Senator Carona's Email Update
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EMAIL UPDATE

May 19, 2006

On May 15, 2006, the Third Called Session of the Texas Legislature was gaveled to a close. This special session was called in response to the Texas Supreme Court's ruling that the Texas school finance system was effectively an unconstitutional statewide property tax because the $1.50 cap on school property taxes did not give school districts meaningful discretion to set local property tax rates. The Court gave the Legislature a June 1, 2006, deadline to reform the school finance system. Following the Court's ruling, Governor Perry created the Texas Tax Reform Commission to develop proposals to modernize the state tax system and provide long-term property tax relief as well as sound financing for public schools. Their proposals were filed as a package of four bills at the beginning of the special session, along with a fifth bill that created a property tax reduction fund. Following is an overview of those bills:

HB 1 dedicates $3.825 billion of the current state surplus to property tax relief by providing a local school property tax rate reduction of $0.17 per $100 of valuation in 2006-2007. The school property tax rate will be reduced an additional $0.33 in 2007-2008. The issue of extending this school property tax relief to senior citizens and the disabled, whose school property tax rates are frozen, will be addressed in the 2007 legislative session. The school property tax reductions will be funded with revenue generated by HBs 3, 4 and 5. As amended in the Senate, HB 1 makes numerous changes to how the state funds public schools, which include:

HB 1 also enacts numerous education reforms aimed at increasing fiscal and academic accountability, making our public schools more efficient, and improving high school success and college readiness. Among these changes, the bill:

Additionally, the bill provides for a $2000 raise for teachers, librarians, counselors, and nurses, and a mandatory school start date of the fourth Monday in August. Curriculum development and textbook adoption were kept under the State Board of Education and elementary math texts will stay on track for adoption.

HB 2 was not part of the Texas Tax Reform Commission's recommendation, but was filed to use the new revenue generated by HBs 3, 4 and 5 to create a property tax relief fund. All revenue in the fund will be dedicated to property tax relief until the tax rate is reduced to $1.00 per $100 of valuation. At that point, 2/3 of the revenue in the fund will go toward further tax relief, while 1/3 will be used to increase the level of equalization of enrichment tax effort.

HB 3 reforms the franchise tax, broadening its base, lowering its rate, and closing many of its loopholes. This measure was the centerpiece of the Texas Tax Reform Commission's recommendations. While the franchise tax was based on the higher of either a business's net income or net worth, at a rate of 4.5%, the new tax will be based on a business's margin, which will be calculated by deducting either the cost of goods sold or employee compensation and benefits from a business's revenue, at a rate of 1%, or .5% for retail and wholesale businesses. Sole proprietorships, general partnerships owned by natural persons, and businesses with less than $300,000 in total revenue, as well as non-profit organizations will not be subject to the reformed franchise tax. The new tax will go into effect January 1, 2008, and it is estimated that it will generate $3.38 billion in 2008, growing to nearly $4 billion in 2011.

HB 4 requires that the sales tax paid on a used car be at least 80% of a vehicle's "standard presumptive value" or average retail value which will be based on national used vehicle guide books, such as the Kelley Blue Book. The bill will go into effect October 1, 2006, and it is estimated to generate $42 million per year.

HB 5 increases the tax on cigarettes and other tobacco products excluding cigars. The cigarette tax will be raised by $1.00, while the tax on other tobacco products will increase from 35.213% to 40%. It is estimated that the bill will raise over $430 million for fiscal year 2007 and between $600 and $700 million in subsequent years. The bill takes effect January 1, 2007.

Once school finance, tax reform, and local school property tax reductions were addressed, Governor Perry expanded the call of the special session to allow the Legislature to work on other issues, each of which passed. These included:

It has been our goal to stay focused on a long-term solution to financing our public schools and to ease the property tax burden in order to give meaningful discretion to the local school districts, where you have a local voice. The choices have been difficult, but I believe that overall we have achieved that goal. I also believe the Texas Supreme Court will rule that the legislation adopted in the Third Called Session makes our school finance system constitutional. When the 80th Session of the Texas Legislature convenes next January, we will be prepared to address additional details related to the historic changes that we have just enacted.

For the remainder of this interim, the various Senate and House committees will continue to hold hearings according to their charges in preparation for the next regular session. Next month, I will return to the regular Email Update format to help keep you informed on these and other state agency activities. Please do not hesitate to contact me if you need assistance or have questions.

Have a fun and safe holiday this coming Memorial Day weekend.

Sincerely,

John Carona
State Senator - District 16
http://www.carona.senate.state.tx.us/

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