Texas lawmakers close in on tax reform

News Currents

Adhering to the Texas Tax Reform Commission’s recommendations, five bills aimed at providing long-term property tax relief passed the Texas House of Representatives in late April. While the tax reform legislation lowers the property tax rate, it broadens the scope of business taxes to include limited liability partnerships and other corporations. Otherwise known as the Perry-Sharp Plan, House Bills 1 through 5 moved from the House to the Senate for consideration where, at press time, the Senate had tentatively approved HB 2, 3 and 4. HB 1 and HB 5, were still before the Senate Finance Committee.

The Independent Insurance Agents of Texas endorsed the plan in league with a number of other business and industry organizations. And although the IIAT has gone on record in support of the reforms, they yielded to the fact it would negatively impact some of its members.

“IIAT clearly understands the pressing need for reform of the state’s public school financing and recognizes that while no tax plan will be satisfactory for all, the Perry-Sharp plan does produce as equitable a collection and distribution of tax revenues as is possible under current law,” stated Randy Reynolds, IIAT president.

Speaking as an agency owner, Jimmy Beathard, president of Texas Insurance Professionals (PIA Texas), told Insurance Journal, “Bottom line is we must fund our schools. And though this bill will cost corporate businesses and LLPs across the state more money, if it truly does lower my property taxes, I am for it. When all the revenue-increasing options are considered, this bill is probably the lesser of all evils. There has to be some give and take somewhere.”

IIAT Executive Director David VanDelinder agreed that the reform isn’t the three-point-shot at the buzzer they were perhaps hoping for, but it does provide immediate property tax relief and needed school funding. “We’ve dealt with worse proposals on previous special sessions and we feel this is the most equitable business tax they could come up with,” he said.

In the face of an apparent determination to tax businesses to accomplish the goals for school finance, VanDelinder said, “We are not jumping up and down for joy, but it is a better proposal than we’ve seen in any session so far.”

The first of the five bills uses $2.1 billion in state surplus funds to buy down property taxes $0.17 in the first year.

HB 1, sponsored by Rep. Warren Chisum (Pampa), Rep. Rob Eissler (The Woodlands) and Rep. Dan Branch (Dallas), would go into effect this year and meet the requirement of the Texas Supreme Court’s order to lower the state’s reliance on local property taxes to fund public schools.

HB 2 by Rep. Jim Pitts (Waxahachie) creates a Property Tax Relief Fund outside of the general revenue fund. Likened to a tax relief “lock box,” the fund is generated by revenues from changes in franchise, cigarette taxes and sales taxes on used motor vehicles. Those funds would then be earmarked exclusively for future property tax reductions; future legislatures would be prohibited from using funds from the property tax relief fund for any other purpose.

The goal of HB 2 is to reduce the property tax rate down to $1 per $100 valuation. Once that threshold is reached, one-third of the new revenues would go directly toward public education, with the remaining two-thirds dedicated to further property tax reduction.

HB 3 revises the franchise tax provisions in Texas with the aim of ensuring that each business pays its fair share of education costs. Sponsored by Rep. Jim Keffer (Eastland), Rep. John Otto (Dayton) and Rep. Vilma Luna (Corpus Christi), this bill will be the primary source of funds used to buy down property tax rates.

The primary franchise tax will lower from 4.5 percent to 1 percent. An additional $3.4 billion is expected to generate annually from businesses, including those that currently avoid paying the franchise tax through loopholes. Retail and wholesale firms will pay a 0.5 percent rate.

HB 4, sponsored by Rep. David Swinford (Dumas), tightens the language and the requirements for the sale of used motor vehicles to replace documents previously dubbed as the “liar’s affidavit” requiring sellers to reveal and pay tax on the true sale amount.

The last of the bills, HB 5, increases the tax on the sale of tobacco products to raise an estimated $678 million in revenue for property tax relief. Sponsored by Rep. Peggy Hamric (Houston), it was sent back to committee after being debated on the House floor when a committee substitute was ruled not germane to the bill. It moved to the Senate on April 27.

Approval of HB 5 “completes the House’s total passage of the Sharp Plan,” Speaker Tom Craddick said in a House news release. “HB 5 brings in more additional revenue to ensure taxpayers get the property tax cut they deserve and to allow schools to receive more stable funding.”

“I believe that the measures that we passed … take the necessary first step towards providing long-term, meaningful property tax relief for Texas residents,” said Rep. Bill Callegari of Harris County.

The plan “represents a tax shift from an over-reliance on property taxes to the use of a broader, balanced business tax,” Callegari said. “In order to compensate for the long term property tax cuts, which will benefit both homeowners and businesses, we had to look for an alternative source of revenue. The result was a reformed franchise tax plan that protects our property tax cuts, provides a reliable source of funding for our schools, and does not increase our taxes overall.”