Senator Eliot Shapleigh - El Paso, Texas

Rep. Kent Grusendorf, R-Arlington, (left) and Rep. Jim Dunnam, D-Waco

AUSTIN – Only Texans in households making more than $100,000 would receive a net tax cut under the tax overhaul bill that the House is considering, according to a nonpartisan legislative analysis.

Under the bill, the poorest 1.7 million households – those earning less than $23,000 – would see their tax burden rise more than 5 percent, as lawmakers would add a penny to the sales tax rate and sharply boost taxes on snacks and cigarettes.

The richest 840,000 households – those with annual incomes of more than $140,000 – would have their taxes cut nearly 3 percent, according to the Legislative Budget Board, a research agency run by a group of legislative leaders who track the budget.

The bill, slated for debate by the House on Thursday, would cut school property taxes by a third. To make up the loss, it would levy the highest state sales tax rate in the nation, 7.25 percent, and impose a new business payroll tax. Other changes include an increase in motor vehicle sales taxes, the cigarette tax, and a new 3 percent levy on soft drinks and snack food not sold in restaurants.

Democrats quickly seized on the analysis as cinching their argument that the bill is unfair, and Lt. Gov. David Dewhurst, a Republican, emphasized that the Senate intends to try to cushion the poorest Texans from a bigger sales tax bite. The Senate's plan would cut by 40 percent the sales tax rate levied when welfare or food stamp recipients use the Lone Star Card.

House leaders downplayed how the tax increases are distributed, emphasizing property tax relief.

Rep. Jim Dunnam, the House Democratic leader from Waco, cited the analysis on Tuesday as the House took up a companion measure on school finance.

"The net effect is raising taxes to the tune of $1.1 billion on all Texans making under $100,000 a year," he said, citing the estimate for how much more would be collected from 6.7 million households in fiscal 2007. The wealthiest 20 percent of households would pay $437 million less.

"Do you think that that is fair and real tax relief?" Mr. Dunnam said to Rep. Kent Grusendorf, R-Arlington, a leading architect of the House's proposed school finance and tax swap package.

Cutting property taxes

Mr. Grusendorf noted that the package cuts school property taxes by a third.

"Additionally, it provides that those rates will not come back up automatically," he said. "So this provides ... greater taxpayer protection than we've ever seen in the state of Texas."

The analysis has limitations. The tax bill's impact on specific individuals or families depends on whether they own or rent their homes; if they own a small business and what type; and lifestyle matters such as how much tobacco and bottled water they consume.

The analysis also uses only broad income categories, lumping together people whose housing and other choices often vary, which would alter the result. Still, it's the only in-depth economic analysis of how the bill would affect tax equity.

House leaders have insisted they want a "revenue neutral" tax bill, with increases raising no more money than it takes to slash school property taxes. They contend that cuts to other state programs and efforts to improve government efficiency would provide the $1.5 billion a year in new money promised for schools.

Some tax experts said the House bill would make Texas' tax system even more regressive – meaning that the poor pay a larger percentage of income than the rich – than it is now.

'Very regressive tax'

"We are taking a very regressive tax, the sales tax, and using it to replace a less regressive tax, the property tax," said Dick Lavine, senior fiscal analyst at the Center for Public Policy Priorities, which advocates for low-income Texans.

Bernard Weinstein, director of the Center for Economic Development and Research at the University of North Texas, said, "There are two words they don't speak in the Legislature: one is income tax and the other is regressive."

He said that if the bill is enacted, the state will "still have an upside-down revenue system."

A spokesman for a group advocating limited government and free markets noted that after Congress attempted several years ago to tax luxury items such as yachts and private jets, low-income people lost jobs at factories producing those goods.

"You have to be careful about the knee-jerk statement that this is regressive or progressive, because all taxes get shared," said Michael Quinn Sullivan of the Texas Public Policy Foundation.

Mr. Sullivan said the payroll tax would eliminate jobs filled by unskilled, poorly educated Texans. Under the bill, the existing business franchise tax would be repealed and all businesses would have to pay 1.15 percent of each employee's salary, up to $90,000 per worker annually.

Mr. Sullivan said the House should have considered alternatives such as expanding the sales tax to services provided by stockbrokers, travel agents and interior designers, services that "people at the lower end of the economic scale don't use."