In a mere three weeks, the deal to overhaul school finance and provide property tax relief had gone from a public relations disaster to a done deal—and now Texas’s top elected officials were celebrating their victory . With just a few days left in the legislative session, Governor Greg Abbott, Lieutenant Governor Dan Patrick, and House Speaker Dennis Bonnen sat at a table in the shade in front of the Governor’s Mansion as thirteen key legislators stood behind them sweltering in the sun. House Education Chairman Dan Huberty sneaked a water bottle out of his pocket for a quick sip. Several lawmakers took a moment to pet Abbott’s golden retriever Pancake as she pranced about.
Out in the crowd, behind the reporters and the TV cameras, stood a short, balding man with intense brown eyes who seemed aloof even from his peers on the governor’s staff. As congratulations passed back and forth on the center stage, Abbott suddenly gave the man a shout-out. “There is a person who’s been toiling in the vineyard of policy reform for decades and an adviser to members of the House and Senate and myself for a long, long time who, for me, has been an architect of so many of these programs that have come to fruition. And that is my policy adviser, John Colyandro.”
The Big Three—Abbott, Patrick, and Bonnen—would get the credit for passing an $11.5 billion package of tax cuts and public education spending, including pay raises for educators and a school finance overhaul. This was the first time that the Legislature had managed to pass a combination school funding/tax cut package without the Texas Supreme Court ordering them to do so.
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But Colyandro was the driving force behind Abbott’s efforts to make the deal work. The ideas he brought to Abbott were the same ones he had been peddling for decades as a conservative intellectual and highly partisan Republican. Early on, Colyandro sold Abbott on a key component of the property tax cuts the Republican leadership had promised: capping public school district tax revenue increases at 2.5 percent a year. It sounds wonky, but the property tax cap, in theory at least, would slow the growth of property tax bills. Despite fierce, even angry, opposition from local officials, who argued that the cap would make funding schools difficult, Abbott took a hard line, insisting that he wouldn’t agree to any deal that didn’t include the cap.
Colyandro’s other policy proposition—dramatically increasing the sales tax rate in order to permanently buy down property taxes—proved to be a near-disaster. When the Big Three unveiled the tax swap in April, Democrats immediately seized on it as proof that Texas Republicans were eager to raise taxes on the poor and working class, and when some conservative lawmakers signaled that they weren’t comfortable with a sales tax hike, it looked like the whole deal would fizzle.
But don’t count the idea of swapping increased consumer taxes for property tax cuts dead just yet. It has a long and venerable history in Texas politics. And as much as Abbott, Patrick, and Bonnen are celebrating right now, their grand bargain is only a temporary one. Without a permanent way to pay for the additional education funding and the property tax relief, the scheme may unravel in the coming years. Abbott’s tax cap alone may set up a potential tax increase (sales tax, anyone?) when the Legislature convenes in January 2021.
The current debate over school finance and property taxes began in 2016 when the Texas Supreme Court ruled that the state school finance system was a legal policy mess—in shorthand: awful but lawful. The House pushed for increased funding for schools during the 2017 legislative session, but it died in the stalemate over Patrick’s desire to regulate which bathrooms transgender teens can use. After the legislative fight ended, Abbott, Patrick and then-House Speaker Joe Straus agreed to create a select committee to produce an in-depth study on school finance.
At this point, Abbott turned to Colyandro for direction. Colyandro already had plenty of ideas on hand, most of them grown in the ideological hothouses of the right.
Colyandro is best known for pleading guilty to money laundering in 2005 as part of Tom DeLay’s effort to take control of the Texas House in 2003. He was a founding board member of Texans for Educational Opportunity, a school choice advocacy organization pushing private school vouchers. As the head of the Texas Conservative Coalition Research Institute, a policy think tank for state officials, he designed conservative legislation for House members and advised Abbott when he was Texas attorney general. In 2012, he advocated for eliminating property taxes as a source of funding for public school operations.
Under Colyandro’s tutelage last year, Abbott became enamored with capping property growth, settling eventually on a 2.5 percent cap on public school district revenue increases. Abbott’s embrace of the 2.5 percent solution was as much vanity as policy.
The Colyandro cap was essentially all the governor presented to the school finance commission. Meanwhile, Colyandro became his point man, selling it to citizens around the state with a presentation entitled, “Comprehensive School Finance & Property Tax Reform.”
When the commission completed its work in December, it put forth numerous detailed recommendations for how to improve schools, but only gave legislators a laundry list of potential ways to pay for the package, including the Abbott tax cap proposal. At first, legislative leaders didn’t give the tax cap plan much consideration. School finance experts had complained that it would give a financial advantage to booming districts such as Austin ISD over those with stagnant property values. Behind the scenes, legislative budget writers and education leaders started meeting privately with Abbott, Patrick, and Bonnen to try to find a way to pay for billions in tax cuts and education spending. Where would all the money come from?
In a series of meetings, the group gathered in front of white boards to discuss revenue alternatives. One of the first ideas was to end sales tax exemptions for professional services such as lawyers and architects. Closing the loopholes would generate almost $5 billion in revenue for the biennium. But it had a big downside; it would generate special interest lobbying against the bill.
By late March, the group seemed to have run out of easy alternatives. Some told me that finally, at Colyandro’s suggestion, the group agreed to an increase in the sales tax from 6.25 percent to 7.25 percent, putting Texas on par with California for the highest sales tax in the nation. The Big Three began promoting the idea in early April.
It sounded like a good idea at the time. After all, shifting the tax burden to consumers was a bit of Republican dogma Colyandro had been pushing since at least 2004.
In 2005, Governor Rick Perry tried and failed to overhaul school finance with a sales tax increase. (By no small irony, Perry’s political director Luis Saenz defended the proposed tax swap when one of Perry’s rivals attacked it as a tax increase. Today, Saenz is Abbott’s chief of staff and the leader of Team Abbott in pushing the tax swap to reluctant legislators.)
They say those who fail to study history are doomed to repeat it. Apparently, so are those who live through it. In July 2005—when Colyandro and Saenz had front row seats at the Legislature—the Republican-controlled House voted down the proposed Perry tax swap by a vote of 124-8. Less than a decade earlier, Governor George W. Bush’s proposal for a half-cent increase in the sales tax for a property tax swap died due to the lack of Republican support in the state Senate.
Raising sales taxes to pay for property tax cuts superficially looks like a dollar-for-dollar swap. However, sales taxes are highly regressive. They place a much higher tax burden on the poor and middle class than they do the wealthy. The state Legislative Budget Board drily pointed out this year that only families earning more than $150,000 a year would see a net tax cut from the swap, effectively revealing the shortcoming of consumer tax orthodoxy.
Republican Senator Paul Bettencourt of Houston, a veteran anti-tax crusader, started speaking out against the plan almost immediately. Tea party groups questioned why the state leaders were talking about a tax increase when the surplus was $9 billion. As a desperate attempt to save the plan, the Big Three held a news conference in early May to drum up support. Patrick promised to pass a sales tax through the Senate on a simple majority vote if he had to. But the timing was terrible; just that morning, the budget board had released its analysis.
As I exited the Big Three news conference, I ran into a Republican House member who had just had a meeting with Bettencourt. He had been shown how 85 percent of the households in his district would face a net tax increase. “I can’t support this,” he told me. By the following Monday morning, the plan was effectively dead, having lost all the Democrats and a large portion of the Republicans.
The next day, Huberty and other House Republicans denounced Bettencourt for killing the tax swap. “You have members of the Senate demanding property tax relief their entire legislative careers who did not vote for the only bill that actually provide property tax relief this legislative session,” Huberty told the House. The Senate’s education chairman, Larry Taylor, told me he was surprised that Republicans turned their backs on a consumption tax, a plank in the Republican Party of Texas platform.
Nonetheless, Bettencourt wasn’t going to budge. Increasing the tax burden of the poor simply makes them more dependent on government, he told me. “It’s my Catholic side,” Bettencourt said. “We’re just not going to raise taxes on the poor.”
For the third time in 22 years, the Republican dogma promoting consumer taxes had died when faced with political realities. In policy, a tax swap may be a swap, but in politics it is a tax increase.
After their public belly flop, the leadership had few options. In the end, they leaned heavily on the state’s current flush finances to pay for the property tax relief and school funding.
In the final days of the session, the Legislature adopted a sweeping school finance reform package costing $6.5 billion over the next two years along with property tax cuts totaling $5 billion. To pay for it, the Legislature primarily uses $9 billion in a windfall of tax revenue generated by a surging economy still closely tied to oil. To balance everything out, they leaned on smaller sources of money, such as a lawsuit collecting sales taxes from out-of-state online sales and a one-time accounting gimmick that saves the state up to $1.8 billion. In layman’s terms, the Legislature spent their bonus on payday.
Even as the deal was hammered out, Abbott threatened to blow up the deal if it did not contain his 2.5 percent cap on public school property tax increases.
Perhaps the package overall is as transformational as the Republican leadership claims. But this is a transformation built on financial sand because its financing is dependent on Texas retaining a strong economy.
Several Democratic legislators who voted for the package also issued warnings about its financing. “While we have laid the groundwork for restoring balance to our public school finance system, I am concerned with our ability to sustain this level of spending,” said Representative Eddie Rodriguez of Austin. Representative Trey Martinez Fischer of San Antonio said he feared the state is setting itself up for the “tragedy” of 2011 when $5 billion was cut from state education spending. “We have seen this before, and we are making the same mistake again,” he said.
Huberty and Taylor are optimistic, though. “The economy is going to continue to do well,” Huberty said. “We’ll have the resources and tax growth to continue to pay for it.” Taylor said it is a matter of investing in having a future educated workforce that pays taxes, even if that means sometimes having to deal with “bumps” in the road. “Someone might say we will have some cataclysmic thing in the future. That can happen any time even if we didn’t spend anything. But I guarantee you this: If we didn’t make the investment today in our educational system, we would be a state facing declining revenues forever.”
Still, Huberty and Taylor’s legislation anticipates that the new system isn’t financed beyond two years. On page 185 of the education finance bill, the Legislative Budget Board is ordered to study “potential sources of revenue that may be used to reduce school district maintenance and operation taxes.” In layman’s terms that means looking into what taxes can be raised two years from now to pay for the tax cuts, school funding, and teacher pay raises meant to get Republicans through the 2020 elections.
One of the main drivers of the study is uncertainty about what the Abbott tax cap—the Colyandro tax cap—will do to both state and local school district finances.
Among the new taxes and fees up for consideration will be an annual registration fee for hybrid vehicles and eliminating sales tax exemptions on professional services, public opinion polling, outdoor advertising, and on goods such as bottled water. Aren’t small bottles of water sold a convenience stores a luxury, not a necessity? The 2005 budget writers asked this same question and rejected it, because Texans wanted to drink their water tax free.
If the state economy stays strong and continues to generate sales tax revenue, and if the price of oil stays above $50 a barrel for the red-hot Permian Basin, then the discussion of a possible tax increase in 2021 is probably moot. If not, then expect a lesson of history to be ignored once again as consumer tax increases are the first put on the table. And if it is, we can be pretty certain that Colyandro will be there promoting it.