Texas Tax Reform Commission plan highlights

Tax plan recommendations:

• The Legislature should cut school district property taxes for maintenance and operations substantially. With many districts setting rates at or near $1.50 per $100 of valuation, Texans are clearly paying too much in property taxes. The rate should be lowered to $1 per $100 and permanently re-capped at no more than $1.30 per $100 by the 2007 tax year. Reductions for the 2006 tax year sufficient to comply with the Supreme Court’s mandate must be provided immediately
• The Legislature should reform the state’s franchise tax by:
  • Broadening the base of businesses that pay into the system and eliminating loopholes that have allowed many businesses to avoid paying their fair share.
  • Cutting the franchise tax rate from 4.5% to 1% and changing the underlying base of the franchise tax.
• Basing the franchise tax on a business’ margin by allowing each business to choose between two calculations: deducting either the cost of goods sold or employee compensation (including health insurance, pensions and other benefits) from its total revenue.
• Doubling the small-business exemption from $150,000 to $300,000 in total revenue and exempting sole proprietors and non-corporate general partnerships.
• The Legislature should raise tobacco taxes, including raising the tax on cigarettes by $1 per pack.
• The Legislature should implement anti-fraud measures to boost state tax collections, including increasing the Comptroller’s audit and enforcement activities and implementing an improved tax system for the sale of used cars.
• The Legislature should use a portion of the state surplus to buy down property taxes. Using some of the state’s surplus would avoid the need for increases in other fees and taxes, such as the state’s sales tax, which is already among the highest and broadest in the nation.

Benefits of the recommendations

• Texans will get a $6 billion reduction in property taxes – the largest property tax reduction in history.
• Homeownership would be more affordable for millions of Texans.
• Recommended reforms to the franchise tax would encompass a broader cross-section of the state economy and be a fundamentally fairer way of funding our children’s education or providing additional property tax relief.
• The reforms to the existing franchise tax would apply to those businesses with state-provided liability protection, as was originally intended.
• Unlike earlier proposals for franchise tax reform, businesses would be rewarded for creating more jobs and providing health care and pensions.
• The state would pick up an estimated 50% of the costs of funding public education, a dramatic increase over the 34% level expected for fiscal 2007.
• Doubling the small-business exemption from $150,000 to $300,000 in total revenue would help small businesses prosper and grow.
• The plan would reduce the amount of money recaptured and re-directed to other school districts by Robin Hood.

Tax fairness: Report of the Texas Tax Reform Commission (PDF)