Texas Tribune Blue Government News
In the early days of the 1997 legislative session, then-Texas Gov. George W. Bush promised to “spend every dime” of his political capital on a multi-billion dollar tax reform plan.
The overhaul was expected to burnish Bush’s executive bona fides for a presidential run, showing he could marshal bipartisan support and tackle a formidable fiscal issue. Instead, the plan ran up against strong opposition and dramatically collapsed — at the feet of Bush’s own GOP senators.
“It’s just too much pain,” former state Rep. Paul Sadler, D-Henderson, said he was told by a Senate leader. “The adversarial side was too great.”
More than two decades later, a new attempt at tax reform may encounter the same political pitfalls.
Gov. Greg Abbott and other state leaders have bitten off a major tax reform plan, and are pitching fellow conservatives — generally loathe to raise taxes — on a sales tax increase. Their proposal could generate some $5 billion in new revenue a year, which would be used to offset property taxes.
But with just a month left in this legislative session, it’s unclear if the plan will survive.
Like Bush, Abbott faces a school-finance system that’s come under court scrutiny, and is increasingly dependent on local property tax levies. Like Bush, Abbott has backed a plan that would swap one source of tax revenue for another — with a goal of having no net tax increase.
Senate Media Services
But political observers say the optics of any new tax can be politically poisonous in the hands of a skilled Republican primary opponent. And the prospect of a tax restructuring can pack industry groups into an ardent opposition bloc, as they seek to protect their bottom lines.
“This is not a Texas-specific phenomenon,” said Billy Hamilton, a former deputy comptroller and now deputy chancellor at the Texas A&M University System.
A dramatic reduction in one tax often leads to an increase elsewhere.
“The problem is, the politics of doing that is extraordinarily difficult because every exemption has advocates,” Hamilton said. “You’re going to expand it to 50 new items? You wind up spawning 50 political fights in the Legislature.”
Already, the sales tax plan has made fiscal conservatives squirm and earned a rebuke — then approval — from Grover Norquist, originator of the no-new-taxes pledge endorsed by Ronald Reagan and his ideological progeny. In a recent letter, Norquist said his conservative organization, Americans for Tax Reform, preferred that lawmakers pay for property tax reform with spending restraint. But that a revenue-neutral tax swap was not in “violation” of the group’s “Taxpayer Protection Pledge.”
The Senate, meanwhile, has mobilized a last-minute working group to look at alternate sources of revenue. The announcement came as the chamber’s self-proclaimed “tax man,” state Sen. Paul Bettencourt, R-Houston, announced he had grave concerns about a sales tax pitch.
“We’ve never had a swap that’s worked,” he told colleagues at a hearing.
But at a joint press conference Friday, Abbott said it was the “urgency of the demand” from Texans clamoring for tax relief that “brought us to a point where we’re talking about increasing sales tax.”
“If we are able to pass a sales tax increase that will be dedicated to driving down property taxes — if you add that to all these other strategies that we are working on,” Abbott said, “we are going to be able to leave this Capitol and inform our fellow Texans that their property tax bills next year are going to be less than they were this year.”
“I need you to do this”
Most states rely on a mix of income, property and sales taxes to provide a relatively stable revenue stream. But income taxes are a political non-starter in pro-business Texas. Abbott has proposed outright banning them.
Bob Daemmrich for The Texas Tribune
Texas also has no statewide property tax. Instead, property owners pay taxes to local authorities, like cities, counties and school districts, which are partly funded by the state. Decades of court rulings have probed the equity of Texas’ school finance system, and its reliance on local tax bases that have wildly disparate levels of wealth. In past years, court orders have forced the Legislature to rebalance the tax system, including in 2006, under then-Gov. Rick Perry.
“There’s simply not another tax in the system that can bear the burden of school finance and meet other needs,” said Sadler. “So you’re going to be stuck in this property tax dilemma,” perpetually caught between school funding and rising tax bills.
It would take “massive tax reform of the whole system” to change it, said Sadler, who co-authored a rewrite of the Education Code in the 1990s.
Bush took aim at the state’s school tax system when he was campaigning for governor. In his second legislative session, in 1997, he made his pitch: A multi-billion dollar tax plan that would reduce school property tax rates by 20 cents statewide. It would be funded, in part, by an overhaul of the franchise tax and a budget surplus.
The plan was altered by the Legislature. And it quickly faced headwinds.
A bid to increase the sales tax rankled Democrats, who said the tax would disproportionately affect poor people.
Proposed changes to the business tax struck fear in the hearts of limited partnerships. (Because of their structure, they were not paying those corporate taxes to the state.)
And an army of lobbyists sprang into action to defend clients threatened by new taxes.
In April 1997, one Democratic lawmaker remarked on the ambience in the Capitol: “It’s a feeding frenzy.” It’s like “running into a pool of sharks,” former state Rep. Gerard Torres, D-Houston, told a Fort Worth Star-Telegram reporter, of the lobbyists congregated outside the House chamber.
Even the 1997 chair of the tax-writing Ways and Means committee, state Rep. Tom Craddick, did not offer an enthusiastic explanation for why he was carrying the legislation for the governor.
“As a courtesy to him, I am introducing his bill in my name,” the Midland Republican said, in statement at the time. “All inquiries or questions about his bill should be directed to his office.”
The House and Senate, headed by Democrats, pushed tax plans that differed from Bush’s. Led largely by Sadler, the House tried to find new revenue by closing tax exemptions. The Senate took a more conservative tack, and opted to broaden the business tax base.
“It was a bloodletting of a session,” said Sadler, who chaired the House’s public education committee. “I’m sitting in the room with [then-Lt. Gov Bob] Bullock and Bush and they are literally in two chairs facing each other, almost nose to nose. And Bullock’s saying, ‘I’m not doing this,’ and Bush is saying, ‘I need you to do this,’” he recalled.
In the end, a compromise deal collapsed. From its remains, lawmakers salvaged a plan to triple the homestead exemption, from $5,000 to $15,000, paid for with a $1 billion budget surplus. It saved homeowners an average of $140 a year.
Bush stood by his attempt to overhaul the system, saying he fought a good fight. But the plan’s failure was recounted as he ran for president, even evoking comparisons to the infamous “no new taxes” promise his father, George H. W. Bush, made in 1988.
“Hell froze over”
A decade later, tax reform was all but forced on the state. The Legislature was under court order to fix its school funding system. The deadline to do so was tight: Lawmakers had less than one year.
Perry formed a tax commission — headed by his longtime political rival, John Sharp — and called a third special legislative session to ram through a fix. In 2006, Perry signed into a law a complete overhaul of the state’s loophole-ridden business tax, coupled with changes to the tax on cigarettes and used car sales.
The state comptroller forecast the new franchise tax would bring in $6 billion its first year — projected to help cover a one-third reduction in school property tax rates. But it didn’t bring in the money it was expected to. Nicknamed the “margin tax,” it was complicated and predicated on definitions that didn’t exist in the federal tax code. Estimates for it fell short, to the tune of $1.5 billion that year.
Since then, lawmakers have steadily chipped away at the tax, and efforts to eliminate it altogether have gained steam.
(Some of the antipathy to the business tax is because it is not imposed only on earned profits, lest it be considered an income tax. Under this model, businesses must pay taxes whether they are making a profit or not.)
Still, the swift passage of the tax overhaul was a mammoth feat. James LeBas, who worked in the Bush administration and is now a lobbyist, chalked it up to the pressure of the court order, the novelty of the tax, and the “magic” of Perry and Sharp, a former comptroller and now the chancellor of the Texas A&M University System.
At one of the final hearings of the bill, LeBas recalled the Capitol auditorium was packed with witnesses testifying in favor of it. “I’m talking major lobbyist-types, school finance-types,” said LeBas, who was instrumental in creating the plan.
“John Sharp said, ‘The temperature just reached 32 degrees in Hell,’” he remembered. “Hell froze over.” Sharp declined comment this month.
“There’s just not many ways to do it.”
But any relief taxpayers felt in 2006 was short-lived. Property values rose. Taxing units raised their rates and issued more debt. The Great Recession decimated the national economy.
Fast forward to the 2019 legislative session, and the concerns that plagued Bush and Perry are back in full force.
The Legislature is negotiating an omnibus school finance package that could save the owner of a $250,000 home $100 a year, or more, in property taxes. They have priority bills to cap the rate at which property taxes rise, aiming to prevent the rapid increase that demolished the 2006 relief.
And after proclaiming that property tax reform and school finance would play leading roles during this 140-day session, the state’s top three leaders unveiled a tax swap plan in April. It calls for school property taxes to be offset by a one-cent increase to the sales tax, making it one of the highest state rates in the country — alongside California’s. Most Texas cities and counties would see their sales tax rates reach 9.25%.
But the plan’s passage is far from assured.
As in 1997, Texas Democrats are loathe to raise the sales tax, with a party spokesman calling it “dead wrong.”
Some Republicans — including the governor — are adhering to strict conservative orthodoxy and insisting that each new tax dollar be spent on tax relief.
Meanwhile, Bettencourt has eschewed the swap altogether and said the state could collect money from an online sales tax, or divert severance taxes on oil and gas production. Those taxes are volatile and are generally sent to the state’s “rainy day” fund, or earmarked for highways and schools.
When it comes to reforming the school finance system, “there’s just not many ways to do it,” said Hamilton, the former deputy comptroller.
Public education funding must be carefully balanced, and the property tax is so large, it can’t easily be replaced by sewing up an exemption or dredging up state revenue. At the same time, even a major cut to the property tax yields a marginal reduction on most taxpayers’ bills.
Abbott, at the May press conference, said a sales tax swap would allow for “sustainable” tax relief. Bonnen, R-Angleton, said the new revenue would yield a “noticeable” difference on property tax bills — a $250-a-year reduction for the owner of a $200,000 home, he said.
Still, Brandon Rottinghaus, a University of Houston political science professor, said the swap “may have been more than most Republicans and Democrats bargained for when they backed tax reform before the session started.”
Though the 1997 and 2006 sessions provided some relief, he said both Bush and Perry “tried to go big on reform and missed the mark.”
“There have been these moments where there has been tremendous opportunity for change,” Rottinghaus said. “And it’s happened, just not the way the governor intended.”