May 2006 Legislative Update

After several years, repeated special sessions, a Texas Supreme Court ruling, and much public frustration, the Legislature finally took action last week to reduce property taxes and address our school funding crisis.

While the total package is not exactly as I would have written it, I was proud to support legislation that provides a $2,000 pay raise to teachers, closes loopholes in the state business tax structure, and reduces property taxes by $1,000 on a home valued at $200,000.

The new system also dramatically reduces the effect of Robin Hood. By the second year of implementation, none of the school districts in House District 50 will see their local property taxes redistributed to other parts of the state.

I was also proud to be part of a new spirit of bipartisanship at the Capitol, in which Republicans and Democrats worked together to find solutions to our state’s challenges. This new spirit was born when Governor Rick Perry asked his former political opponent, Democrat John Sharp, to lead the Texas Tax Reform Commission in its effort to close the loopholes in the business tax system. The Tax Commission’s proposal to abolish the current franchise tax and replace it with a new state business tax was the cornerstone of the $5.5 billion property tax reduction package.

This is a major step forward for school funding in Texas, but there is more work still to be done. The people of Texas must demand that the Legislature invest in a first-class education system that will maintain our competitiveness in a global economy. And as the state assumes a larger share of the burden of financing education in Texas, local school boards - and the voters who elect them - must ensure that the money is spent wisely.

I am honored to serve you in the Texas House of Representatives. Below is a summary of the entire school finance package. I hope you will find it helpful.

Sincerely,
Mark Strama

FREQUENTLY ASKED QUESTIONS ABOUT THE SPECIAL SESSION

What was the purpose of the special session called by the Governor?

Late last year the Texas Supreme Court ruled our school finance system unconstitutional. The Texas Constitution prohibits a statewide property tax, and state law caps school property taxes for operations at $1.50 per $100 of valuation. Because the Legislature has failed to fund schools in an amount necessary to meet state standards, school districts have been forced to raise local property taxes to the maximum allowable rate. The court ruled that because nearly all school districts were taxing themselves at the maximum allowable rate, the state’s school finance system violated the ban on a statewide property tax.

The prohibition against a statewide property tax is consistent with a long tradition in Texas of local control over public schools. This tradition is grounded in the principle that local school boards and their voters are best attuned to local educational needs and local educational costs. With school districts taxing themselves at the cap, they no longer had the ability to set their own budgets. In addition, the Legislature’s share of funding for the system had declined to the point that the Court admonished that the system was drifting towards inadequacy.

The Supreme Court gave the Legislature a deadline of June 1, 2006 to restore local control to school districts by reducing local property taxes.

How can you reduce local property taxes without taking money away from public schools?

Reducing local property taxes without taking money away from public education requires the state to increase its spending on education, to make up for lost property tax revenue. For this reason, Governor Rick Perry created the Texas Tax Reform Commission, and appointed former Comptroller John Sharp as its chairman.

The Tax Commission was charged to identify revenue sources that would enable the state to reduce school district property taxes from $1.50 to $1.00 per $100 valuation - a 33% reduction in school district operating taxes. This would require the Tax Commission to identify over $5.5 billion in new revenues to replace the lost revenue to school districts.

The Tax Commission started by examining the state’s notoriously inefficient corporate franchise tax. Many of the state’s largest and most profitable corporations, and nearly the entire services sector of the economy, avoid the state franchise tax - leaving billions of tax dollars on the table and creating an unlevel playing field for the small businesses that actually pay the franchise tax.

What is the new state business tax?

After holding hearings across the state with large and small business owners, property taxpayers, and education advocates, the Tax Commission proposed legislation to scrap the current franchise tax and replace it with a fairer, more inclusive state business tax.

The new tax is a low-rate, broad-based solution. Businesses will pay 1% on gross receipts (retailers and wholesalers will pay 0.5% due to their smaller profit margins). Businesses will also be able to deduct either their cost of goods sold or their employee compensation, including benefits. Sole proprietorships and general partnerships are exempt from the franchise tax, as are all businesses that gross $300,000 or less.

Unlike most taxes, the new state business tax actually rewards, rather than penalizes, companies every time they hire a new employee, give someone a raise, or contribute to their employees’ health insurance or pension. By granting tax deductions for all payroll expenses, and by reducing property taxes for businesses as well as homeowners, the new tax encourages companies to do more business in Texas, and will improve our economic climate by taxing all businesses at a low rate on a level playing field.

What about taxes on cigarettes and used cars?

The Tax Commission also recommended an increase in tobacco taxes, which will increase the price of a pack of cigarettes by one dollar, as well as a requirement that used car sales be taxed at or near the blue book value of the car. These measures, combined with some surplus revenues generated by higher than expected tax revenues this year, provided enough money to meet the Tax Commission’s goal of reducing property taxes by 50 cents per $100 of property value.

How much will property taxes go down as a result of all this?

The legislation requires school districts to lower their property tax rate for operations by 11 percent (from $1.50 to $1.33 per $100) this year, and by 33% (to a rate of no more than $1.00 per $100) next year. The property tax savings on a $200,000 home will be approximately $1,000 in the second year.

This property tax relief will benefit Texas taxpayers without weakening our schools. Skyrocketing property taxes in Texas have not only hurt homeowners; they have discouraged businesses from locating their operations here. It is important to note that Texas businesses will also benefit from the property tax cut, which will help them to absorb the new state business tax as well.

What steps were taken to improve education?

Because I believe education is the most important issue in state government and is the key to creating opportunity and prosperity throughout the state, I would have liked to have seen a greater emphasis on improving public schools during the special session. However, some improvements were made.

Local Enrichment and Robin Hood

By shifting a large share of the burden of funding education from local property taxes to the state, the need to shift wealth from property-wealthy districts to property-poor districts - known as the Robin Hood system - is greatly diminished. As a result of this legislation, by the second year of its implementation, no school district in District 50 will have to share its local property taxes with any other district.

Even more importantly, the Legislature provided that all school districts, regardless of wealth, can generate significant new funds for education if they choose to raise local property taxes by a few pennies for enrichment purposes. From now on these enrichment pennies, instead of being equalized by the top down through Robin Hood, will be equalized from the bottom up by the state, ensuring that all districts, rich and poor, will receive enough money to meet their needs through their local enrichment efforts.

Teacher Pay

The Legislature provided a $2,000 across the board teacher pay raise. This was a much-needed and long overdue increase in teacher pay; however, it still leaves Texas teachers far below the national average. I believe we need to do more to recruit and retain the best teachers for our children, and paying teachers competitive, professional salaries is a big part of that.

The Legislature also expanded “incentive pay” programs for teachers. Some of the money in the incentive pay program is based on student test scores, which penalizes teachers who take on the most challenging assignments, and could create a competitive - rather than a collaborative - environment on campuses.

I have long advocated that teachers should receive extra pay for extra work that improves the learning environment on campus. Experienced teachers who agree to serve as mentors for new teachers, as department heads, or as extracurricular coaches, should be rewarded accordingly. I worked to ensure that some of the incentive pay funds are directed toward these teachers who go above and beyond the call of duty.

By providing experienced teachers a financial incentive to help new teachers succeed, we can reward our best teachers, develop our new teachers to become great teachers, and improve the quality of instruction in our classrooms at the same time. I will continue to work to see that our incentive pay programs incentivize collaboration and cooperation, not competition, among teachers.

Preparing a 21st Century Workforce

Included in the new law is a High School Allotment, funded at a rate of $275 per high school student, to be spent on initiatives to decrease the dropout rate, promote graduation, and prepare students for post-secondary education. High schools will be allowed more flexibility for non-traditional instructional schedules in order to help students who are at risk of dropping out of school to reach graduation. Students will be required to take four years of math and science in high school.

Pre-kindergarten for Children of Active Duty and Activated Soldiers

I coauthored HB 90, which was included in the major school finance bill. This legislation allows children of active duty soldiers, activated reserve and National Guard, and soldiers who have been injured or killed while serving on active duty to be eligible for pre-kindergarten classes.

School Year Start Date

Beginning with the 2007-2008 school year, classes will begin on the fourth Monday in August for all school districts.

What about the current budget surplus?

Shortly before the special session began, the Comptroller announced that high oil and gas prices and higher than expected sales tax revenues had generated a budget surplus of over $8 billion. A portion of that surplus was spent to fund the property tax cut, and another portion of it was spent to fund the teacher pay raise.

The total package was criticized by some for not spending enough of the surplus on further property tax cuts. However, while spending the surplus would have been politically easy and advantageous, surplus revenues are not a reliable funding source for a permanent property tax cut. Depending too heavily on the surplus could have created a severe budget shortfall in the future.

Others criticized the package for spending too much of the surplus. I believe the legislature was prudent and cautious in spending less than half the surplus on property tax cuts and teacher pay, and that the growth in the new business tax will help to fund those expenditures in future sessions.

Overall, the fact that the plan was criticized from both extremes is probably a sign that the Legislature struck a reasonably balanced compromise.

What about property taxes for seniors and the disabled?

The property tax reduction bill, as originally proposed, neglected to provide proportionate tax relief for senior citizens and people with disabilities whose taxes have been frozen. Representative Elliott Naishtat offered an amendment to the bill and introduced a constitutional amendment to ensure that all Texas homeowners, including those whose taxes are frozen because they are over 65 or have a disability, would receive the same proportional tax relief as other homeowners, and their taxes would be frozen at the new, lower rate. I and other House members supported Rep. Naishtat’s effort, but unfortunately — and inexplicably — his proposals were killed in the Senate.

For senior citizens or individuals with disabilities whose tax rates were frozen at a lower level than the new reduced tax rates, no benefit will be received this year. Others will receive only a small reduction. I will be working with Representative Naishtat and other house members to fix this problem during the next legislative session.