03/31/2006: "Sharp Proposal Can Benefit the State"
The Texas Tax Reform Commission has made some significant proposals that could eventually prove highly beneficial to the state economy. The recommendations of the commission, chaired by John Sharp, former Comptroller of Public Accounts, reflect a considerable overhaul and modernization of the Texas tax system.
If adopted by state lawmakers during the special session which begins April 17, the plan will provide record tax relief, real tax reform, and greater tax fairness for those who own homes and businesses. The plan will also supply schools with a reliable revenue stream for the future. Moreover, it will provide opportunities for economic growth and job creation.
Although all the intricacies of the Commission’s proposal have not yet been thoroughly examined by the legislators, sufficient information is available to assess its value. In general, the plan will reduce property taxes, eliminate the current corporate component of the franchise tax, and remove much of the penalty currently imposed on large, capital-intensive enterprises. In doing so, the proposal will stimulate investment and economic development across the state. The plan will also tap about $1 billion of the state’s budget surplus.
A special feature of the program suggested by the Commission is that, if adopted, the burden of taxation will be spread more evenly throughout various industrial sectors, thus making the system more responsive to expansion in state performance and fiscal needs.
The plan calls for the largest property tax reduction in state history, providing more than $6 billion in relief, which represents a 33% reduction in school operations taxes for homeowners and employers. As a result, homeownership will be much more affordable and employers will be able to use more of their financial resources on jobs and growth.
The Commission’s proposals ensure that a greater share of education costs will be assumed by the state; picking up about half of the cost compared with an estimated 36% currently. As a result, it ends the over-reliance on local property taxes to fund school operations and reduces the amount of local property tax dollars that are recaptured and shifted from one district to others elsewhere in the state.
Texans in every income bracket will receive some relief if the proposal is adopted. The only exception will be those who use tobacco; the plan calls for a $1-per-pack tax increase in the cigarette tax.
In addition to the general tax relief the plan suggests, it will also institute a noteworthy reform in the franchise tax, making it broader and fairer, while lowering it from 4.5% to 1%. In doing so, it closes the loopholes so that more businesses will pay their share of education costs and spreads the opportunity of paying for education across a broader cross section of the economy. The result will be a more stable and predictable revenue stream for schools.
Another benefit of the plan will be its creation of a strong climate for job expansion by doubling the small business exemption from $150,000 to $300,000 in total revenue and indexing it to inflation. Exemptions in place will continue for sole-proprietorships and general partnerships owned exclusively by natural persons.
The increased efficiency in the allocation of the tax burden alone will result in substantial gains to the economy. Our estimates suggest the efficiency will return $2.179 billion in annual Total Expenditures; $0.794 in annual Gross State Product; $0.216 billion in annual Personal Income; $0.867 billion in annual Retail Sales, along with the creation of some 11,265 Permanent Jobs.
In addition, expansion in business activity will provide an annual increment to State revenue of some $301.2 million, with practically all major industrial sectors reaping increases in output and employment. When the real estate gains and stimulus to economic development are factored in, the estimated benefits rise to $10.971 billion in annual Expenditures; $4.158 billion in annual Gross Product; $2.118 billion in annual Personal Income; $1.640 billion in annual Retail Sales; and 48,755 Permanent Jobs. A further benefit will be the stimulation of more than 2,000 new housing starts per year and almost 3,000 sales of existing homes.
The Texas Tax Reform Commission’s proposals represent a momentous milestone in moving our tax structure toward a model well suited for the information and technologically oriented society in which we live. Lawmakers are encouraged to give thoughtful consideration to what it can mean for Texas—today and tomorrow.