GIVE RICK PERRY SOME CREDIT. After two regular sessions and three special sessions of nothing but futility and failure on school finance and with the state facing a June 1 deadline to rectify a school-funding method that the Texas Supreme Court has ruled unconstitutional, he finally figured out the solution: If you have to raise taxes, ask a Democrat.
That Democrat, of course, was John Sharp, his onetime Aggie buddy and, more recently, a bitter political opponent of both his and Lieutenant Governor David Dewhurst’s. The story of how Sharp and Perry encountered each other at a skeet range east of Austin in July 2005 has been widely told around the Capitol. Once it was clear that neither was going to open fire on the other, they patched up their friendship, and Perry subsequently appointed Sharp, who served as state comptroller between 1991 and 1999 and knows the tax structure inside and out, to head his Texas Tax Reform Commission. Sharp’s charge was to develop a plan to reduce school property taxes by finding other sources of revenue. That mission accomplished, he now finds himself in the strange position of lobbying to save the career of the man who ruined his.
Make no mistake: The special session that began April 17 is the last train for the GOP leadership and legislative majority to board if they want to prove themselves capable of governing the state. If the session fails and if the unthinkable comes to pass—a shutdown of the public schools come June 1—all hell will break loose. You would think that responsible politicians would never let the situation come to this.
I interviewed Sharp at an Austin restaurant a few days before the start of the special session, in between two briefings at the Capitol. He was in great spirits, clearly pleased not just that he’s back in the game but that his proposed solution to the problem—a reformed business tax—had survived its incubation period without major opposition. “[Bob] Bullock used to say, ‘If a tax bill lives for forty-eight hours, it’s going to pass.’ We’re well past that deadline, and this bill is getting stronger,” Sharp told me, citing the oft-brilliant, oft-manic former Democratic comptroller and lieutenant governor who, seven years after his death, still remains a point of reference in many a political discussion. I said that I had noticed Sharp make several references to Bullock during the unveiling of the tax bill the previous week. “Oh, I talk to Bullock every day,” Sharp said. I don’t think he was kidding.
Sharp is the unluckiest politician in recent Texas history, one who had the misfortune to be the last viable Democrat just as George W. Bush was at the height of his popularity in the state, a public servant of great competence and intelligence at the exact moment when those qualities ceased to matter if you had a D after your name. He might have beaten Perry anyway in the 1998 lieutenant governor’s race had he not made the decision to take an effective anti-Perry ad off TV in favor of a positive spot about himself. Four years later, he lost to Dewhurst in a race he expected to win with the help of conservative Democratic votes—only by that time, most conservative Democrats had become Republicans.
The stimulus for Perry’s turning to Sharp was the Supreme Court’s ruling last fall that the state’s reliance on property taxes to fund education had increased to the point that it amounted to a statewide property tax, which is prohibited by the state constitution. So many school districts are taxing at or near the maximum allowable rate of $1.50 per $100 of property value that they have little room to raise taxes to meet local needs. Hence the need for new revenue to “buy down” the property tax rate and provide room for districts to raise money locally. Sharp’s piece of the puzzle is to revise the state’s loophole-ridden business franchise tax to raise more revenue without being a burden on the economy.
The art of taxation has been described as the art of plucking the most feathers from the fattest goose in a manner that produces the least hissing. Business plays the role of the goose. The logic for taxing business is that it gets legal protection from the state in the form of limited liability and thus has an obligation to help support state government and also that it benefits from state-run public schools and universities, which educate and train its future employees. The modern Texas economy is built around professional-services firms, which have avoided paying the franchise tax by arranging themselves as partnerhips— as have some of the state’s biggest companies. As far back as 1997, when Governor Bush pressed for property tax cuts funded by a reformed business tax, it was clear that the franchise tax had lost much of its usefulness. But no progress had been made until Perry and Sharp got together.
The problem, Sharp explained to me, has always been “how to make it work for H-E-B and Dow”—that is, how to write a tax bill that is fair for businesses like H-E-B, a retailer with a thin profit margin, and Dow Chemical, a manufacturer with a higher profit margin. Recent efforts to reform the business tax focused on a payroll tax, which had the backing of Speaker Tom Craddick. But a payroll tax murders labor-intensive businesses like insurance companies, and especially retailers like H-E-B. It was Christmas for capital-intensive manufacturers like Dow, which need only a small number of employees. Sharp’s solution was twofold. First, he imposed a gross-receipts tax with two different rates: half a percent for retailers and wholesalers, one percent for everybody else. Then he allowed companies to deduct—dealer’s choice—either their labor costs or their cost of goods sold. H-E-B would choose cost of goods sold. So would Dow. But insurance companies and airlines, which sell services, not goods, would choose to deduct payroll. Dow will pay a lot of tax,