Tax Cut Proposals Divide Senate Democrats

As the size of proposed tax cuts keep growing and hurtling toward seemingly inevitable adoption, Senate Democrats are divided.

At a press conference Tuesday, Senate leaders unveiled a new plan for $4.6 billion in tax relief, up from $4 billion in the first draft budget. But Sen. Jane Nelson (R-Flower Mound) stressed that proposal was “bipartisan.” That’s true to a certain extent; five out of 10 Senate Democrats have signed on to at least one part of the tax plan—$2.5 billion in property tax cuts by adjusting the homestead exemption.

Sen. Kirk Watson (D-Austin), one of the five Democrats to sign on to Nelson’s Senate Bill 1, said in a statement that raising the homestead exemption is “the best way to provide every homeowner a break.” Sen. Chuy Hinojosa (D-McAllen), who also co-sponsored the bill, said that SB 1 will let taxpayers “keep more of the dollars they earn.”

The homestead exemption applies to the first $15,000 of a home’s taxable value. If SB 1 becomes law, homeowners will be exempt from paying taxes on 25 percent of the state median home value, which in 2016 is projected to be $134,500. That means the first $33,625 of a home’s worth is exempt from taxes.

At the average total school district tax rate of $1.25 per $100 in property value, SB 1 would save home-owning taxpayers about $233 in 2016.

The plan is also designed to prevent future increases in home values from eroding the tax break—a problem with past attempts at lowering property taxes.

Sen. Judith Zaffirini (D-Laredo) is skeptical of the benefits of SB 1. She said that although she strongly supports tax relief, she wants to “ensure that any tax relief legislation is meaningful for all Texas families, including those who are not homeowners.”

“Approximately $200 savings a year for homeowners, for example, may not have as great an impact on our state as would investing the $2.5 billion in our public schools or in our higher education system to help reduce tuition for Texas families,” Zaffirini said.

Texas Monthly’s R.G. Ratcliffe has pointed out that the savings from Nelson’s proposal will differ significantly from place to place in Texas. For homeowners in some areas—where values are “stagnant or declining”—the tax break is a “windfall,” he wrote. But homeowners who live in areas where property values are rapidly rising—Austin and Houston, for example—may not see their tax bills reduced. The tax relief will just keep these homeowner’s bills from going up as quickly—similar to how President Barack Obama described Obamacare as “bending the cost curve.”

The homestead exemption package also doesn’t directly help apartment-dwellers or other renters.

The property tax proposal also won some Democratic support because the state will make sure schools don’t lose any funding from the property tax reductions.

But that’s just to keep the school districts from being any worse off than they already are, said Eva DeLuna Castro, an analyst with the progressive Center for Public Policy Priorities. So although the state might be giving more aid to schools than it currently does, the schools will still be under-funded.

That worries Sen. Jose Rodriguez (D-El Paso).

“If we decide to pass this legislation, the state needs to live up to its responsibility to adequately fund education,” Rodriguez said. “As it is, school districts are still recovering from cuts the state made in 2011, and we have hanging over our heads a district court ruling that our school funding system is inadequate and inequitable.”

Rodriguez doesn’t think that tax cuts in an already low-tax state should be a priority over access to quality education, or other infrastructure needs like health care, roads, water and pensions.

But if there have to be any tax cuts at all, progressive advocacy groups like the CPPP and Texas Forward agree that the homestead exemption is the way to go. The proposed homestead exemption is “a lot more noticeable for people at the bottom” of the economic spectrum says DeLuna Castro. It’s “progressive” policy to give almost every homeowner the same exemption, rather than structure reforms that largely benefit those with expensive homes, said DeLuna Castro.

That’s probably why more Democrats are on board with the homestead exemption than the other proposed tax cuts, which reduce the tax burdens of Texas businesses. Four Democrats are co-sponsors of  Senate Bill 7, which would permanently reduce the franchise tax—the state’s primary business tax—by 15 percent for all businesses, shrinking the tax rolls by $1.5 billion.

Only three Democrats have signed onto Senate Bill 8—filed by Sen. Charles Schwertner (R-Georgetown)—which would exempt businesses with an annual revenue of less than $4 million from paying the franchise tax.

Hinojosa is one of the few Democratic supporters.

“For many small businesses struggling to make it, the franchise tax represents an unnecessary and burdensome tax that limits job growth and economic investment,” Hinojosa said in a statement.

He noted that SB 8 will exempt more than 61,000 businesses that would otherwise pay the state’s franchise tax. But small businesses with less than $1 million in gross receipts are already exempt from paying the franchise tax, and seven out of eight Texas businesses currently pay no franchise tax, according to the public investment advocacy group Texas Forward.

Gov. Greg Abbott has previously vowed that he won’t sign any budget that does not significantly lower—if not eliminate—the franchise tax. Lt. Gov Dan Patrick said that he and other senators want to eventually eliminate the franchise tax altogether. But that would be a cut totaling $9 billion, according to DeLuna Castro.

“That would eat up all the available general revenue, so no one is really taking that seriously,” DeLuna Castro said.

Although Watson supports the homestead exemption proposal, he said in a statement he couldn’t “get behind cutting the franchise tax.”

“It would be irresponsible to cut off an important stream of revenue before we know what the Legislature’s obligations will be to fulfill its constitutional responsibility to Texas schoolchildren,” he said in the statement.

Will Francis, co-chair of Texas Forward’s Steering Committee, says that businesses got their tax cuts last session, and now they need to “put their fair share” into essential state services like education and healthcare. Francis, who is also the government relations director for the Texas chapter of the National Association of Social Workers, said that “there’s a volatility of resources” in Texas. While there may be a surplus in the budget now, he said, the economic fortunes of the state could quickly change.

At least one Senate Republican agrees. Sen. Kevin Eltife (R-Tyler)—who didn’t sign onto either SB 1 or SB 7—told the Quorum Report that “we have got to meet the needs of the state before we cut taxes,” and noted that state pensions, the highway system and health care for teachers are all underfunded.

Patrick has claimed that even with the tax cuts, the budget has plenty of room to address other needs, including education, pensions and roads, but he didn’t say on Tuesday how these other needs might be funded, only that they’d be addressed in the coming weeks. DeLuna Castro said that while the money is available lawmakers have limited their options because of an unwillingness to raise the constitutional spending cap or touch the Rainy Day Fund.

“The issue isn’t available revenue,” DeLuna Castro said. “It’s ‘we don’t want to.’”

Nelson said that next week the Senate Finance Committee will hear any tax relief bill from any senator.