HOW ABOUT A MULLIGAN? -- WILL TEXANS SEE THE MARGINS TAX, PART DEAUX

The Quorum Report ^ | July 2, 2008 | Byron Schlomach

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The Quorum Report July 2, 2008 4:52 PM Copyright July 2, 2008 by Harvey Kronberg, www.quorumreport.com, All rights are reserved

SCHLOMACH: HOW ABOUT A MULLIGAN? -- WILL TEXANS SEE THE MARGINS TAX, PART DEAUX Economist Byron Schlomach may have moved on, but even from afar he has some thought about Texas tax contortions

I don’t know how seriously to take Lt. Governor Dewhurst’s threat to revisit the margins tax. When I read about his suggestion though, it brought back a flood of memories - memories of lost opportunities and unheeded warnings.

There are two reasons the margins tax is likely to become a big issue. The first is the monumental failure of Texas’ leaders to boldly address school funding and finance. The second is that despite the impossibility of hiding taxes from everybody, this doesn’t keep the elected class from giving it the old college try.

Let’s recall some history. The school districts (tax-supported government entities) sued the state (a tax supported government entity) because most districts had raised their property tax rates to the maximum allowed by the state. The school districts claimed they’d raised their rates only because they needed to, and since they supposedly needed more money, the state’s limits were unreasonable.

In a nutshell, the state Supreme Court ruled that schools had enough money, but they needed the ability to get more. That seems contradictory; let me restate. Schools have enough money, but they don’t. OK, let me try again. Schools in Texas need to be able to get more money, but without really trying.

Actually, I’m still struggling to figure out just what that ruling said. I’m not saying it was a particularly good ruling, either as an exercise in jurisprudence or logic. But, the other two branches of Texas government are nothing if not obeisant to black robes, so no solution outside of dumping another pile of money on the public schools was ever even jokingly considered.

Texas’ leaders could have just raised the maximum property tax rate to $1.60 or $1.70 from $1.50, but there were at least two problems with that. First, although school boards raised rates, legislators knew who would get blamed. Superintendents and school boards are experts at hiding their wasteful ways by blaming everything on the Legislature. Second, rising property values were turning increasing numbers of school districts “rich” under the funding system, meaning they were having to give up property taxes to other districts. Letting rates rise would not have solved this problem.

State leaders had several other options, as laid out by Ted Kruse, the state’s Solicitor General. Predictably, they picked a non-solution option that had been unsuccessfully employed in the past. They decided to stop robbing the Texas property taxpayer and rob the Texas taxpayer instead. See the difference? Me neither. Nevertheless, that’s what the margins tax is all about. It merely shifts school property taxes from property owners to “businesses,” many of whose owners, customers and employees are property owners. This strategy was doomed from the beginning.

Many legislators could remember 1997 when the Legislature addressed school finance after a property tax commission formed by Governor Bush made its rounds. Then, property tax rates were reduced by making up district losses with surplus state tax funds. Rates shot right back up nearly overnight. After 1997 the Legislature occasionally threw more money at districts in hopes they would slow their march to the $1.50 maximum rate. In reality, this just encouraged even faster increases since the new money flowed to districts through formula adjustments that rewarded tax increases.

In the deliberations that led to the margins tax, the Legislature tried to reduce property taxes in stages while simultaneously allowing school districts to increase tax rates, even as the Legislature loudly professed to be reducing property taxes. When the margins tax was passed, property tax rates were reduced considerably - theoretically down to a dollar over a period of years. But for rates to ever actually get that low, school districts had to exercise fiscal discipline and not raise their rates. That’s like telling a teenager not to drink and drive as you hand him a six-pack and car keys. Besides, the whole point of the lawsuit, the margins tax, and the rate reduction was to allow districts to raise their rates again.

Especially baffling considering school districts’ well-known inability to resist the temptation to raise rates, the Legislature cleverly provided even more encouragement for rates to rise. Districts were given several “golden pennies” of property tax rate. Each of these pennies would yield as much new revenue, with state subsidies, as the Austin school district - a “rich” district - could raise. To go for the gold, though, districts had to raise rates.

So, not only did the Legislature willfully ignore history that told them attempts to bring down property tax rates with state funds were doomed to failure, it positively encouraged school districts to raise their rates. Actually getting down to a $1.00 property tax rate was a practical impossibility - and everybody knew it. The Legislature did not address school finance. The Legislature played caddie as school finance addressed the taxpayer, lined him up between the club and hole, and sank the taxpayer with a hole-in-one.

When surprise is expressed at the fact that school taxes are not any lower today, it must be feigned. Either that, or those expressing surprise are profoundly and willfully ignorant.

The Legislature, Governor Perry and Lt. Governor Dewhurst should have challenged the court with a radically different way of looking at school finance and the state’s constitutional requirements. This might have allowed them to fight Texans’ way out of the Rube Goldberg contraption of school finance the court has cornered them into. Instead, leadership’s timid reaction was to try and make everybody believe they were reducing taxes by hiding the new taxes from as many as possible. Thus, they came up with the margins tax, a tax only business owners, business managers, and accountants would explicitly ever see and sign the checks to pay. The problem is, now business people are mad and state leaders are hearing about it. They succeeded in fooling all the people some of the time, but we have caught up with all the time and only some of the people are still fooled.

"A native Texan and Texas Aggie, from 1994 to 1999 and again during 2002 and 2003 Byron worked for State Representative Kent Grusendorf, former Chairman of the House Public Education Committee. From 1999 to 2002 he worked for the Comptroller's office researching a variety of issues, including school finance. Formerly Chief Economist at the Texas Public Policy Foundation, Byron now lives and works in Arizona. His personal e-mail is: redneckeconomist@cox.net."

Copyright July 2, 2008 by Harvey Kronberg, www.quorumreport.com, All rights are reserved

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