Under the Gun: June 1 Deadline Looms Over Tax Debate

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Legislative Affairs Feature - April 2006   

By   Ken Ortolon
Senior Editor  

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 funding.

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, 'That's fair.'"

Whether lawmakers will go along with those proposals is another matter.

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." 

Constitutional Conundrum  

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 problem.

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 cigarette taxes.

Representative Pitts told the Quorum Report , 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 political will.

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 rates.

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."

Ken Ortolon   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  Ken Ortolon.   


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