Villages of Woodland Springs Homeowners Association

Public School Refinance Information from Vicki Truitt

May 15, 2006

From: Representative Vicki Truitt District98.Truitt@house.state.tx.us]
Sent: Monday, May 15, 2006 4:12 PM
To: District 98
Subject: Session Update

Dear Friends,

The Texas Legislature has finally, after many years of effort, restructured our public school finance system and committed the state to an increased and growing role in the way our schools are financed in the future. Just three weeks ago, I sent you an update that described in some detail the package of bills the House sent to the Senate after the first week of this special session. I am pleased to report to you that the Senate accepted much of what the House passed without changes, and where changes were made to these bills, I believe, for the most part, these changes improved the end result.

You may recall there were five bills that, taken together, comprised the overall plan for lowering property taxes and restructuring of public school finance. As of today, HB1 (lowers property taxes) has passed both houses as amended by the Senate, and will be going to Governor Perry for signature. HB2 (dedicates new revenues to property tax reduction) was modified slightly by the Senate, and then again in conference, and then accepted by the Senate on Friday. The House accepted this final version of HB2 today. HB3 (restructures business taxes) passed in the Senate without any changes and sits on the Governor's desk ready for signature. HB4 (closes loopholes in the way sales tax on automobiles are collected) also sits on the Governor's desk. HB5 (raises cigarette tax one dollar per pack) passed the Senate with amendments and the House accepted this version of the bill as well.

Taken together, the impact of these bills will be huge. Here are the highlights.

Lowers Property Tax: Local school district maintenance and operations (M&O) taxes, set at or near $1.50 per $100 of valuation today, will be rolled back by 17 cents in 2007, and another 33 cents in 2008. The first 17 cent reduction is funded from surplus state revenues while the future years are funded by the incremental state revenues from the changes in the business, cigarette and automobile sales taxes. It is important to note, future revenue increases from these tax sources are also committed to further property tax relief in the years beyond 2008.

Creates a Constitutional School Finance System: The Supreme Court had declared that the state must put "meaningful local discretion" back into the local maintenance and operations (M&O) property tax system in order for our property tax system to not be, in effect, a statewide property tax which is constitutionally prohibited. So, in addition to lowering local property taxes, the Legislature also needed to ensure that there was sufficient local discretion in setting M&O rates. At the same time, the Legislature wanted to avoid a recurrence of what had happened through the 1990s when M&O tax rates climbed steadily toward their caps all over the state with little direct voter participation. That's one of the reasons future revenue growth in the business tax is dedicated to future property tax relief. But additionally, school districts will be allowed to raise M&O rates up to four cents (one time) without getting voter approval (current law allows a six cent increase annually), and they must seek voter approval for any additions above the first four cents. There is also a new roll back provision that allows voters to choose to lower their M&O rates if appraisal values increase M&O revenues more than the equivalent of a four cent rate increase.

Reins in Robin Hood and Commits the State to School Funding: In addition to committing future business tax proceeds to further property tax reduction, the state will be taking on greater responsibility for "equalization" (balancing the results of the tax effort between property rich and property poor districts). Robin Hood is the system that places the whole burden of accomplishing equalization for "local enrichment" (the result of raising local M&O taxes when we exercise our "local discretion") on the backs of the property tax payer in the property wealthy districts (a.k.a. Chapter 41 districts). HB1 says the first four cents of local enrichment will be equalized by the state. That may not sound like much, but remember, it is the first time the state has ever stepped up to this problem of equalizing local enrichment (which is mandated by the Supreme Court), and with 90% of legislators representing primarily school districts benefiting from Robin Hood, getting any change to the system has proven to be very difficult. I believe this is a start and I will continue to work to get the state to take on more of the burden of equalization of the local enrichment tier of public school funding. HB1 also increased the minimum level at which the Robin Hood burden kicks in, thereby reducing the overall equalization and recapture burden across the state.

Lowers Business Taxes And Eliminates Corporate Loopholes: For years now I have been saying one of the biggest reasons Texas got into the Robin Hood mess to begin with was because our method of taxing business didn't match the way our modern economy works. And to make matters worse, we made it so easy to escape paying the business tax that only one in 16 businesses in the state are still "volunteering" to pay it. I agree with those of you who say it would be better to not have any business taxes at all. But if we are going to rely on a business tax, and apparently we need to because we haven't been able to replace it, it needs to be one that includes all segments of our economic base, not just businesses that can't escape or volunteer. The HB3's tax structure allows corporations and business partnerships earning more than $300,000 (all others earning less are exempt) to choose between deducting the costs of goods sold ?– or - the total of employee compensation and health benefits (up to $300,000 per employee) when calculating their "taxable margin," and reduces the rate from the current 4.5% in the franchise tax to 1% for the manufacturing and service sectors and 0.5% for retailers and wholesalers. This way business taxes are broader, lower and fairer for everyone. When comparing the "before and after" of the business tax environment, don't forget to take into account the reduced property taxes for businesses. By and large, the only businesses whose tax bills go up under this plan are businesses that weren't paying any taxes at all.

Increases Small Business Tax Exemption: All sole proprietors of any size and all small businesses with revenues less than $300,000 a year are exempt from business taxes. This doubles the current $150,000 exemption. Businesses who owe $1,000 or less are also exempted from filing.

Addresses Healthcare Cost and Revenue Concerns: For medical practitioners, 100% of revenues from Medicaid, Medicare, CHIP, and indigent care are exempted, along with permitting them to deduct all of their documented costs of uncompensated care. All not-for-profit organizations are exempt from the tax. For other medical institutions, such as for-profit hospitals and clinics, 50% of these revenues may be deducted. All employers may deduct the cost of employee health insurance and their contributions to employee health savings accounts, and salaries, up to a total of $300,000. School teachers, counselors, librarians and nurses had their $500 health benefit reinstated that was taken away in the 2003 budget cut.

Penalizes Companies that Claim Deductions for Undocumented Workers: For the first time, the Texas Legislature has voted to penalize employers in the agriculture and timber sectors who hire undocumented workers by prohibiting those Texas businesses from deducting from their taxable revenue the costs of salaries and benefits for undocumented workers. Much more work needs to be done in this area, but this is a good start.

Establishes School Finance Transparency: The Texas Education Agency (TEA) will be required to put on line financial and accounting information for school districts that will enable average citizens to evaluate the financial and accounting performance of their school districts against other similarly situated school districts. All the data to do this are available today, but the average citizen doesn't have the expertise to access, organize and interpret the information. HB1 charges TEA with the responsibility to fix this problem.

Funds Pay Raises for Teachers: In addition to the reinstatement of the $500 health benefit, HB1 fully funds a $2,000 pay raise for teachers, counselors, librarians and nurses. HB1 also introduces a new program to encourage and reward teaching excellence that allows local school districts to create incentive plans for teachers working in hard to staff schools or subjects.

Those are the highlights. There is a lot more to these bills, but too much to cover in an update. The level of support for these bills has been overwhelming. Virtually every business association in the state has supported this effort. The education establishment has been supportive. HB1 passed unanimously in the Senate, and the vote in the House was 136 to 8. Given the complexity and divisiveness of these issues in the past, it is truly remarkable to see this level of support.

Still, as I reminded you in my last update, I know I won't please all the people all the time, and that I try to study the issues and make thoughtful, informed decisions. I try always to vote to serve the best interests of my constituents and all Texans. During this session, I feel the whole Legislature did just that. We worked cooperatively and in a bipartisan manner.

There are some aspects of these bills I know some of you won't like. Many of you will let me know what you don't like and, believe it or not, that helps and I appreciate it. There are parts these bills I don't like. But taken as a whole, they represent a tremendous improvement over the way our state and our schools are funded today. I cannot tell you how much work has gone into this, and I feel these results will be worth all the effort.

No doubt, problems will come up with some of this legislation as often happens with new laws. But I am confident the problems will be identified and fixed, and Texas will be a great deal better off, in the short run and the long run, because of these reforms.

I am, as always, honored to have the opportunity to do this work for you, and I thank you for the privilege.

Vicki Truitt
State Representative
District 98
(512) 463-0690
(512) 477-5770 Fax