TAXES

Any meaningful school finance reform unavoidably involves tax reform. The tax system established in a special session could determine the size of state budgets for the next ten years or more.

I am Scott McCown, Executive Director of the Center for Public Policy Priorities. Thank you for inviting my testimony today. I applaud Lt. Governor Dewhurst, Senator Shapiro, and the Senate for proposing a specific school finance plan.

Texans need to face our own fear of the Monster in the Closet--the state income tax. If we can find the courage to fling open the door, we too will discover that there is no monster.

In 1999 the Legislature passed SB 441, which created franchise tax credits for research-and-development, capital investment, job creation, and day care spending. Credits that have already been earned under these provisions, but not yet used to reduce franchise tax payments, total $371.1 million. These credits could be used to reduce state revenue for up to 20 years in the future.

The optional homestead exemption permits school districts to exempt up to 20 percent of the value of residential homesteads from property taxes. Under current school-finance rules, the state replaces one half of the revenue that school districts lose to the exemption. This provision could cost the state an estimated $224 million in 2005. Fewer than one-quarter of school districts offer this exemption. More than half of the benefit of the exemption goes to homeowners with a family income of over $90,000 per year.

Texans need to put more money into state government. Our state has a budget shortfall close to $15.6 billion, meaning it needs that much money on top of the comptroller's revenue estimate to do for the growing number of Texans next biennium what it did this biennium. This primer discusses ways to raise this money.

The Texas Legislature met in emergency special session in 1986, when a sudden collapse in oil prices reduced state revenue dramatically. The Legislature responded to the crisis by raising taxes by 6.1 percent, as well as reducing spending by 4.6 percent. This is equivalent to a tax increase of $3.4 billion for the coming 2004-05 fiscal biennium, as well as a spending cut of $2.9 billion from current budget levels. The budget deficit is proportionately larger now than it was then, but a similar approach is needed.