Strayhorn Jumps Ship on Tax Vow

AUSTIN — Saying the state’s business tax receipts were in “free fall,” Comptroller Carole Keeton Strayhorn urged lawmakers Monday to increase cigarette taxes.

Strayhorn becomes the first statewide officeholder to shatter the “no new taxes” unity among Republican leaders.

She listed a $1 a pack increase among 20 items that could yield $4.1 billion for the state in 2004-05. The state’s cigarette tax has been 41 cents a pack since 1990.

Strayhorn’s other suggestions, many under legislative review, include the legalization of video lottery terminals at horse and dog racetracks, reducing administrators in public schools, authorizing the state’s participation in a multistate lottery and tweaking a state law letting corporations reorganize as partnerships and avoid the state’s corporate franchise tax.

“My advice (to lawmakers) is to get busy on this,” Strayhorn said.

Gov. Rick Perry’s response was to say a cigarette tax increase “ain’t going to happen.”

Perry, emerging from talks with House Speaker Tom Craddick, R-Midland, said he remains “comfortable” that legislators will balance the two-year budget without new taxes before the 140-day session ends June 2.

Strayhorn said receipts from the state’s corporate franchise tax, accounting for 6 percent of annual tax revenues, are running nearly 18 percent behind what she projected for the fiscal year, which ends Aug. 31.

“We’ve got a franchise tax free fall going on,” Strayhorn said, attributing the drop to more corporations organizing as partnerships to avoid the tax.

House-Senate negotiators have been inching toward a roughly $117 billion budget that avoids higher taxes and closes a more than $10 billion gap between the cost of existing programs and state income in 2004-05.

But progress has become “squishy,” an aide said, because Perry, Craddick and Lt. Gov. David Dewhurst, all Republicans, have not agreed on how much to spend on education, higher education and other areas.

Spending targets likely would be affected again if Strayhorn lowers her estimate of state income for the two-year period.

But higher state taxes are not an option, Perry said.

“There’s not going to be a cigarette tax increase during this session of the Legislature,” Perry said.

Dewhurst agreed, saying, “I don’t believe that we need to raise taxes in order to balance our budget.”

Strayhorn, saying the cigarette tax increase would generate $1.5 billion in state income, joins others who have urged such an increase, including Republican Sens. Jeff Wentworth of San Antonio and Bill Ratliff of Mount Pleasant.

Sen. Judith Zaffirini, D-Laredo, filed a proposal last week to conduct a November straw poll of voters on the increase. She said she sought the nonbinding referendum because a $1 increase hasn’t been forwarded by the House, where tax measures must originate.

“This is one revenue stream that would have a beneficial impact,” Strayhorn said. “As a mama and grandmama, I want to deter young people from smoking.”

Strayhorn told Texas Monthly in December, “Nothing I do is ever going to trigger a tax bill.” And in a January report to lawmakers, she said would “vigorously oppose” higher taxes and creation of a state personal income tax.

Perry declined to criticize Strayhorn, saying, “She puts a lot of different ideas on the table. And that’s what the comptroller’s job is.”

The leader of a conservative group that named Strayhorn its “friend of the taxpayer” several years ago called a cigarette tax increase untimely.

“It’s the wrong way to go,” said Peggy Venable, director of Texas Citizens for a Sound Economy. “I’m not slighting her for making the recommendation. It’s up to policymakers to say that’s not the way to go.”

Strayhorn said she doesn’t believe she’s breaking with past positions by urging the increase.

Legislation to close the so-called franchise tax loophole — used by corporations that include the owner of the Express-News and SBC Communications Inc. — is widely considered dead.

Strayhorn didn’t name corporations that have taken advantage of the loophole. But she said more are doing so, and she listed nine examples of firms that paid between $100,000 and $9 million in franchise taxes in 2002 but zero for 2003 as of a deadline last week.

Strayhorn said franchise tax payments from the state’s largest corporations have diminished nearly 40 percent compared with May 2002.

“This is significant news, and it’s negative news,” Strayhorn said, saying the loophole needs to be closed or business taxation needs to “go a different route.”

Rep. Ron Wilson, D-Houston, who heads the tax-writing Ways and Means Committee, cited Perry’s anti-tax position as reason for not taking up cigarette taxes, though he said the increase could be weighed if a special session is necessary to finish the budget.