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proposal that we did which is to broaden the sales tax base to business and professional services and to take cognizance of the role that gross receipts play in the total corporate picture. Right now the Texas franchise tax, our main tax on corporations that do business in Texas, is tied to capital which is a disincentive to make new investments, to pave the way for the diversification that we need in this state. So what we tried to do was to lower that disincentive by drafting a formula that takes into account both receipts and capital investment, give a little incentive to make new investment by giving double credit for capital investment in a given tax year. And also, in the sales tax, to exempt investment in new production equipment. That’s the so-called Bullock II Plan that has been laid on the table, the revised tax plan. That’s where we stand. Glickman: John, when you extend the base to services, who ultimately pays those taxes, when you tax architects? Are doctors included? Moore: Doctors are out. The main reason that doctors are out is that half the poor people in Texas are not covered by any kind of health insurance and they would pay that tax directly. But, as far as who pays, you know who ultimately pays any tax. But .. . Hazleton: Basically, it’s the business community that pays. The business community will pay a higher share. Bullock’s estimate was that it would increase . . . it used to be that about 55 to 60 percent of the sales tax was paid by businesses this was in the heyday of the oil companies. Because a lot of wholesale trade really was oil companyrelated. With the decline in oil prices, it is now about 45 or 44 percent of the sales tax is paid by business. What this will do will probably make it more about 50-50. You look at who hires accountants, architects, and engineers and lawyers and it’s probably more business than private. So it shifts a little bit of the sales tax burden. Let me just say where I come out in all of this. This week I’m giving four talks to different groups about this same topic. . . . My basic thing is that in the next few years we face three choices. We either dramatically reduce the rate of growth in state spending we have reduced it over the last couple of years and it’s just being pent-up out there. But in every area I look at there are increased demands for spending in highways and prisons and mental health and education and public universities. I would prefer to see some changes made in the way we spend it because I think some of it is spent poorly. I mean I think we shouldn’t have 1,063 school districts, some of them tax havens, that we subsidize. I think we shouldn’t probably have 37 senior universities and 49 junior colleges, but I don’t think we’re going to change any of that. So I don’t think we’re going to cut state spending. I don’t think we’re going to go the way of Mississippi; I think we’re going to go the way of California. By the way, we don’t rank all that low in education spending. We rank 17th or 18th per capita in state and local spending in education and higher education, much higher than the states like Massachusetts and others. We’re not a state that denigrates education and I get kind of tired of reading that. If we don’t cut state spending, then we’ve got two choices how we raise the money and there’s only two ways to do it: one way is a very broad sales tax on just damn near everything except food and medi There are two choices: A very broad sales tax on damn near everything, or an income tax. cine at a fairly high rate, that is, at one of the highest rates in the country, or, an income tax. That’s essentially the choices. And we’re almost to the point where people are beginning to see that, I think. And my feeling is that what we really need to do as a society is to find some organized way to address those issues and look and see what an income tax does and what a high sales tax on everything does. And look at the equity of it, look at the efficiency of it and I think that’s where we’re going. Whether we [will] get there this year or next year, I don’t know. Schmidt: When you say income tax, [you mean] personal? Hazleton: Personal and corporate. I think on the corporate side, the more you fiddle with the franchise tax, the better a corporate income tax looks. When you fiddle with the sales tax, then lawyers begin to say, “Well, gee, would I rather pay five percent on my gross receipts or six or seven or whatever or would I rather pay a two and a half percent income tax?” The only problem, as we all know, is that income taxes always start out very small and very fair and they always end up fairly high and not very fair. But I’ll leave it to you guardians of the public interest to get us out of that one. I’ve got to go. I’m sorry. Schmidt: I’m glad to hear him testify. Glickman: I never know whether I’m happy or sad agreeing with Jared, but I think those choices are exactly what we’re facing. And I guess my sense of things is there’s an enormous fear of using the “I” word, income tax, whether corporate or personal. And it’s an ideological deal rather than, I think, a practical deal. The more you extend the sales tax, in some ways you get closer and closer to personal income tax more like a consumption tax, obviously but it’s an unfair way of getting to a broad-based tax. The numbers that I’ve kind of fiddled with would indicate that to raise the kind of money that Jared’s been talking about and people in the legislature are talking about, you need a sales tax around seven percent, six and a half percent to seven percent range, which means nine percent in Dallas and nine percent. in Austin where you have a local add-on. And I don’t think that’s politically feasible. . . . The problem with the sales tax, in terms of equity, is that, you know, it’s based on consumption and as incomes rise, you spend relatively less on consumer goods, and therefore a rich person pays a much lower percentage of income than a poor person, so it’s not fair. There’s also a lot of other kinds of distortions that an income tax can avoid. I don’t agree with Jared that it needs to get big and it needs to get unfair. I think in the state of Texas it is never likely to get big. It could get unfair but we need to be vigilant. I think that the corporate tax will come first but ultimately I think, as Jared s i #id, the more we talk about gross receipts, the more likely we’ll get a corporate tax. But I think ultimately we’re going to go like 44 other states and get a personal income tax as well. And the sooner we do it, the better. And I think that we can raise with a tax in the range of two percent to four percent . . . we can raise about 3.1 billion dollars. And that’s better than chicken races. Schmidt: I think we ought to be more clever about trying to get the income tax in because, I know this canard that goes around that the people of Texas won’t swaller an income tax may or may not be true, but in any event we ought to be clever enough to start low, as the sales tax came in. I think maybe the reason I’m on this panel here today is because I’m ancient enough to have paid taxes longer than anyone here and I can recall in the ’30s, for instance, that the first states that started the sales taxes THE TEXAS OBSERVER 11