In late November, the Texas Supreme Court declared a key part of the state’s public school funding system unconstitutional. The court placed an ultimatum on the state, requiring lawmakers to find a solution by June 1, 2006. If lawmakers fail to agree on a new school finance system by the deadline, state funding will halt and schools may not open next fall.

In Texas, the majority of public school funding stems from property taxes, with a maximum $1.50 per $100 valuation cap. Most districts throughout Texas are at or near the maximum assessed limit. The Texas Constitution clearly states that a statewide property tax is unconstitutional. With nearly all local districts assessing maximum ad valorem property taxes, what are Texans faced with? No discretion at the local level, a de facto statewide property tax, and a tax structure that has been deemed illegal by Texas’ highest court.

Here in Texas, nearly 75% of our tax revenue comes from two sources – the sales tax and the property tax. The latter accounts for more than 40% of the state’s total tax load. While Texans are excluded from a statewide income tax, our property and sales tax rates are among the country’s highest. Other states distribute the tax load by assessing a personal income tax, thereby decreasing the heavy burden of sales and property taxes. Should Texas do the same?

During the 79th legislative session, lawmakers considered some ideas to pay for education while decreasing Texans’ property tax, including a real estate transfer tax and a tax on professional services. A real estate transfer tax is a tax assessed on every home sold. This would inevitably increase the already-high barrier to homeownership in Texas. A study conducted by the Real Estate Center at Texas A&M looked at an assessed transfer tax rate of 1% on a $164,400 home purchase price. Based on this assumption, Texas homebuyers would need to pay $1,644 more at closing. If this amount were reduced to just 0.5% (half a percent), 16,000 more Texas families would be prevented from buying a home each year. That can’t be good for Texas, which already ranks a woeful 45th out of 50 states in homeownership.

A tax on services includes professions such as legal, accounting, real estate, and more. This amounts to an income tax on all people working in the professions singled out for this tax. More importantly, for all Texans who want to buy a home, a tax on the services would have a negative effect, significantly increasing the overall cost. Every professional service involved in purchasing a home, including inspections, real estate fees, and the like, would be taxed. Both the real estate transfer tax and tax on services will likely have a negative impact on the one thing that has consistently bolstered the Texas economy – real estate. Although neither idea has carried enough support to reach the house floor, they may resurface unless lawmakers can agree upon a low-rate, broad-based tax that is equitably distributed among Texans.

In 2005, Texas lawmakers attempted to revamp the current tax system in one regular and three special legislative sessions, but to no avail. As a result, Texas Gov. Rick Perry created a blue-ribbon tax panel to address the issue. On Nov. 4, 2005, Gov. Perry named the bipartisan members of the Texas Tax Reform Commission. The 24-member panel – lead by Democrat and former Texas Comptroller John Sharp – is expected to recommend improvements to Texas’ current taxing structure with the goal of providing long-term property-tax relief and improving public school funding.

With the high court’s ruling declaring the current system unconstitutional, Gov. Perry’s tax panel will need to come up with innovative ways for reducing property taxes, while shifting the burden of education costs to other taxes. Because Perry and Sharp removed a personal income tax from consideration, the commission plans to focus on business taxes, which include closing loopholes (many businesses operating in Texas manage to avoid paying any state taxes at all) and ensuring equitable, broad-based rates.

Modernizing the Texas tax structure is vital to our state’s economic future. Decreasing property taxes for Texas property owners will stimulate growth by enhancing economic development opportunities and making private-property ownership more affordable. Gov. Perry’s panel of Texas business leaders has a difficult road ahead. Over the next several months, the commission will hold public hearings across the state, listening to ideas from fellow Texans. Their recommendations could have enormous implications for the future of the Texas economy and our schoolchildren, whose fates are intertwined. While revamping the current tax structure will take time, Gov. Rick Perry’s blue-ribbon panel is a step in the right direction.