by Scott Bennett    Fri, Nov 25, 2005, 02:06 pm

Now that the Texas Supreme Court has ruled Texas’ current education funding system unconstitutional legislators are mulling exactly what type of system would be constitutional. They have until June 1st of next year to decide. Given that December is a lost month and that party primary campaigns will take up most of January, February and March lawmakers really have about two special sessions worth of time. Needless to say the issue of taxation and school funding will dominate the party primaries to the virtual exclusion of all else.

There are several opening options. One, a state income tax, is presumably off the table until Uvalde freezes in July. A state property tax appears to be off the table, as it will require a constitutional amendment and because too many legislators oppose introducing a new tax. Some type of business activity tax seems to be an option – at least in the Senate. Increasing and/or broadening various existing taxes including the sales tax is in a strong position. Republican rhetoric says local property taxes will be somehow cut, but talk is cheap when you consider just how much other taxes will have to go up to fill in the whole local property tax reduction will leave.

Democrats will oppose any scheme that shifts the tax burden from the more well to do to the less well to do. Any shift from the local property tax to any other consumer-focused taxes (cigarette, sales, etc.) does that. Democratic demands will be for business to pay its fair share and not long suffering folks.

Fair enough. So what would business “fair share” be? Bill Hammond, CEO of the Texas Association of Business and Chambers of Commerce (henceforth TABCC) shocked me last week by asserting that ‘business’ pays 60% of all Texas taxes. That seemed excessive if not outrageous. As it happens Hammond is on the money. When you consider the share of the sales and property taxes paid by businesses business indeed pays 60% of all state and local taxes.

Is that not ‘fair’ enough? By comparison the national average is 43%. Or how about this: In California business pays 41%. Ah, but Texas is indeed a low cost state so that means their tax burden is still very light. Right? A non-partisan outfit called COST (Council on State Taxation) says that Texas businesses tax payments represent 5.8% of the state’s gross product (now approaching $1 trillion). By comparison businesses in California pay only 4.1 %. “Fair” would seem to mean a cut in business taxes.

An organization you have probably never heard of, but who will have a lot to say about the shape of taxes to come, The Texas Public Policy Foundation (full disclosure: I was a founding director back in the early 80s but have not served on the board in many years) makes the case businesses don’t pay taxes they merely collect them. In other words businesses either pass on taxes as a cost of doing business to consumers if economic conditions allow, or if not they pass them on to their employees and shareholders in the form of lower wages, abolished jobs, or decreased investor equity.

Put another way if you get less of what you tax then increased taxes on business will mean less businesses in Texas, less economic activity and fewer jobs.

There is a broader concern about business taxation: since people don’t realize it is really they who pay there will always be political pressure to pile it on business. The reason that commercial and residential property are taxed in tandem is that once separated homeowners would demand all property taxes be piled on business.

The TPPF opposes any new business taxes. It does make a distinction between taxes imposed on everyone including business (e.g. sale and property) and taxes imposed only on business (e.g. franchise). Yet property tax relief can be provided to homeowners only one of three ways: separate commercial and residential tax rates (terrible policy), by dramatically increasing the homestead exemption (the same effect as separating), or by giving commercial property a break too (very expensive).

TPPF is right. Businesses don’t pay taxes they collect them although many will collect it from consumers who live elsewhere. TABCC is right in that businesses in Texas are over taxed. And Texas’ homeowners carry far too much of the burden of financing local government including education. And the Texas combined sales taxes (although only mildly regressive so long as food is exempt) is pushing 10-cents and that is too high.

So what to do? How about a very low flat rate personal income tax (2%?) with no deductions, constitutionally dedicated to public education that can only be raised by a vote of the people or by a two-thirds vote of the legislature (for one year)? And take the power to tax property away from school districts altogether? And cut the sales tax? And abolish the grossly unfair business franchise tax?

I wonder what the weather forecast is for Uvalde?

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