Yesterday, State Comptroller Carol Strayhorn told lawmakers there is a $400 million surplus in the state's budget. House and Senate leaders were predicting a shortfall of $1 billion to $2 billion, far less than the $10 billion shortfall that confronted the Legislature 18 months ago. Nevertheless, Lt. Gov. David Dewhurst predicted "I believe we're going to be able to accomplish our goals of providing all of our essential services without raising taxes," he said.

Senate supposedly close to finalizing school funding plan

Lt. Gov. Dewhurst said last week the Senate is nearing a consensus on a plan that would significantly increase school funding, cut property taxes, and create a flat rate business tax. " We're looking at a bold plan, a bolder plan than anything I've ever seen in the last decade in the Legislature," said Dewhurst.

While Dewhurst has not officially released the new Senate plan, it is reported to generate $7.2 billion in additional state revenue in fiscal year 2006 and $7.4 billion in fiscal year 2007. The increased revenue will come from the following sources:

-expansion of the franchise tax as explained below.

-a half-cent increase in the state sales tax and motor vehicle tax.

-a 50 cent-per-pack increase in cigarettes and other tobacco products.

-the renewal of the telecommunications infrastructure fund.

-a 1.5 percent real estate transfer fee.

-various alcohol taxes.

-other increases in tax collections.

Then, property taxes would be reduced annually by $5.5 billion by replacing the current local property tax with a statewide maximum property tax of $1 per $100 valuation. Currently, local property taxes are capped at $1.50 per $100 valuation.

However, under the new plan, the franchise tax would be expanded to include all businesses. Only one in six businesses currently pays the franchise tax. According to some senators, expanding the franchise tax to all businesses, using a low tax rate, would generate about $3.5 billion - over half the amount needed to replace the $5.5 billion in property tax relief.

Gov. Perry said he would be open to a broad-based business tax to help fund public schools. "To lower property taxes, and to generate that loss of revenue from lowering property taxes, we're not averse to looking at some type of a very broad-based business tax that will fairly get Texas an equitable and, I think, fair system," said Perry.

Speaker Craddick says a statewide property tax is a possibility, but he is not yet lending his support to it. He said a House plan is likely to include a provision that would give school districts the option of setting their own rates at slightly higher than $1.00 per $100 valuation. Concerning the expansion of the franchise tax, Craddick said, " I don't think we can shift all of the burden on business."

However, Dewhurst was confident all three could reach an agreement. "Although no final agreement has been reached, I'm surprised how close we are on almost all the major points," he said.

Last year, a state district judge declared the current school funding system unconstitutional and ordered the Legislature to develop a plan that adequately funds state schools by October of this year. Gov. Perry, in a bold statement last week, declared "We'll stay until it gets fixed." The Legislature tried to fix the problem in a special session last spring when numerous proposals to cut property taxes and increase school funding never gained traction in the House. The Texas Constitution prohibits a statewide property tax. To establish one would require two-thirds approval of the House and Senate and a majority of the voting public.