Tax reform schools.

• Author: Hood, John

If you think changing tax codes is tough in D.C., just try Albany, Annapolis, Atlanta, Austin...

George Bush delivered a big tax cut, and conservatives pummeled him for it. No, not that George Bush. I'm talking about Texas Gov. George W. Bush, son of the former president and (for wont of anyone else with star quality) the putative front-runner in the 2000 GOP presidential field. Last year, after months of testy debate with state lawmakers, he engineered a $1 billion property tax cut. Even for Texas, the nation's second most populous state, that's hefty tax relief. Yet the governor's notices, particularly among Republican power brokers and D.C.-based conservative activists, were terrible.

Bush's bad reviews shed light on the political dynamics of the national tax reform debate that Steve Forbes kicked off during his 1996 presidential run. The experience in Texas reflects the obstacles that tax reform has encountered in state capitals across the country. This year, tax cuts totaling $4 billion to $5 billion have been or will be considered in about 35 states. But tax reform has yet to gain any ground, and in many ways state and local tax codes are moving further from the neutrality, simplicity, and equality that reformers seek. The main problem is that fundamental tax reform inevitably means higher taxes for some. In a war between those seeking tax cuts and those protecting themselves from tax hikes, the latter will almost always win. To get past this obstacle, reformers may have to scale back their immediate goals.

The push for reform in Texas began with a tax system widely perceived as out of whack. Texas is one of five states without an individual or corporate income tax. The average state derives 40 percent of its revenue from income taxes, a third from sales taxes, and the remainder from levies such as business licenses and gasoline taxes. Texas, by contrast, gets half of its revenue from a sales tax, and it relies more than most states on local property taxes to pay for public education and other services. Its sales tax rate (6.25 percent) and its property tax burden are correspondingly high.

Lacking a corporate income tax, Texas imposes a disproportionate share of its business tax burden on capital-intensive industries, such as manufacturing, oil refining, and mining, that own a lot of taxable real property. According to a study by the governor's office, in 1997 the average property tax in the capital-intensive segment of Texas business was $5,300 per employee, compared to $595 per employee in labor-intensive businesses. "The bottom line is that the Texas economy has changed rather dramatically since the current structure was put into place," Austin attorney and tax reform activist Chris Shields told the Austin Business Journal in January of last year. "Asset-backed companies represent one-third of the economy but pay two-thirds of the school property taxes."

Elected governor in 1994, Bush started talking about the Texas tax code the day after the 1995 legislative session adjourned. The legislature had just adopted all four of Bush's key campaign promises: tougher juvenile justice laws, tort reform, welfare reform, and local control of schools. The governor was on a roll, and he decided to push on, into the tax thicket. Ruling out the adoption of income taxes, Bush put together a blue-ribbon panel to study ways to reduce property taxes and reform the financing of public schools.

In January 1997, Bush was ready to release his plan. It had four major components: 1) a big cut in school property tax rates in each of the state's 1,044 school districts; 2) a five-fold increase in the property tax homestead exemption, to $25,000 per home; 3) a half-cent increase in the motor vehicle tax and the statewide sales tax; and 4) a new 1.25 percent "business activity" tax to replace the state's franchise and property taxes on business. It would have applied only to companies with at least $500,000 in sales.

Overall, Bush's plan offered property-tax payers a projected $2.8 billion cut the first year and $6 billion over the budget biennium, translating into a 40 percent reduction of the average homeowner's tax bill as well as significant tax savings for businesses...