be more audible to him than to Bullock or Laney because most of the complaints are coming from Republican Party constituents living in white-flight suburban school districts. In fifty mid-wealth school districts and the state's fifty poorest districts, since 1991 the average tax rate has increased from $0.90 to $1.40 per hundred dollars of value. But in the state's fifty wealthiest districts, the average tax rate has increased from $0.37 per hundred dollars of value to $1.38 per hundred dollars of value. That's an increase of almost 400 percent among suburban Republicans, who began to see their school taxes soar after the Legislature complied with state Supreme Court rulings and equalized school funding. That's a political problem for a Republican Governor and a liability for a presidential candidate. Democrats, on the other hand, might realize they have little to gain by adopting the Governor's reform package. The combination of sales and business taxes included in "the plan" currently circulated among select legislators shifts much of the tax burden from homeowners and businesses to consumers. What would Democrats gain by shifting the tax burden from suburban Republicans to families with lower incomes? Governor Bush calls consumption taxes "voluntary," which may be somewhat true for him, because his income allows him to spend only a small percentage of his earnings on items covered by sales tax. But low-income families typically spend about three-quarters of their income on goods and services subject to sales tax. In fact, according to the Austin-based Center for Public Policy Priorities: "The sales tax burden as a percentage of a family income is four-and-one-half times greater on a Texas family in the state's lowest income group than it is on a family in the highest income group." A business activity tax--known as a value added tax--also falls heaviest on those who are least able to pay. "The Congressional Budget Office calculates that a national VAT like the one being considered for Texas would take 4.8 percent of the annual income of a family in the lowest income group, 2.8 percent of a family in the middle-income group, and only 1.5 percent of the income of the highest-income families," according to Dick Lavine of the Center for Public Policy Priorities. And the biggest losers of all, if the Governor has his way, will be renters--who represent 40 percent of the state's residents. Homeowners will at least get property tax relief. Renters will get only two tax increases: increased sales tax and the new value added tax increases businesses will pass on to consumers. "It just won't work--the poorest areas are going to suffer," El Paso Representative Paul Moreno said after listening to fellow Democrat Rob Junell lay the plan out for the El Paso Chamber of Commerce. "We just have to face the reality whether we like it or not, Texas has to put a personal income tax on the ballot." That's the one option that's not an option. In 1991, Bob Bullock made the case for a state income tax, then waited for Democratic Governor Ann Richards and other leaders in his party to back him. After waiting a year, Bullock recanted and proposed a constitutional amendment that would require voters to approve of a personal income tax. The amendment was easily adopted by the voters who are not going to approve a state income tax even if the Legislature were to put it on the ballot. And yet it might be easier to sell a tax increase to voters than to Republican legislators, because many of them take great pride in the fact that they have never voted for any tax increase. So the Governor might find a tax increase a hard sell in his own party, where he will have to sell it. A legislative budget draft released January 7 does not provide any of the $1 billion he requested for tax relief. Where does that leave us all if the Legislature fails to enact the plan put together by the Governor and his surrogates? Well, the Center for Public Policy Priorities--the only progressive group doing serious research and advocacy on tax issues--has found that the property tax, for all its flaws, is fairer and less regressive than both the sales and value added tax. So no progress is better than the progress proffered by the Governor. And if Bush fails--well, John Sharp, Garry Mauro, Jack Kemp and Phil Gramm can each begin to look toward their next campaign.