Commentary: Perry's Texas tax overhaul isn't right for U.S.

The Fort Worth Star-TelegramNovember 1, 2011 

If Gov. Rick Perry's flat-tax plan is anything like his tax policy in Texas, don't get your hopes up. It will be too simple to solve the problem and too good to be true.

Perry hopes that a bold idea will revive his struggling presidential campaign. But even some conservatives slammed the flat-tax proposal that he made last week, saying it wouldn't raise enough revenue to pay down the deficit.

Perry's signature achievement on taxes came in 2006, when Texas property taxes were slashed by $7 billion as part of an overhaul of public school finance. The state was supposed to make up that money from higher cigarette taxes and a new margins tax on business.

The sin tax delivered better than expected, but the business tax -- projected to generate the bulk of the revenue -- has fallen short from the outset. From 2008 to 2011, the tax delivered almost $9 billion less than originally projected. And it replaced less than one-third of the lost property taxes, according to the Center for Public Policy Priorities, a liberal think tank in Austin.

The state has filled the gaps with surpluses from earlier years, federal stimulus dollars, rainy-day funds, accounting tricks and deep cuts in education.

Even the property tax relief hasn't felt like much. The cuts were real, but other branches of local government, including cities, schools and special tax districts, ramped up their levies almost immediately. As a result, the savings were short-lived.

"The average property tax bill contains so many moving parts that school tax relief has been obscured," the Texas Taxpayers and Research Association wrote in 2008. "Texans are actually paying higher total property taxes today than they did in 2005 -- the year before the tax cuts began to take effect."

Perry isn't responsible for increases in local government taxes, of course. And the deep recession affected revenues from the business tax, just as it depressed sales taxes for Texas and elsewhere.

But many insist that Texas' shortfalls aren't just cyclical. They often talk about a "structural deficit" on taxes, meaning that the system doesn't generate enough revenue to cover costs. So one-time moves, sometimes painful, are necessary to balance the budget.

Yet Perry hasn't pushed for many changes in the business tax, despite the disappointing results. An exemption for small businesses was increased, so companies with less than $1 million in sales wouldn't owe anything. There were also minor tweaks to stop penalizing certain businesses. All that further reduced tax collections, but some sectors embraced the upside.

"Ironically, the fact that the margin tax has generated less income than anticipated has put the tax more in line with business taxes in other states," Texas Taxpayers wrote in a report this month.

The group, which advocates for business, said Texas ranks 19th-highest on business taxes. If the margins tax had delivered as projected, it said, Texas would be No. 6, ahead of California.

While the 2006 reforms benefited many companies, Texas Taxpayers President Dale Craymer said Perry's most important accomplishment was holding the line on new measures.

"He consistently said no to other taxes," Craymer said. "Tax increases were getting traction in other states but never here."

His group's recent analysis of the business tax concludes that it broadened the burden to service businesses, as intended. It also eliminated many tax dodges that were widely deployed under the previous system.

But it didn't simplify the process, which was a big selling point. Because the state uses its own definition for some financial terms, companies must keep two sets of books for federal and state requirements. That makes compliance "very complex," the report said, and creates confusion and audit problems.

In his flat-tax proposal, Perry touts the simplicity of paying income taxes by filling out a postcard. But he also wants to give people the choice of staying with the current system. That means many would calculate their taxes two ways, which would take more time and deliver less revenue to the government.

In Texas, the tax changes under Perry simply haven't delivered. The margins tax isn't generating enough revenue, and the property tax cuts haven't been a game changer. And rather than repair the system, Perry patched together short-term fixes.

"He tried a simple solution to a complex problem, and it's just not working," said Dick Lavine, senior fiscal analyst at the Center for Public Policy Priorities.

Lavine has suggested a Texas-style income tax, saying it's the best way to bring more stability, revenue and fairness to the state budget. That appears to have no chance of getting public or political support, even if most Texans would end up paying less in taxes.

He points out that Perry vetoed a 2009 proposal to study other states that allow property tax relief for low-income residents. Yet in 2001, Perry supported a loophole that lets some large capital-intensive businesses abate their school taxes.

Despite such pro-business moves, the state's high property taxes still penalize many companies. Two years ago, Craymer made a presentation called "Has the new and improved business tax delivered?"

In 2006, the first slide showed, Texas' school finance system was under assault, property taxes were among the highest in the nation and many viewed the business tax as unfair.

Three years later, each problem remained, almost unchanged, the final slide showed.

Today, one more issue can be added to the list, and it's arguably the most important: Texas' budget is running billions short.

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