Forrest for the Trees

Say you’re a Houston energy guy. You’ve done well for yourself, and now you’re in the market for a nice boat. Maybe you’ve got your eye on a 405-foot Frank Mulder-designed giga-yacht that comes with a salon, cinema, fitness center, helicopter garage and 10 luxurious multi-level VIP suites. List price: $209,423,500. At the current Texas sales tax rate of 6.25 percent, your tax would work out to more than $13 million. But wait! Florida, land of sinkholes and bad tans, caps the sales tax on boats at $18,000. Your loyalty to your money being greater than your loyalty to your home state, you go to Florida to buy your yacht and save yourself $12,982,000. Florida reaps all the ancillary benefits: the mooring fees, the maintenance costs, the fuel, the swabbies scrubbing your decks with endangered sea sponges.

This scenario bothers state Sen. Larry Taylor (R-Friendswood). Taylor, who once urged an insurance bureaucrat not to “Jew ’em down,” wants to “level the playing field and make Texas more boater-friendly” by capping the sales tax on yachts at $25,000. Our hypothetical $209 million giga-yacht would carry an effective tax rate of 1/100th of a percent.

You might think a huge tax break for yacht owners sounds unfair, but Taylor insists it’s all about the little guy.

“It’s not about giving tax breaks to the rich,” he told a Senate committee in April. “It’s all about jobs and protecting our Texas economy.” Yacht owners, he claims, are setting sail from Texas and taking jobs with them.

Yet the number of 40-foot-plus boats registered in Texas has remained steady since March 2009 (Florida’s law went into effect in July 2010). So has the total number of boats registered with the state, which suggests there is no mass yacht exodus. But even if there were, this is crazy policy.

I pick on Taylor not because his bill has a chance to pass this session (it doesn’t), but because it illustrates something wrong with how we fund government in Texas.

Typically, state government finances rest on a three-legged stool of sales, income and property taxes. In Texas, we famously don’t have an income tax. Property taxes are just about maxed out. That leaves revenue from the sales tax, which is both volatile (it fluctuates wildly based on the economy) and regressive (it falls disproportionately on poor folks). But it’s the sales tax that’s increasingly being called on to fund critical needs and to give tax breaks to the wealthy.

Much has been made of the reassertion of power by the business wing of the Texas GOP. It’s now considered an act of awesome political bravery to stand up to tea party absolutism. In March, Republican Sen. Kevin Eltife earned cheers from Austin insiders for saying he supported raising the sales tax by half a percent to pay for the state’s woefully underfunded transportation infrastructure.

Texas Monthly’s Paul Burka suggested recently that Texas could fund its needs by “raising the sales tax in small increments over time.”

Here’s a better idea: If we need more money—and there’s no doubt we do—let’s undo the massive tax breaks, tax abatements, corporate loopholes and big-business giveaways before we start raising the sales tax. In December, The New York Times calculated that Texas metes out more corporate incentives than any other state—about $19 billion a year.

Here are just two places to start: 1) Abolish the high-cost natural gas tax exemption. This $1 billion-per-year giveaway to natural-gas producers was created in the 1980s, when “fracking” was just a wild idea. The companies profiting from the booming shale plays in Texas no longer need this tax break. 2) Make it harder for local governments to give enormous property tax breaks to feedlots, wind farms and nuclear power plants. Created in 2001 by the Legislature, these deals don’t cost local school districts anything, but drain the system of dollars that would otherwise be dispersed to schools around the state. A bill reauthorizing the program would cost $4.38 billion over the next decade. Even the comptroller, who signs off on these deals, has said the program “over-incentivizes projects that create few or no jobs.”

Curtailing corporate welfare isn’t going to fix a broken system. But it’s a place to start before we stick it to working people.

In a last-ditch effort to salvage payday loan reform this session, Rep. Mike Villarreal (D-San Antonio) called on a recalcitrant House committee to send legislation to the Full House. (Sen. John Carona, a Dallas Republican, was scheduled to attend the press conference but couldn’t make it.)

“It is time for this Legislature to protect consumers from the cycle of debt,” said Villarreal. “It is time. We need to do this now. We should not put it off any longer.”

In April, the Senate passed a surprisingly tough bill that would’ve imposed strict caps on interest rates for payday and auto-title loans, effectively shutting down the $5 billion market in Texas.

But the House Committee on Investments and Financial Services has refused to budge. Villarreal, who chairs the committee, said today that he is the only ‘yes’ vote on his payday reform bill, even though his version is significantly weaker than what the Senate passed. The committee has two Democrats and five Republicans. In a hearing on April 29, members of the committee spent hours perishing the thought of regulating payday and title loans, which often carry interest rates in excess of 500 percent APR. “It allows individuals to exercise their freedom,” said Rep. Charles “Doc” Anderson (R-Waco).

Villarreal’s approach would limit the size of loans based on borrower income; limit the number of loans a consumer can have at any given time; restrict the number of “rollovers” or refinances; and pre-empt cities from enacting their own payday regulations.

That approach, Villarreal said, respects markets while “also recognizing our state’s long history and tradition of moral and legal opposition to usury.”

If the Legislature fails to do something meaningful, Villarreal promised to travel around the state, helping cities pass ordinances to regulate the industry. So far, Austin, Dallas, Denton, El Paso and San Antonio have enacted ordinances.

Late into the night on Monday, the payday loan industry strutted its stuff before a very friendly House committee. The hearing came just a week after the Senate passed a surprisingly tough bill that the industry insists would shut down most of Texas’ 3,400 payday and auto-title storefronts. Even though the legislation aired last night is a faint shadow of the Senate bill, it got a rough treatment from six of the seven committee members.

Only the chairman and author of the bill, Rep. Mike Villarreal (D-San Antonio) evidenced any interest in cracking down on the industry.

“I think the tone of the committee was that clearly there was no support for what Villarreal put out there, at least right now,” said Ann Baddour of Texas Appleseed.

What happens next is anyone’s guess but it is possible that payday reform is dead for the session.

The industry was apparently spooked after the Senate made its move last week.

The original version of the Senate bill “was a bill that required sacrifices for all parties but we were willing to make those sacrifices for the benefit of Texas,” said C. Dan Adams, CEO of South Carolina-based The Capital Corporation.

The lenders are now openly working to kill anything and everything except perhaps legislation that would pre-empt city ordinances regulating payday loans.

At last night’s hearing, Rep. Mike Villarreal, the Democratic chair of House Investments and Financial Services, tried to frame payday loan reform as a balancing act. “It is not just an issue that is about markets but, based on all the testimony we have heard from our constituents, is also an issue about morality,” he said.

Villarreal’s bill is considered by consumer groups to be a minimalist reform effort. The Senate version would close a loophole that allows payday and title lenders to get around Texas’ anti-usury laws and charge unlimited rates. Instead it would impose a strict 36 percent APR cap on loans, effectively scuttling the business model in Texas. The Villarreal proposal, which focuses on limiting the number of “rollovers” and imposes modest limits on the size of loans based on borrower income, has only received tepid support from consumer groups.

The committee consists of two Democrats and five Republicans, including some of the House members most hostile to regulation. Collectively, the seven have accepted almost $115,000 from payday loan interests since 2009, according to Texans for Public Justice. Committee vice-chair Dan Flynn (R-Van) has received the third most payday cash ($50,500) of any House member. Speaker Joe Straus, who makes committee appointments, has by far received the most payday donations of any official in the state, about $312,000 since 2009.

Many of those donors, and their lobbyists, were out in force last night. Former state Reps. Vicki Truitt (R-Southlake) and Burt Solomons (R-Carrollton) were spotted in the hearing room. Bill Hammond, the powerful head of the Texas Association of Business, testified against Villarreal’s bill. So did Bill Peacock of the corporate-funded think tank Texas Public Policy Foundation; Peacock testified that the only thing TPPF is in favor of is striking down city ordinances regulating payday and title lending.

Also testifying: many CEOs, owners and employees of payday and title loan companies. Lorri Davis, who is affiliated with Power Finance, a company owned by Rep. Gary Elkins (R-Houston) testified. So did Robert Reich, the CEO of Community Loans of America, a large title-loan company doing business in Texas as LoanStar Title Loan.

The industry reps must have felt like they were among friends.

“I don’t believe in loan sharks, but on the other hand I’m a little offended when someone wants to assign a morality to an issue of a business,” said Rep. Dan Flynn (R-Van).

“You don’t have to do this. You really don’t have to go get a loan if you don’t want one. … It’s a marketplace. If this industry goes away who services this market?”

Rep. Doc Anderson (R-Waco) also worried that freedom could be harmed by any regulation.

“That’s one of the good points of this product, this market,” he said. “It allows individuals to exercise their freedom.”

What happens next is impossible to predict but billions in revenues hang in the balance.

Daniel Freehan, the CEO of Cash America International, acknowledged as much on a conference call with analysts last week.

“Dozens of different scenarios could unfold at this point that run the gamut of this bill never getting out of the House committee, to a bill that passes the House in identical form of Senate Bill 1247. In between these two extremes are multiple permutations that could develop, and it’s impossible to predict how this may unfold with any reasonable degree of confidence.”

A worst-case scenario from the point of view of the reformers is legislation that would strike down city ordinances but not add any new statewide regulations. One such pre-emption only bill, House Bill 2953 by Rep. Ryan Guillen (D-Rio Grande City), is already headed to the House floor.

Last night, Rob Norcross of the Consumer Services Alliance of Texas, a group that represents 80 percent of all the payday and title storefronts in Texas, tried to play down the pre-emption issue, saying that he believed the industry would prevail in its court. But there’s no doubt that ordinances passed in Austin, Dallas, San Antonio, El Paso and Denton are cutting into profits. In January, Mark Kuchenrithe, the CFO of Austin-based EZCorp, told analysts that the company’s “profitability… was negatively impacted by over $1 million” during the last quarter of 2012 “as a result of ordinances enacted in Dallas and Austin.”

While rain slicked the streets of Austin, lawmakers heatedly debated legislation that would use $2 billion from the state’s Rainy Day Fund to pay for the state water plan, an increasingly urgent issue for lawmakers. But, after hours of stop-and-go debate, a procedural error derailed the legislation.

The bill’s author, state Rep. Allan Ritter, a Republican from rainy Southeast Texas, said House Bill 11 was “doorknob dead.”

House Democrats, who organized a point of order to kill the bill, said they resorted to that parliamentary tactic only because their demands to put more into Texas’ schools, and fully undo the cuts from 2011, were going unheeded. Rep. Sylvester Turner (D-Houston) said they’d like to see the House pass a 2-2-2 plan: $2 billion for roads, $2 billion for water and $2 billion more for public schools, all paid out of the Rainy Day Fund.

Texas Monthly‘s Paul Burka described the Democrats’ dilemma:

This is also the last point in the session when the Democrats will have any leverage. The moment the gavel falls to certify the final passage of HB 11, the Democrats will lose whatever power they have.

House Bill 11 also faced challenges from the House’s tea party faction, which has been itching for a fight all session. To appease the brawlers, the House GOP caucus chair Rep. Brandon Creighton (R-Conroe) presented what one lawmaker called a “nuclear bomb”: an amendment stipulating that if the bill didn’t get a vote of two-thirds of the House, then it would be funded out of general revenue by imposing a $2 billion across-the-board cut. In other words, Creighton would force lawmakers to choose between water and everything else in the state budget.

The proposal, said Turner, puts “water first and everything else is second. By definition your amendment has picked a winner and everyone else stands to lose.”

Creighton’s rejoinder was that everyone would suffer from not funding the water plan. “Whoever is impacted by small reductions in the budget will benefit for years from this move,” he said.

But before the amendment came to a vote, the point of order killed the bill.

It’s unclear how the House gets the water plan funded now. Any transfer from the Rainy Day Fund, as is preferred by Gov. Perry and other top Republicans, would require a two-thirds vote. The Senate passed a proposed constitutional amendment last week pulling a total of $5.7 billion from the Rainy Day Fund, including $2 billion for water. However, Ritter said that legislation “has a snowball’s chance” in the House.

Ritter and the Democrats pointed to another bill sitting in committee, House Bill 19, which spreads $3.7 billion from the Rainy Day Fund to water and roads.

Without 100 votes, something will have to give to fund the state water plan.

In the end, the Senate proposal to spend $5.7 billion out of the state’s Rainy Day Fund on roads ($2.9 billion), water infrastructure ($2 billion) and schools ($800 million) was unanimous: 31-0.

Sen. Tommy Williams (R-The Woodlands), who chairs the powerful Senate Finance Committee, told lawmakers he had “woken up at 2:30 this morning not knowing how we were going to get this out of the ditch.”

During the day, according to the Austin American-Statesman, “an angry dispute over the resolution developed behind closed doors” as Democrats and Republicans tried to reach a deal.

Although Democratic proposals to fully restore the $5.4 billion cuts made to public education were rebuffed on partisan lines, the additional money for schools in Senate Joint Resolution 1 amounts to a concession by Senate Republicans.

“We are within spitting distance” of matching spending levels before the Legislature made big cuts in 2011, noted Sen. Wendy Davis (D-Fort Worth).

Later, Sen. Leticia Van de Putte (D- San Antonio) said, “With today’s vote, we have signaled that we are no longer going to kick the can down the road on water, transportation, most importantly, the infrastructure of opportunity: education.”

Even with the additional spending, the state’s Rainy Day Fund—officially called the Economic Stabilization Fund—is expected to have a balance of around $6 billion when the Legislature meets again in 2015.

Still, for today at least, the Senate could brag on itself: It almost restored all the damage it did two years ago. Now, there’s a campaign slogan.