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FEATURE The Best Idea They Won’t Talk About Why a state income tax might save you money and improve education. No, Really. BY DAVE MANN 0 n April 17, the Texas Legislature will convene in special session for yet another attempt to re-jigger the way we fund public schools. If you’re keeping score at home, this will be lawmakers’ sixth try in three years to fix a broken school-finance system. This time around they absolutely, positively have to come up with a plan. Last fall, the Texas Supreme Court declared the current system unconstitutional and gave lawmakers a deadline of June 1. The goal, once again, is to cut property taxes andif there’s some cash left overincrease funding for school districts. In the weeks that follow, you will hear more talk about various state taxes than you ever wanted to. There are sales and property taxes, of course, but there’s also the cigarette tax and perhaps liquor taxes. Don’t forget the franchise tax and the governor’s broad-based business tax, which some lawmakers are calling a gross-receipts tax and others would rather see configured as a business-profits tax. If all that tax talk doesn’t give you a headache, you must be an accountant. But there’s one tax that you probably won’t hear much about, and that’s the one that might actually fix the system. It’s the revenue source that dare not speak its namea state income tax. Of course, it’s usually around this time of yearwhen federal tax returns come duethat many Texans privately thank their maker that we’re one of only nine states without an income tax. No extra forms, no worrying about forking over additional money to a state agency, no added hassle. That is, unless you’re a public school teacher wondering why your salary is so far below the national average or you’re a school district administrator trying to figure out why your budget can’t pay for art classes anymore or you’re a homeowner coping with property taxes that have doubled since you bought your house. The root of these problems is structural: Our outdated tax system delivers too little revenue to state coffers. That means the Legislature spends far too little on public schools; Texas ranks 38th nationally in average spending per student, and that ranking has been heading south lately. To compensate for meager education monies from the Capitol, local governments have hiked property taxes as high as possible. That’s a terribly inefficient way to fund schools: Texans pay some of the highest property tax rates in the country, and in return, we’re getting a consistently cash-starved school system that doesn’t educate kids well enough \(Texas’ average SAT then we may have a better deal for you. 6 THE TEXAS OBSERVER APRIL 21, 2006 We know what you’re thinking: Here comes the liberal hard sell that we all need to pay more taxes to boost the public schools, save our children, yadda, yadda, yadda. But therein lies the twist. Under a state income tax, you would likely pay less in state taxes. Study after study shows that a state income tax would give the majority of Texans a net tax cut and still provide several billion dollars more for education. Lower taxes and better schoolssound too good to be true? To find out, we asked some of the state’s tax-policy expertsboth conservative and liberalhow a Texas income tax would actually work. It’s common knowledge around the Capitol that you don’t tangle with Dick Lavine about taxes unless you know your numbers. Lavine majored in economics at Harvard and holds a law degree from the University of Pennsylvania. He now works as an analyst and lobbyist for the Center for and has been a longtime proponent of a state income tax. He’s crunched the numbers many times and says the income tax is clearly the best way help abate two of the main problems he sees with the Texas tax structure. First, the current system will never generate the revenue the state needs for education, and second, the money it does bring in comes disproportionately from middleand low-income families. “The biggest problem in Texas is we have a structural deficit,” Lavine says. “The growth in spending is much faster than the growth in revenue.” group Citizens Commission on Education Excellence and an income tax proponent, puts it, “We have a 19th-century tax system in a 21st-century economy.” \(Lewis is spearheading a petition to bring Texas’ spending on education up to the national based on physical infrastructurelocal factories and refineries, for example. But it leaves untapped two growing sectors of the 21st-century economyprofessional services \(lawyers, doctors, salary and Texas doesn’t take in as much tax revenue as it should. The other problem Lavine sees is the system’s astounding inequity. According to the state comptroller’s office, if you earn $20,000 a year, you pay 12 percent of your income in various state taxes \(those making just $12,000 a yearbasically at the poverty linefork over 14 or more, you pay just 5 percent to the state. That’s the magic