Will Governor George W. Bush’s property-tax proposal be a rookie mistake?
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Everyone at the Capitol that morning in late January knew George W. Bush was at a high plateau, and they were there expecting to witness history being made. Popular and successful after two years as governor, openly discussed already as a potential candidate for national office, he was, on this cold, clear Tuesday, about to give his second State of the State address. The Capitol was crowded and practically boiling over with activity. The gallery of the House chamber filled until every seat was taken and every spot to stand was occupied.
It was no secret that the governor wanted to reduce property taxes. He had gotten practically everything he’d wanted during the previous session. Now he was asking for something quite different, and the stakes were higher. Lowering the property tax, whose revenues are used to pay for public schools, would transform Texas. He would be changing the method of raising money for education from one that is outmoded and unpopular at best and inadequate and unfair at worst. Those are reasons enough for making the change. But that’s not all. A governor who had successfully lowered taxes would be a governor with a strong record to take before voters, whether just in Texas or in the whole country.
On the other hand, money for schools had to come from somewhere. Any tax cuts in one area would mean new taxes in another. What was Bush going to do? And whatever it was, could he get the Legislature to vote for it? A governor who proposed a tax cut and failed would be just that—someone who had tried and failed.
Years from now, if Bush’s political career continues to advance, this speech would be remembered as an early decisive moment. If his career does not advance, this morning would be remembered, to the degree it was remembered at all, as the first misstep.
The Speaker of the House Pete Laney and Lieutenant Governor Bob Bullock sat near the podium on a platform with other dignitaries. At eleven o’clock, the sergeant at arms proclaimed that the governor was at the door of the House, and the Speaker solemnly announced him. As he walked to the podium, he looked happy, even amused, with a cocksure tilt of his head and a confident smile.
The governor began his speech by saying that he felt different today from when he made his first State of the State speech two years ago. “I’ll admit I was nervous,” he said. “I was the brand-new governor, a rookie in a different ballpark.” But this time, he said, he came knowing he was among friends. Still, there may have been a sign of nerves even this second time around. The governor gave his speech too quickly. For someone who was rolling the dice on his future, he seemed to take no pleasure in the rolling, as if he just wanted to get the bones out there on the table and be done with it.
In the first part of his speech, which was not much commented upon later, he zipped through the accomplishments of the last legislative session—education reforms, tort reform, toughening criminal justice, and welfare reforms. He reemphasized his reading initiative and its goal—which he called “the clearest and most profound goal I have for Texas”—of having every child reading at grade level by the third grade and continue reading at grade level or better throughout elementary and secondary school. He spoke of encouraging adoption, some further strengthening of the juvenile justice code, and laws keeping violent criminals from getting early parole. He said he wanted a long-term water plan and that “there is more to do” on tort reform, but he did not specify what that might be.
He spoke about creating a welfare system that changes behavior but does so in a compassionate way. He specifically mentioned “faith-based groups” and a report named “Faith in Action” that describes “how government can encourage people of faith to help people get off and stay off welfare.” If the proposals he was about to make had not been so dramatic, this would surely have been the most controversial portion of his address. There has been growing support among conservative circles for Christian organizations and programs whose statistics show great success in solving a variety of social problems—getting addicts off drugs, getting people off welfare, and the like. Perhaps they’re right, but every drug and welfare program that has come along looking for public money has flashed impressive statistics, yet drugs and welfare are still with us.
Finally, the governor got to the part of his speech everyone had come to hear. He began by describing why property taxes in Texas are among the highest in the nation. Property tax rates were raised repeatedly during the bust to make up for the revenue that was lost when property values declined. Now property values and tax appraisals are going back up again while the rates are remaining at high levels. Thus, property taxes keep going up and, as the governor said, “are headed through the roof.” He told a few horror stories of people worried that taxes would force them from their homes and of business leaving Texas because of the property tax burden.
Then he described his plan:
•A constitutional amendment increasingthe homestead exemption by $20,000
•A 20-cent cut in the school property taxrate in every district
•Eliminate the corporate franchise tax
•Eliminate the school property tax on business inventory.
The New Taxes
•A 1.25 percent business tax on sales over $500,000, allowing deductions for the cost of goods and the capital invested
•A 1⁄2-cent increase in the sales tax
•A 1⁄2-cent increase in the motor vehicle tax
•An unspecified tax on lawyers and other professionals that are currently not taxed at all.
After describing the plan, Bush repeated his opposition to a personal income tax and finished with a story about schoolchildren in his office who shouted an affirming “I’m going to make it.”
He had just proposed the most sweeping changes in Texas for a generation or more. At the same time, he had reopened the whole question of school financing, which had spent years in the courts, costly and contentious years whose wounds had not yet healed. He had rejected a personal income tax while proposing something similar on business. And he had called for, by his estimate, a 40 percent cut in property taxes on average throughout Texas. His future as a politician, whether in Texas or nationally, hung on his success in passing the dramatic program he had just announced. And the response was … polite.
There was some applause and, on the whole, an air of good feeling, but no one really knew what to think. The governor’s program is not so much a tax cut as a tax shift. Legislators immediately recognized that he had put them in a corner. If they vote against his plan, they will have to face the charge that they opposed a tax cut. But if they vote for his plan, they will have to face the charge that they raised taxes. The beneficiaries of lower property taxes and a business revenue tax will be highly capitalized industries—refineries, chemical plants, heavy manufacturing, and so on—because they get property tax relief and can deduct capital expenditures before paying the business tax. The losers will be companies with high volume and low margins, because they will have to pay the business tax on their large revenues, and companies with many employees, because salaries cannot be deducted. Such companies are groceries, restaurants, retailers, high-tech manufacturing companies, and partnerships, from the Bass brothers to doctors and lawyers. And homeowners? Who knows? The governor’s office says that the owner of a $100,000 home with a family income of $60,000 would save $308 a year under the governor’s plan. But that figure does not include any rise or fall in consumer prices that might come from the changes in business taxes.
I think the governor got a reminder of the difficult future that lies ahead just two days after his speech in Austin. He spoke early that morning at the Fairmont Hotel in Dallas to a combined meeting of the Dallas Friday Group, the Dallas Rotary Club, the Greater Dallas Planning Council, the Dallas Citizens Council, and the Dallas Assembly. In other words, a moderate, pro-business Republican like Bush could not find a more friendly audience anywhere in the world.
He outlined his proposals in a speech that was a variation of his State of the State address. Halfway through he raised his voice and lifted a hand and proclaimed he wanted “to eliminate the corporate franchise tax.” He paused, clearly expecting a major response from this audience. Instead, only a few people applauded briefly. “Scattered applause,” the governor said with a wry smile and a shake of his head before going on with his speech.
Bush has staked his political future on a complicated proposal whose effects still seem murky. To his credit, he has done that because he believes lowering property taxes is the right thing to do for the future of Texas, but the coming battle over his tax proposals, with people still trying to figure out if they win or lose, will be fought more contentiously and divisively than any of his previous programs as powerful special interests line up on both sides.
As it turns out, this is the year he is a rookie in a different ballpark.