78th LEGISLATURE, SPECIAL SESSION

Perry budget pulls money from past, future
Lawmakers question governor's plan to shift cash from other years for schools, tax cuts

By Ben Wear
AMERICAN-STATESMAN STAFF
Friday, April 23, 2004

State Comptroller Carole Keeton Strayhorn has spent much of the past two weeks pointing out what she and her staff say are the numerical shortcomings of Gov. Rick Perry's school finance and tax cut plan.

The governor and his people, for their part, have said the attacks by Strayhorn, a possible Republican primary challenger for Perry in 2006, are all about politics and have accused her of "fuzzy math."

But around the Capitol, a good number of Republican and Democratic officeholders, legislative staff members and lobbyists with no particular bone to pick with Perry say the finances of his plan have a gaping hole. A $2.6 billion hole in the 2006-07 two-year state budget cycle, to be precise.

And you don't necessarily need fuzzy math, an accounting degree or rampant political ambition to detect that gap. It's right there on Page 21 of the governor's plan.

To pay for the $7.1 billion in tax cuts and education spending increases that Perry envisions for the 2006-07 fiscal years, the governor would reach back into fiscal 2005 and ahead into fiscal

2008 for almost 37 percent of the money. The upshot is that without that one-time windfall in budget cycles to come, that money would have to be generated some other way.

"You'll be back on the biennium schedule" after the one-time money shift, Sen. Florence Shapiro, R-Plano and chairman of the Senate Education Committee, said Thursday. "And then, you're stuck."

Kathy Walt, the governor's spokeswoman, said time and a recovering Texas economy would solve any such problem.

"The economic expansion will more than fill that," she said.

Aside from Shapiro, another who sees a glitch in the Perry plan is Sen. Steve Ogden, R-Bryan, chairman of the Senate Finance Committee, who attempted with little success at a committee hearing earlier this week to get Perry to explain the disparity.

The critics say that Perry, in attempting to present a balanced financing plan, relied on some accounting tricks commonly used in state and federal government to balance budgets — derisively referred to as "smoke and mirrors" — but stretched those strategies to the breaking point.

Perry wants to cut property taxes by $3.4 billion and increase education spending by $3.7 billion in that 2006-07 cycle. To pay for it, he proposes, among other measures, to raise cigarette taxes by a dollar a pack, legalize and tax video lottery terminals, levy a $5 surcharge on admission to strip clubs and close some loopholes that allow many businesses (including the American-Statesman) to avoid paying the state franchise tax.

But according to Perry's own figures, those changes would generate only $4.5 billion during 2006-07, leaving the $2.6 billion shortfall. To fill that hole, Perry's plan contemplates starting several of the revenue-raising strategies in the 2005 fiscal year to stockpile $1.44 billion for use during the following two years. In addition, Perry suggests shifting sales tax revenue for the first month of the 2008-09 biennium to 2006-07.

That 25th month of sales tax revenue would bring in another $600 million — but the next biennium would once again have just 24 months of sales tax. Perry would bring in another $600 million by doing a similar acceleration of collection on the franchise tax.

Ogden asked Perry about all this when the governor testified Monday before the Joint Select Committee on Public School Finance.

"It looks to me like there's two one-time measures," Ogden said. "How are you going to replace that $2.6 billion in the future?"

Perry said the accelerated tax collections could be continued indefinitely. "That will never catch up to you," he said.

"Yeah, but you can only spend it once," Ogden said.

Perry ended the dialogue by suggesting that "rather than dig a big hole here," his budget chief Mike Morrissey would explain it all to the committee later that day. Morrissey, when he appeared, acknowledged the one-time nature of the $2.6 billion in revenue.

But he told the committee that the revenue estimates were conservative. The video lottery tax and closure of the franchise tax loopholes, he said, likely would raise much more than appears in the governor's estimates. And other economic growth, and the resultant healthier tax receipts, would also help make up the difference, he said.

Maybe so, maybe not, said Dale Craymer, chief economist of the Texas Taxpayers and Research Association, when it came his time to speak to the committee. But if so, using the money that way would likely chip away at another pillar of the governor's plan — to use state revenue surpluses to drive down school property taxes to half their current level.

Morrissey told the committee that Perry's overriding priority is to avoid any tax changes that will make businesses leave or discourage them from locating or expanding in Texas.

Rep. Dan Branch, R-Dallas, a member of the committee that will write the House version of the education finance bill, said he favors replacing the current franchise tax with a broader business tax. Instead of being taxed at a 4.5 percent rate based on their net revenue, companies would pay a 2.85 percent tax based on the wages they pay, excluding benefits, he said.

"Those with larger work forces would pay more into the system," Branch said. "So the idea is to lower and broaden. Have more businesses helping out, but lowering the rate."

Shapiro also favors expanding the franchise tax to include all Texas businesses, while simultaneously cutting the tax rate from 4.5 percent. That would raise enough money, she said, to fully fund education and avoid counting on future economic growth to make it all balance.

"If we fall short, that would be a real shame because we have an opportunity in my view to change the system for a long, long time," she said. "And if we do it right, and put the needed dollars in the right places, we will have made significant progress in the world of education."