Legislative Affairs Feature - April 2006
They couldn't get it done in a regular session and three special
sessions, but now Texas lawmakers have a gun to their heads. The
Texas Supreme Court has declared the current school property tax
system unconstitutional and has given the legislature until June 1
to fix it.
Lawmakers and Austin politicos expect Gov. Rick Perry to call
the Texas Legislature back into special session this month to make
one last try at school funding reform. But it remains unclear what
tax proposal might emerge as the potential solution, or even if
there is enough consensus among lawmakers and the leadership to get
something accomplished this time around.
A 24-member Texas Tax Reform Commission appointed by Governor
Perry and chaired by former Comptroller John Sharp held hearings
across the state and was expected to release its recommendations in
mid to late March. But Lt. Gov. David Dewhurst and others in the
legislature may have their own ideas about how to reform school
And, complicating the issue is state Comptroller Carole Keeton
Strayhorn's recent estimate that Texas has a $4.3 billion surplus.
That might tempt lawmakers to temporarily patch the problem and
leave the heavy lifting of school finance reform for the next
regular session in 2007.
A further complication is the timing. This is an election year
in which all members of the Texas House of Representatives and half
the Texas Senate are up for reelection. Governor Perry is seeking
another term in office, and Comptroller Strayhorn is running
against him as an Independent.
Regardless of what emerges, Texas physicians want to make sure
the tax is fair, doesn't adversely affect access to care, and
recognizes the contribution doctors already make through programs
such as Medicaid.
"Doctors support a fair and equitable tax system, one that
recognizes the work that physicians are doing, which is currently
subsidizing the state health care system," said Abilene
otolaryngologist Austin I. King, MD, chair of Texas Medical
Association's Council on Legislation.
Beaumont orthopedic surgeon David Teuscher, MD, says a majority
of the tax reform commission and Mr. Sharp recognize that
"practicing medicine is not a traditional business activity" and
that physicians already are burdened with unfunded emergency care,
and underfunded Medicaid, Medicare, Workers' Compensation, CHAMPUS,
and other government-sponsored health programs.
"If physicians are going to be included, they deserve a tax
credit for the subsidies they already are providing to our
government by taking care of our citizens," said Dr. Teuscher, the
only physician on the Sharp commission.
Speaking at TMA's Winter Conference in February, Mr. Sharp said
the commission is working to come up with something that lessens
the burden on physicians, hospitals, and other health care
professionals who participate in those programs. "The health care
industry is special," he said, adding that his commission wants to
propose a plan "that this association can look back at and say,
Whether lawmakers will go along with those proposals is another
Also at the TMA Winter Conference, Sen. Robert Duncan
(R-Lubbock) refused to commit to tax credits for physicians who
provide Medicaid, Medicare, or uncompensated care.
While lawmakers should not do anything "adverse to health care,"
Senator Duncan said, the conservative approach is to enact a
broad-based tax that "brings everybody in."
The state's school finance system was unpopular long before the
Supreme Court ruled it was unconstitutional in November. Over the
past several years, the percentage of overall school dollars coming
from the state declined, so local districts had to raise a greater
share of their revenue from property taxes. Plus, property-wealthy
school districts were disgruntled over having to boost their tax
rates to share revenue with the property-poor districts under the
so-called "Robin Hood" plan.
That caused most districts to tax at the constitutional cap of
$1.50 per $100 of assessed property value. That, in turn, prompted
a number of districts to challenge the system in court.
A 2004 special legislative session, the regular session of 2005,
and two special sessions that followed failed to solve the
With no consensus, Governor Perry and legislative leaders
decided to wait for the court ruling. Last fall, the Supreme Court
ruled that the current system imposes an unconstitutional statewide
property tax since virtually every school district taxed property
at the legal maximum. It ordered the system fixed by June 1.
Before the ruling and anticipating the need for tax reform,
Governor Perry appointed the Texas Tax Reform Commission to
recommend an overhaul of the current tax system.
Mr. Sharp says several proposals are being considered, but
indicated he leans toward an "alternative margins tax" based on a
company's gross receipts, with deductions for all employee salaries
and benefits, such as health insurance coverage and pension plans.
However, business owners and high wage earners could only deduct
the first $300,000 of their compensation. The tax likely would be
applied to corporations and to limited-liability partnerships and
professional associations. The anticipated rate at least initially
would be set very low, perhaps 1 percent of the adjusted gross
receipts, for most businesses.
This tax rewards businesses for hiring people and providing
health insurance and other benefits, Mr. Sharp says. He says the
commission wants companies to have pension funds, retirement
programs, and health plans for their employees.
Dr. Teuscher says the tax will be the panel's "big initiative."
He also believes it will "incentivize providing health care
benefits for employees and their dependents."
Where's the Consensus?
But it's not clear whether lawmakers will jump on the bandwagon.
House Appropriations Committee Chair Jim Pitts (R-Waxahachie) says
he is drafting a school finance bill to cut local property taxes
and increase teacher salaries. His bill would institute a business
tax similar to the Sharp proposal, as well as increase sales and
Representative Pitts told the
, an online political newsletter, in February that he has informed
House Speaker Tom Craddick's office "that I wanted to get out of
court, give teachers a pay raise, and go home."
The tax reform commission also is examining cigarette and sales
taxes, Dr. Teuscher says. "You can pretty much bet on the fact that
we're going to recommend a $1 per pack cigarette tax increase."
The panel likely will not recommend a sales tax increase, but
might propose extending the current 6.25-percent state sales tax to
bottled water and other items not currently taxed, he says.
Dr. Teuscher says the projected budget surplus makes it easier
to craft a quick fix for the problem, but the tax commission
continues to look at "long-term" solutions.
He says the panel probably will recommend ways the legislature
can solve the immediate problem, things it should do because
they're good public policy, and steps it could take if it has the
First would be cutting property taxes, increasing the cigarette
tax, and scrapping the outdated franchise tax in favor of a
broad-based business tax, such as the alternative margins tax. The
second category would include launching a taxpayers' fairness
initiative and removing sales and severance tax exemptions. The
third would be raising the alcohol tax and passing a constitutional
amendment to hold property and business taxes at the new lower
While there has been considerable talk about gambling and a
state income tax, those issues will not be considered in the
special session because they would require voter approval and could
not take effect by the June 1 deadline, Dr. Teuscher says. "A
personal income tax in Texas is dead on arrival."
can be reached by telephone at (800) 880-1300, ext. 1392, or
(512) 370-1392; by fax at (512) 370-1629; or by email at