Tax leaders cheerless over tax prospects

By APRIL CASTROAssociated Press Writer

AUSTIN (AP) - As cheerless lawmakers explored a new tax system to pay for public schools, leaders acknowledged Friday that even if they reach an agreement in the remaining days of the special session, it won't go far enough to modernize the state's antiquated business tax structure.

Instead, proposals will merely patch the law that now allows thousands of businesses to avoid paying.

A new business tax structure should depict Texas' service-oriented economy and should “be fair and broad based, what we've been trying to do forever,” said Rep. Jim Keffer, an Eastland Republican who has led the House tax-writing effort. “We weren't that successful this time.”

In the final days of the special legislative session, a panel of House and Senate negotiators are working to hammer out a compromise between proposals that each chamber has already approved. Each body rejected separate attempts to restructure the state's business tax, in favor of a watered down version that closes loopholes without changing the system.

For more than 80 years, the franchise tax was based on a company's net assets. It fell heavily on oil and gas companies, utilities and others with a lot of land and equipment. In the 1980s, companies successfully sued over the tax, forcing the Legislature to patch it in 1991 by making it more like a corporate income tax.

The Texas franchise tax, which dates to 1907, raises about $2 billion a year.

Only one-fourth of the 580,000 corporations doing business in Texas paid the franchise tax last year, according to the state comptroller's office. Counting businesses that are not incorporated – such as partnerships and sole proprietors – fewer than one in 10 of Texas' 2.4 million businesses paid the tax, the comptroller estimates.

“Ultimately, we will do it because the voters will demand it, the courts will demand it and the state's economy will demand it,” said Sen. Steve Ogden, a College Station Republican who has led the Senate's tax bill. He called both the House and Senate versions of the bill inadequate.

Keffer and Ogden predicted that the Legislature would one day be back to restructure the state's business tax.

Changing the state's business tax has confounded Texas politicians for years. When he was governor, President Bush tried and failed to rework the business tax system.

Bush made tax reform his top priority in 1997 and asked lawmakers to grant $3 billion in property tax relief. To replace that education money, he advocated spending some of the budget surplus, raising sales and motor vehicle taxes and imposing a business activity tax.

But the Legislature wouldn't go along. Even Republicans who normally supported Bush were lukewarm, amid heavy lobbying by business. Lawmakers settled on a scaled-back plan and a $1 billion tax cut, allowing Bush to claim a partial victory.

In the current legislation, closing the loopholes would be one of the revenue sources intended to replace reduced property taxes. Both chambers adopted proposals that would lower school property taxes for homeowners, but to varying degrees. The amount of property tax relief could be a key obstacle for agreement between the two chambers.

The House has proposed lowering the current school property rate from the current maximum of $1.50 per $100 of property value to $1.23 in 2006 and $1.12 the next year. The Senate approved a more modest property tax cut to $1.30 in the first year.

“In the original (legislation) we got down to a dollar, but because of help from different members of the executive we are not there anymore,” Keffer said, referring to pressure from Perry's office. “We in the House would like to stay around those numbers the best way we can if at all possible.”

Money also would be generated by increasing the sales tax, though both chambers disagree on how much to raise that levy. Both chambers want to raise the cigarette tax by a dollar – a proposal that has cigarette-maker Philip Morris USA running radio ads across the state in opposition to the tax bill.

The Senate also wants to raise alcohol taxes by 20 percent. Higher alcohol taxes have been repeatedly shot down in the House.

Both sides expect to meet throughout the weekend and say they need to have a plan to the full chambers by Monday to avoid a legislative train wreck _ either failure to reach a compromise and meet legislative deadlines before the session ends Wednesday or a threatened filibuster by a Democrat over the proposed sales tax hike.

“I know time is of the essence here in this special session, but just to do something to do something would be wrong for the state of Texas,” Keffer said.