OPINION: The Governor’s Tax Plan
By David A. Hartman
While it is too early to celebrate the House’s passage of the Governor’s tax plan, pending the Senate’s deliberations and passage, it nonetheless was a giant step toward commendable state tax reform.
What Texans are witnessing thus far is a complete reversal of last year’s failure to effectively address the public school finance conundrum, by a resolute and organized process from creation through legislation.
Gov. Rick Perry went back to Square One, establishing a bi-partisan commission under the able direction of John Sharp to consider alternatives, and to propose the resolution. The House then efficiently drew up legislation under the direction of Jim Keffer and Dan Branch and secured bipartisan passage (without allowing dismemberment of the bill by 70 amendments) under the leadership of Speaker Tom Craddick.
It thus far has been an excellent example of inclusive management and what that can achieve.
The Governor’s tax plan has really provided not just a plan to answer the Supreme Court’s demand for an end to relying upon an approximation to a “de facto” unconstitutional state property tax. It is the required permanent solution to state tax reform.
First, it remediates the limitations of the franchise tax by a general business tax without requiring a corporate profits tax or a personal income tax, via a gross margin tax.
Second, it provides the solution to reduction of school ad valorem taxes by roughly one third, restoring constitutional public school taxation on a permanent basis.
Third, the combination of property tax reduction by replacement with the gross margin tax, an increase in cigarette taxes, and use of a portion of the current budgetary surplus makes it not just revenue-neutral but a combined tax reduction.
Fourth, the broader base of gross margins and inclusion of all sectors of “for profit” state enterprise, which provides a more equitable distribution of the tax burden at a far lower nominal rate, is more tax efficient and equitable.
Fifth, the state will now have “three principal legs for the tax stool,” providing the basis for further simplification and equity of the state tax code in the future on the basis of property tax, sales tax, and business margins.
In order to demonstrate these advantages, the Lone Star Foundation commissioned Dr. Milton Holloway, of Resource Economics, Inc. to conduct an econometric evaluation of the Governor’s plan, using the REMI computerized model of the state’s economy used by both the office of the Comptroller and the Legislative Budget Board.
The resulting report confirms the findings described above. But it also shows that given the tax reform proposed, over the coming 10 years, the Texas state economy will increase investment, employment and state output as a consequence.
In evaluating the effects on business sectors of the gross margin tax, one must not forget the size of the residential tax reduction which owners and employees of these businesses will receive, which total two thirds of the tax relief and are one third of their current individual public school ad valorem maintenance and operations tax burden.
A virulent critique of the Governor’s tax plan, prepared and circulated by Steve Hotze, a Houston doctor, is an excellent collection of the misconceptions that could threaten adoption of the plan.
Hotze’s claim that the gross margin tax will be “disastrous for small and medium sized businesses”, and would amount to a “10-15 percent income tax on businesses” is firmly negated by the findings of Dr. Holloway’s reports regarding incidence.
The currently overtaxed sectors of business are shown to be moderately relieved, while those undertaxed are moderately increased in tax share relative to sector GDP.
Dr. Hotze makes no inclusions of business property tax reduction as an offset to gross margin tax, nor does he consider the residential property relief the owners and employees will secure as well.
The Holloway investigations predict positive rather than negative growth, contrary to Hotze’s claims. As for his dismay that unprofitable firms will have to pay taxes, the same as profitable ones do, since when have conservatives proposed that taxation should disproportionately tax profitable enterprises to subsidize losers?
It would seem that Dr. Hotze’s real concern is that much the same as other providers of services — the tax reform package will require professionals to pay a more equitable share of state taxes. Most have accepted this concept as a necessary part of good citizenship. Dr. Hotze must eventually come to the same conclusion.
In the meantime, let’s all keep our fingers crossed and encourage the Senate to pass the tax reform bill, expedited without dismemberment by amendments. The Governor’s tax bill, like any other legislation, could always be improved, but it is a sound framework for more efficient and equitable — and constitutional — state taxation. At the same time, it gives state taxpayers welcome tax relief.
We need the Senate’s approval of HB 3 as sent from the House for an end to the public school finance dilemma, with such improvements as possible reserved for future sessions.
As a postscript, it must be noted that the Governor’s tax plan will not provide an end to “Robin Hood” transfers. We shall remain in the dilemma between, on the one hand, the constitutional requirement for reasonably proportionate taxation, and on the other hand a “de facto” state property tax, given strictly proportionate (and shared) taxation equalized from district to district.
A less rigorous sharing of “Robin Hood” transfers will probably continue to be the unhappy middle ground.
But we do not need the details of that squabble standing in the way of comprehensive tax reform.