Just before Memorial Day weekend, lawmakers inked an $11.6 billion school finance and property tax reform package. The passage of House Bill 3, which includes a boost in state funding for schools, better teacher pay and a massive state buydown of local property taxes, was a kumbaya moment. But there was just one problem. Lawmakers didn’t include a way to pay for it beyond the next two years.
One place to look: the myriad state and local tax exemptions, loopholes, abatements and breaks that disproportionately benefit special interests, including manufacturers, lawyers, the tech industry, retailers and, most recently, yacht owners. According to the comptroller’s office, these carve-outs cost the state $60 billion a year, eroding the broader tax base and forcing average Texans to pay more.
“We need to look at everything” about exemptions, said state Representative Dan Huberty, R-Houston, the architect of the school finance package.
Texas lawmakers have long discussed the need to close many of the state’s tax loopholes and exemptions, but enthusiasm for tax reform has a tendency to vanish when it comes time to vote. Industry lobbyists in Texas are skilled at protecting what’s theirs, from antiquated exemptions to high-octane corporate welfare programs. Republicans’ pro-business pride and Democrats’ fear of the anti-business label both make reform easy to ignore.
In the 2021 legislative session, the GOP will be under immense pressure to preserve what one Republican representative dubbed the “incumbent protection plan.” Some lawmakers are already trying to ensure that a scrub of the tax code is the first thing on the table.
“Before we ask anyone to pay any more money, whether on property tax or sales tax or whatever, we ought to tell Texans, here’s what we’ve done to review and evaluate these exemptions,” said Harold Dutton, a longtime Democratic representative from Houston.
In April, Dutton convinced Republican Representative Dustin Burrows to add an amendment to the House’s property tax bill that would establish a commission to review every tax exemption on the books and recommend reforms to the Legislature. “If they can justify their existence,” Dutton added, “why would they worry about us taking a second look at them?”
Such a commission would likely examine Texas’ biggest corporate welfare program, known as Chapter 313, which is set to expire in 2022 unless the Legislature agrees to extend it in the next session.
Critics of Chapter 313 have long warned that the program hands out expansion-inducing tax breaks to big corporations that would have expanded in Texas anyway, wasting money that could otherwise be spent on schools. It’s projected to cost the state $1 billion per year by 2023. Still, the program is tremendously popular with school administrators, the business community and lawmakers. The House overwhelmingly voted to extend the program this session, but the measure stalled in the Senate.
When it comes to tax reform, it’s hard not to become cynical. Just ask Dutton. During closed-door negotiations in the waning days of the session, Burrows quietly nixed Dutton’s amendment to formally review tax exemptions. “I assume that means it wasn’t his idea,” Dutton said. “He had to do that in concert with some fairly higher-ups.”