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Public School Finance Reform Update

April 13, 2006

On Wednesday, April 12, 2006, I attended a meeting with State Senators Florence Shapiro and Royce West to discuss Governor Perry’s plan for public school finance reform. This was the beginnings of a dialog with local elected officials and business leaders about the proposals.

By way of overview, the plan proposes broadening the applicability of the franchise tax so that more businesses pay a larger portion of the total taxes, and at the same time, lowering property taxes on residential and commercial properties. The Legislature will use the additional tax revenue to fund at least 50% of public education.

Here are some of the highlights:

  • The reformed franchise tax will be broader and assessed at a lower rate. It provides a lower franchise tax rate of 1% (and .5% for certain low-margin employers, like retailers, wholesalers, and restaurants) than the current rate of 4.5%.
  • Unlike previous proposals for franchise tax reform, it provides employers incentives for hiring more workers, providing health insurance, investing in worker pensions, and investing in dependent healthcare.
  • Sole-proprietorships and general partnerships owned solely by natural persons are exempt from the tax.
  • The small business exemption is doubled from $150K to $300K in total revenue.

In exchange for the expanded business tax, property taxes will be reduced. This will be accomplished by lowering school districts Maintenance and Operations tax (M&O) to $1.00 from the current $1.50. Essentially, that means cutting the amount of taxes a school district can levy for school operations.

The new plan will also impose a $1 per pack tax on cigarettes.

The end result would be an infusion of new tax dollars. Both West and Shapiro agreed that the amount of tax revenue projected under this plan is conservative. They expect the tax reform will increase tax revenue by as much as $8 billion.

There will be a lot of debate about how to use the “surplus.” Currently, the extra revenue raised will go into the general revenue fund, but there are those that want it statutorily earmarked for education.

At this point, the plan is still a commission report so it could look very different by the time it is sent to the Senate. Even so, the general consensus is that, of all the plans, this one seems to bring about the least resistance.

The legislature is scheduled to go into special session Monday at 2:00pm for 30 days. Shapiro thinks we will finally see action during this session. If not, the result could be that the Comptroller (who is running for Governor) could, in a political move, shut down the schools.

In terms of the legislative procedure, the thinking now is that the Speaker of the House will divide the proposal into 6 different pieces of legislation. Once the individual pieces are passed by the House, they will go to the Senate, and be put back into one package.

One troubling development is the prospect of lowering the appraisal cap from 10% cap to 5%. For fast growing cities like Cedar Hill and Frisco, this could severely limit a city’s ability to hire new police officers and firefighters, and expand infrastructure necessary to support the new growth. Similar caps have been defeated in prior sessions. I talked with West and Shapiro individually following the event to make sure they understood the implications.

It is sad that Texas SAT scores rank 47 in the nation. 1 out of 3 students will drop out. Of those that make it to college, 30% have to take remedial courses. This plan won’t solve that problem. We must quickly to turn our attention to real education reform.

You can read about the specifics of the plan at http://www.governor.state.tx.us/priorities/tax_reform/TTRC_report.

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