The Texas tax code is rich with tax breaks. There are tax breaks for industries relocating to the state and for anyone with an Internet connection. Tax exemptions for groceries and bottled water. Tax holidays for back-to-school supplies. Tax exemptions for golf courses at private country clubs.
It adds up to at least $38 billion a year for the state’s major taxes and school property taxes, the comptroller estimates — hardly pocket change in a state that is expected to collect $80 billion in tax revenue in 2012-13. But no one claims to know for sure how much the state is forgoing because, by law, smaller taxes — those that raise $2.2 billion or less — are excluded from a biennial report by the state comptroller.
“We have so many exceptions to the tax code, none of us really know how many we have, what they cost, if they make sense or they don’t,” said state Sen. Rodney Ellis, D-Houston.
To get a handle on all those tax breaks, Ellis, along with Dallas Republican state Sen. John Carona, has filed legislation to create a “sunset” process that would eliminate any tax break that isn’t renewed by the Legislature.
“I truly believe every conservative in this Capitol ought to be supportive of analyzing those special government giveaways on a regular basis,” Carona said. “And that’s all this bill seeks to accomplish.”
Just as the state now reviews every agency and its programs on a 12-year cycle, Ellis and Carona want every state and local “tax preference” reviewed on a six-year cycle. The comptroller would set the schedule, the Legislative Budget Board would present the facts, and the Legislature would be forced to reaffirm the tax break or it would die.
Both lawmakers expect that the Legislature would reaffirm most of the tax breaks, including the popular homestead exemption and exclusions for groceries, medical and dental services, and medicines, for example.
But a periodic exam invariably would raise questions. Should golf courses at private country clubs be appraised at less than 10 percent of the land’s market value? Should retailers be paid — some say overpaid — for remitting sales taxes on time? Is there still a need to encourage the spread of the Internet by exempting sales tax on the first $25 of your monthly bill?
Then there are the oddities of the sales tax. Soda is taxed; bottled water isn’t. The services of landscape architects aren’t taxed, but landscape services are. Food meant to be eaten at home is exempt, but not food intended for immediate consumption.
Legend has it that the late Comptroller Bob Bullock plied an employee who loved doughnuts with his fill. When the employee stopped at five, the six doughnut rule was born. Five or fewer doughnuts are taxed as intended for immediate consumption; six or more are exempt from sales tax.
Some tax breaks are seasonal. There are sales tax “holidays” for back-to-school supplies and energy-efficient home appliances, and another is proposed this year for natural disaster items such as generators and flashlights. A bill has been filed to exempt the sale of handguns and ammo once a year.
There are several tax breaks for the petroleum industry as well as temporary — but often large — school property tax reductions for companies that relocate or expand in Texas, just to name a few.
It adds up.
“I think there are billions there, and I think the taxpayers would be shocked at some of the people, some of the businesses that are getting tax breaks that don’t really deserve them,” said state Rep. René Oliveira, a Brownsville Democrat who twice has served as chairman of the House’s tax-writing committee.
Oliveira said he had identified $2 billion in “doable” tax reforms during an interim study in 2010. But even as the Legislature cut billions from public education and other programs in 2011 because of a $27 billion revenue shortfall caused by the economic recession, Oliveira never offered a bill to recapture the $2 billion.
That’s because the political toll of tax legislation is costly. One special interest’s tax incentive is another’s loophole. Closing a loophole raises someone’s tax. And each tax favor has a constituency.
Oliveira cited the power of lobbyists and a lack of a consensus from leadership at the top.
“I think there needs to be significant consensus between the governor, lieutenant governor and the (House) speaker,” he said. “If a Ways and Means chairman tries to do it on his own without there being significant commitment from both sides of the Capitol and the governor’s office, it’s too difficult. But it’s something that should be done.”
Oliveira, who first came to the Legislature in 1981, said he has witnessed tax reform efforts die on the House floor at the hands of lobbyists united to support each other’s tax break.
He recalled lobbyists packing the third-floor visitors’ gallery to watch lawmakers vote.
“They were all locked arm in arm,” Oliveira said.
Several lobbyists interviewed for this story declined to be identified because they didn’t want to offend lawmakers whose support they need on other issues, but none expressed concern that the Ellis-Carona bill would pass.
Gib Lewis, a lobbyist and former Texas House speaker, said a “sunset” process for the tax code is a bad idea.
“Every one of those laws are on the books for a reason,” Lewis said. “They went through the legislative process.”
He said the Legislature can address any single tax incentive without going through the expense and time of reviewing all of them.
Ellis and Comptroller Susan Combs, the state’s tax collector, have corresponded for a year over what information is readily available.
“While I applaud your intent, the scope of this project is beyond this agency’s resources,” Combs wrote. “A review of the many smaller taxes and fees — both state and local — and the exemptions and exclusions from each would undoubtedly yield information of interest, but we don’t have access.”
The Ellis-Carona legislation faces a battle just to get a vote.
Two years ago, a watered-down version died in a Senate committee.
Ellis said that state Sen. Steve Ogden, the Finance Committee chairman, now retired, held the vote open for 15 minutes looking to break a tie. But Ellis said too many of his colleagues were out of the room — and never returned — to vote.
Now Ellis is back with a stronger version that would require the Legislature to act to keep a tax break alive. Carona said that’s important because tax breaks can live unexamined for decades.
“They continue on autopilot, if you will, for years beyond what may be necessity or beyond what the original intent happened to be,” he said.
Carona said he considers tax reform on the same level as addressing education, transportation and water management — and the best insurance against a personal income tax in Texas.
“I’ve seen how these exceptions and these special arrangements are made — most of the time for a perfectly legitimate reason,” Carona said of his 23 years in the Legislature. “But I’ve also come to see how outdated many of them are.”
Carona and Oliveira declined to share examples — itself a telling example of how difficult it will be to get their bill passed.
“I wouldn’t want to reveal anything at this time simply because I don’t want to give that particular special interest time to become better armed than everybody else,” Carona said.
Oliveira agreed: “You don’t put that list out early because it becomes the target.”
Laylan Copelin has covered public policy and politics for the American-Statesman for three decades. Focusing on business issues in recent years, he has examined topics including the use of taxpayer incentives for private industry and plans to develop state land with private sector projects.