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Education, continued from page 5 The state’s over-all investment earnings are expected to decline over the next biennium. And really, there’s only so much you can charge for a hunting license. So new taxes have to be considered, as even the governor and lieutenant governor concede, but it’s a delicate subject for elected officials to broach. Even under restructuring that is technically “revenue neutral”no net gain of money for the statesomebody will pay more than they were paying before. That possibility is giving the business community a bad case of nerves. Reportedly, vicious in-fighting is breaking out in the business lobby, as every sector tries to make sure somebody else gets soaked for the money. “The lobby isn’t interested in sitting down and talking about solutions they’re interested in making sure they aren’t the ones who get taxed,” says one lobby insider. “Everybody circles the wagons and tries to protect what they have. The lobby will sit and watch everybody else get thrown to the dogs.” And where there’s no consensus among the business lobby, cynics say, consensus among state leadership will be a long way off. Take the closing of the “Delaware sublsidiary] loophole. The Delaware sub is a shining example of a shady tax scheme, and its abuses are notorious. It works something like this: Corporations enjoy favored status, and are accorded state services, like legal protections and access to the courts, that other businesses don’t enjoy. The state taxes corporations on the theory that they ought to pay part of the costs of those services. Since unincorporated businesses don’t receive those services, Texas excuses them from the tax. The loophole has proved to be an open invitation for abuse. Businesses operating in Texas incorporate in other statesDelaware, famouslywith low or non-existent corporate taxes. They then form partnerships in Texas, which funnel the profits to the parent corporation. The Comptroller’s office estimates the state lost nearly $250 million through the loophole last year, and expects that those losses will pick up as more businesses restructure to take advantage of the loophole. The governor estimated those losses somewhat higher when stumping for the closing of the loophole last January. But the Delaware loophole has powerful supporters, including computer giant In the three-way tug-of-war between schools, taxpayers, and business, every legislator will have to hammer out his or her own devil’s bar gain. Dell, the HEB grocery chain, and insurance provider USAA Inc. Lobbyists for these interests and others have undertaken a massive offensive to keep the loophole in place. The governor still supports closing the loophole, Walt says. Everyone does. You just don’t hear much about it any more. \(Lately, the governor’s aides seem to be on a nontax revenue tack, churning out proposals for video gambling terminals, statetaxed casinos on Indian reservations, a dip into the state’s cash reserves, and another billion-dollar round of budget The governor’s office has also floated a split property tax, levying one rate on individual property owners and another on business property. While this plan doesn’t address the schools’ over-reliance on property tax, it would allow the state to offer the majority of voters a lower tax rate, at the expense of business. Whatever their other disagreements on tax reform, horrified business leaders are united against the split. “We think it’s an absolutely terrible idea,” says Bill Allaway, president of the Texas Taxpayers and Research Association, a pro-business tax policy think-tank. “I think the one thing on which there is a significant consensus is that business doesn’t think [school funding] is strictly a business issue.” That’s about as close as the business community will come to publicly supporting something like a statewide income tax. \(Support would be “quite a public relations issue” says TTARA But privately, acceptance in the business community for an income tax on individuals may be much broader. In a strange twist, this would make allies out of the fiscally conservative TTARA and the fiscally liberal Center for Public Policy Priorities. CPPP has been pushing the idea of a state income tax on the school finance committee since last summer, pointing out that a moderate income tax that provided for property tax relief would have most Texans paying less than they do now. Notwithstanding, the committee met CPPP economist Dick Lavine’s income tax proposal last July with coughs and paper rustling. Fear of such a proposal runs deep at the Lege, where support for an income tax seems to fall somewhere just short of “letting the terrorists win.” Despite the results of a Scripps-Howard poll showing 52 percent of Texans would support an income tax if the revenue were split between property tax relief and education, state leaders from the governor on down have fallen over each other to voice their opposition. With no solid promise of new money, the Joint Committee on Public School Finance is still fantasizing about a way to get more by spending less. Stanford economist Eric Hanushek gave the committee the glad tidings that money spent locally improves schools, but money spent at the state level mysteriously has no measurable effect. Hanushek also spent hours persuading the Subcommittee on Cost Adjustments that putting more money into education is folly, and that class-size reductions have no effect on student performance. Whether smaller classes improve learning is a hotly contested issue in educational researchin fact, a re-analysis of one of Hanushek’s own studies by Princeton researcher Alan Krueger pur 16 THE TEXAS OBSERVER 12/19/03