Perry Praises Plan for Record Property Tax Cuts

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Mar. 29, 2006

Perry Praises Plan for Record Property Tax Cuts
 Tax Reform Commission Plan Also Calls for Overhaul of Business Taxes

 AUSTIN - Gov. Rick Perry today praised the Texas Tax Reform Commission for its work and said he wholeheartedly supports
 the commission's plan, which would provide a record $6 billion property tax cut while overhauling the state's antiquated
 business tax structure.

 "If Texans want a fairer and broader business tax without loopholes, a stable source of revenue for our children's education,
 and substantial property tax relief, then we've got a plan that works for them," Perry said.

 The commission's plan would pay for part of the reduction in school property taxes with a reformed, broader-based business
 tax while also lowering the rate businesses pay under the current franchise tax.

 The governor said the plan contains four key benefits:

 It is a fundamentally fairer way to fund education because its centerpiece - the reformed franchise tax - is broader, fairer and
 assessed at a lower rate than the tax we have today. It closes tax loopholes so many more will pay their share, and some will pay

 It encourages employers to invest in people. If legislators pass this plan, employers will have new incentives to create jobs and
 invest in worker pensions, worker healthcare and employee dependent care.

 It makes homeownership more affordable for millions of Texas families by slashing school property taxes by about one-third
 starting in the 2007 tax year.

 It dramatically increases the state share of education funding. By Fiscal Year 2008, the state will pick up an estimated 50 percent
 of the cost of public education, instead of only 34 percent, which the current system is leading us toward in Fiscal Year 2007.

 Perry appointed the bi-partisan commission last year to recommend changes to the current franchise tax. He named John
 Sharp, former comptroller and a Democratic, to chair the group.

 The Texas Supreme Court later issued its ruling in a school-finance lawsuit and gave the legislature until June 1 to address
 what it found to be an unconstitutional statewide property tax.

 "For years Texas has needed a new tax structure that protects jobs, reflects the modern economy, broadens the tax burden
 and lightens the load of property owners," Perry said. "Now we have that plan.

 "It is a responsible plan that appeals to Texans' sense of fairness, encourages investments in jobs and workers, discourages
 harmful addictions like smoking, and utilizes a portion of the surplus to give the people a well-deserved tax cut without leaving
 future legislatures a mountain of debt."

 The property tax cut would take effect immediately, with property owners seeing an initial rate reduction in school property
 taxes of 17 cents. Those property tax reductions would be paid for with an increase in taxes on tobacco products, increased
 tax compliance measures and a portion of the state surplus.

 The reforms to the business tax structure would take effect next year and school property tax rates would be further reduced
 to $1 per $100 in valuation - a one-third reduction in the current school tax rate of $1.50.

 "What this commission has proposed is fair, forward looking and future-oriented. It creates a tax structure for a 21st century
 economy. And it provides tax relief to those who need it most," Perry said.

 "This is our great chance, a once in a generation opportunity to lay aside politics in pursuit of shared prosperity. I ask
 legislators of both parties to join me in that pursuit."

 “This plan substantially improves the school finance system, provides a record $6 billion property tax cut for homeowners and
 employers, dramatically increases the state’s share of education funding, protects jobs, encourages investments in workers’
 healthcare and pensions, and reforms the business franchise tax by broadening the base and closing loopholes. And it is a net
 tax cut of more than $1 billion starting in 2007.”

Key Benefits:
It will make home ownership more affordable for millions of Texans by providing $6 billion in property tax relief for homeowners
and employers by 2007.

It will close loopholes and encompass a broader cross-section of the state economy, providing a fairer way to fund our children’s

It encourages businesses to invest in jobs and employee benefits with deductions for hiring and investments in worker healthcare
and pensions.

It dramatically increases the state’s share of education funding.

Key Details of the School Finance Proposal:
Record Property Tax Relief:

More than $6 billion in annual property tax relief will be delivered to homeowners and employers by Tax Year 2007, with nearly $2
billion in property tax relief in Tax Year 2006.

It is a net tax cut of $1 billion in Tax Year 2006, and nearly $1.5 billion in Tax Year 2007.

Fairer Franchise Tax:

The reformed franchise tax will be broader, fairer and assessed at a lower rate.

A greater number of businesses will pay for the cost of educating our children.

It provides a lower franchise tax rate of 1% (and .5% for certain low-margin employers, like retailers, wholesalers, and restaurants)
than the current rate of 4.5%.

Unlike previous proposals for franchise tax reform, we will provide employers incentives for hiring more workers, providing health
insurance, investing in worker pensions, and investing in dependent healthcare.

The reformed franchise tax captures businesses with liability protection, as was originally intended.

Sole-proprietorships and general partnerships owned solely by natural persons are exempt from the tax.

The small business exemption is doubled from $150K to $300K in total revenue, and indexed to inflation, so small businesses can
prosper and grow.

More State Dollars for Education:

The state will fund a larger share of our children’s education, picking up an estimated 50% of the cost of education by Fiscal Year
2008, reversing the trend of greater reliance on local property tax dollars and preventing the state share from dropping to 34% by
Fiscal Year 2007.

It reduces the amount of money recaptured and redirected to other school districts under Robin Hood.

School districts will have increased capacity to raise education dollars.
The Bottom Line:
We can have both significant property tax relief and meaningful tax reform. We can broaden the base of the franchise tax and
lower the rate while ensuring schools have additional funding capacity. We can protect jobs and encourage employers to invest
in their workers’ healthcare and pensions. And we can do this while providing record property tax relief, making home
ownership more affordable and giving Texans a net tax cut of nearly $1.5 billion by 2007.

On May 15, 2006, the Texas legislature adopted House Bill 1 and House Bill 3 to dramatically change the way schools are
financed in the State of Texas. HB 1 implements an immediate cut in school property taxes effective September 1, 2006,
which should benefit most property owners and tenants. The legislature also passed HB 3, which replaces the existing
Texas franchise tax with a new "margin" tax on gross receipts. The new margin tax will apply to a broader range of
taxpayers than the old franchise tax, and will impose a greater burden on some property owners than others, depending on
various factors. All property owners and tenants should seek professional advice to determine how they will be impacted
by this new legislation and whether there are any actions they can take to lessen or avoid a negative impact.

HB 1
     HB 1 reduces school property taxes by approximately $0.17 per $100 of valuation, effective September 1, 2006. The
exact amount will vary, depending on the particular school district.
     HB 1 calls for an additional approximately $0.33 reduction for 2007, bringing the expected total reduction in school
taxes to approximately $.50 per $100 of valuation, depending on the particular school district.
     Landlords and other property owners should see an immediate reduction in their property taxes for 2006 and 2007,
the amount of which will depend upon on a number of factors, including whether and how much assessed values increase
during these years.
     This property tax savings could be passed-through to tenants as a rent reduction, depending on how the tenant’s
lease is structured.
     Property owners and some tenants could each face year-end adjustments for 2006 that might be significant.

HB 3
      HB 3 replaces the Texas franchise tax with a new "margin" tax applicable to virtually all business entities, not just
corporations and limited liability companies.
      Under HB 3, businesses will pay a margin tax equal to 1% of the lowest of (a) 70% of total revenue, (b) total revenue
minus cost of goods sold, or (c) total revenue minus total compensation and benefits. All sole proprietorships, general
partnerships 100% owned by natural persons, and certain passive entities (such as family limited partnerships) are exempt,
as are entities with less than $300,000 gross revenues annually.
      HB 3, on balance, could have a disproportionately negative effect on service and capital intensive businesses, such
as large commercial property owners, who typically do not have as many of the specified allowable deductions.
      HB 3 takes effect January 1, 2007, but tax payments under it are not due until May 15, 2008.
      Depending on the terms of the applicable lease provisions, real estate owners, developers and managers might be
able to pass-through all or a portion of the new margin tax to tenants.

What Is Most Important to You?
      HB 1 might grant immediate and tangible tax relief to real estate owners and some tenants for 2006 and 2007.
      HB 3’s provisions are highly complex and affect various types of real property owners, investors and tenants in
different ways.
      Opportunities do exist to minimize or in some cases avoid the new margin tax.

HB 1 and HB 3 Timeline
     11/22/05:
 Texas Supreme Court finds statewide property tax for school finance unconstitutional, and requires
    legislative remedy.
     5/15/06: State Legislature passes HB 1 and HB 3.
     9/1/06: HB 1 reduces school property taxes by approximately $0.17 per $100 of valuation.
     1/1/07: HB 3 imposes new Texas margin tax on virtually all business entities, requiring payment
    of 1% of gross receipts.
     9/1/07: HB 1 calls for an additional approximately $0.33 school property tax reduction per $100 of
     5/15/08: Tax payments under HB 3 due on or before this date.