Senator Eliot Shapleigh - El Paso, Texas

Gov. Rick Perry's proposal to leave the state's business tax structure largely intact cleared a key hurdle in the Legislature on Wednesday.

The House's tax-writing committee abandoned its yearlong effort to overhaul the state's main business tax and approved a tax-swap proposal that resembles the Perry plan, which leaves the corporate franchise tax unchanged but expands it to more businesses.

But the House measure, expected to reach the full House next week, also would increase the state sales tax from 6.25 cents per dollar to 7.25 cents, making it the highest state rate in the country.

That's a larger increase than Perry had pushed, and it sets the House up for another showdown with senators who said earlier this year that they wanted an increase that was half that size.

That standoff with the Senate killed the tax-overhaul effort in the 140-day regular session that ended in May.

"We passed the best bill at this time that we could pass out," Ways and Means Committee Chairman Jim Keffer, R-Eastland, said Wednesday, though critics said the plan allows too many businesses to not pay franchise taxes.

Lawmakers are looking to increase state taxes to replace billions of dollars that they're trying to cut in school property taxes. It's part of the school finance reform package they were called to Austin to pass in a 30-day special session that began last week.

The committee vote was a win for Perry, whose record on school-finance reform has been spotty.

Lawmakers strongly rejected a proposal he put forth during a special session on the topic last year. He took a hands-off approach to this year's regular legislative session but got the same result: The session ended without an agreement between the House and Senate.

The Ways and Means Committee followed Perry's lead Wednesday by keeping the current formula for the corporate franchise tax, which says corporations must pay the larger of 4.5 percent of net income or 0.25 percent of their net capital.

House leaders also said their plan would apply the franchise tax to corporations that set up partnerships, another goal that Perry espoused.

Lawmakers estimate that five in six Texas businesses do not pay the franchise tax. Companies such as Dell Inc. and the Austin American-Statesman have long been able to minimize their tax bills by restructuring.

Keffer had wanted to give companies the option of paying either the franchise tax or a tax on its payroll while making more businesses pay taxes than Perry suggested. But many House Republicans have been wary of voting for a payroll tax, even if it was an optional one.

Democrats on the committee backed a plan Wednesday that would have given businesses the payroll tax option and increased the sales tax by half a cent.. Rep. Mike Villarreal, D-San Antonio, said that proposal would have increased the number of businesses that pay the franchise tax, or the new payroll option, from 150,000 to 475,000.

Citing numbers from Perry's aides, he said the plan that cleared the committee would add only about 10,000 businesses to the franchise-tax rolls.

"It continues to allow some businesses to be taxed and others to get away scot-free," Villarreal said of the committee-endorsed plan.

The plan would reduce the cap on school property taxes for maintenance and operations by 25 percent over the next two years, which would reduce the taxes due on a home appraised at $100,000 by about $320 by 2006.

No analysis was available Wednesday on how many Texans would see their total tax bills go up or down under the proposal.

The change in the business tax aims to eliminate two strategies, known as "Delaware subs" and the "Geoffrey loophole," that businesses use to avoid the franchise tax.

The Delaware maneuver allows corporations to set up paper subsidiaries in states with low taxes, such as Delaware, and have those subsidiaries form a Texas partnership. Under the Geoffrey approach, businesses report what usually would be taxable profits as expenses paid to a related corporation in another state. (It's named for the mascot at Toys "R" Us, among the first to use this method.)

The plan headed to the House floor also says 15 percent of future growth in state revenues must go toward further property-tax cuts.

It expands the sales tax to cover bottled water, computer repairs and car repairs, which is likely to meet resistance in the Senate.

"I have had no conversations with the Senate," Keffer said.

Although major hurdles remain, Perry applauded the committee's work.

"This vote signals important progress toward a school finance agreement," he said.

The full House approved the other major school-finance proposal, House Bill 2, late Tuesday. Lt. Gov. David Dewhurst said he hopes the Senate will pass its version of that legislation, which lays out how new money should be spent, today.

The Senate has not begun public deliberations on the tax bill.

Two tax plans

How Gov. Rick Perry's tax plan compares with the one approved by a House committee Wednesday:

Franchise tax

Perry: Keep current franchise tax and expand it to more companies.

House: Same.
School property tax

Perry: Cut maximum rate for operations to $1.20 per $1,000 in property valuation this year; add $7,500 to homestead exemption next year.

House: Cut maximum rate to $1.23 this year and $1.12 next year; no addition to homestead exemption.
Sales tax

Perry: Increase by 0.7 cents and extend to car repairs, computer repairs, cosmetic surgery; add $1 per pack to cigarette tax.

House: Increase by 1 cent and extend to car repairs, computer repairs, bottled water; add $1 per pack to cigarette tax.