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By W. Gardner Selby July 9, 2012

David Dewhurst says he "never" supported a Texas payroll tax

Questioning his opponent for the state's Republican U.S. Senate nomination, attorney Ted Cruz asked David Dewhurst: "Did you support a payroll tax -- yes or no -- and is that a good idea?"

"No and no," Dewhurst replied in their June 22, 2012, debate hosted by Dallas’s KERA-TV, Channel 13.

Cruz: "You did not support a payroll tax?"

Dewhurst: "No, I’ve never supported a wage tax and I’ve never supported a payroll tax."

We previously rated Pants on Fire a claim by Cruz that Dewhurst has a record of promoting a Texas income tax. No Texas leader has come close to such a pitch since a Dewhurst predecessor as lieutenant governor, Democrat Bob Bullock, floated the prospect in 1991.

And is Dewhurst correct that he has never supported a payroll tax?

Everyone is familiar with the federal payroll tax, meaning the taxes taken from paychecks of employed Americans, primarily to fund Social Security and Medicare. But Texas has no state payroll tax.

End of story?

No, because a payroll tax feature was debated in Texas in 2004 and 2005, when Dewhurst was in his first gavel-wielding term overseeing the Texas Senate. At the time,  lawmakers were looking at ways of revising the state’s outdated business franchise tax and also generating revenue to cover sought reductions in school property taxes.
According to news stories we corraled via Nexis, Dewhurst steered clear of supporting a payroll tax during a spring 2004 special session called by Gov. Rick Perry toward tackling the franchise tax and lowering school property taxes. The Texas House removed a payroll tax element from its proposal before sending its revised plan to the Senate, which advanced no counter-proposal before the session ended, according to a May 18, 2004, Houston Chronicle news article.

The next year, lawmakers tried again.

As the 2005 regular legislative session began, Dewhurst joined Perry and House Speaker Tom Craddick in vowing to lower school property taxes. The trio did not commit to a particular finance plan, according to a Jan. 11, 2005, Austin American-Statesman news article, though; the story says Perry "reaffirmed his opposition to a payroll tax and questioned whether an increased gross-receipts tax or business-activity tax could jeopardize job growth."

A Jan. 18, 2005, San Antonio Express-News report says that two days into the 140-day session, a Senate plan presented by Dewhurst called for expanding the franchise tax to all businesses except sole proprietorships. The story says senators had discussed setting the rate at less than 2 percent of each firm's net income plus its payroll, minus a deduction for each employee.

So, the initial Senate plan of 2005 had a payroll element.

In March 2005, the House approved a revenue package that offered companies a choice of paying the existing franchise tax or a 1.15 percent payroll tax on salaries up to $90,000 a year.

Dewhurst aired misgivings about the House’s payroll element, according to a March 16, 2005, Express-News news article. The story quotes Dewhurst saying: "I've said over and over and over again that I think a broad-based, low rate that's based upon revenue and income is fairer than a payroll tax" which hurts firms with lots of workers. The story says House leaders had said they got around that difficulty by offering companies a choice of which type of tax to pay.

An April 28, 2005, Dallas Morning News news article, headlined "Dewhurst lays out tax swap," says Dewhurst had "laid out a preliminary tax swap plan" offsetting some $4.5 billion in school property tax reductions with various tax increases including a revamped franchise tax extended to virtually all businesses, which would pay about 1.35 percent on after-tax earnings plus, the story says, employee compensation.
But by May 2005, the Senate voted to answer the House with a plan allowing companies to choose the lower of two business taxes, as long as they generated more money than a minimum tax of 0.25 percent of gross receipts -- and the adopted plan retained payroll elements.

The details are a bit eye-glazing. But as described in a May 12, 2005, American-Statesman news article, the first option for businesses was to pay 2.5 percent of the sum of their net taxable income plus payroll, though they could deduct from the tax base either half of their payrolls or $30,000 per employee plus the cost of some health benefits. The second option in the Senate plan would have required companies to pay a 1.75 percent payroll tax, capped at $1,500 per employee.
After the Senate acted, Dewhurst issued a press release praising the action, as Cruz’s campaign has pointed out. Dewhurst’s release includes a paragraph summarizing the tax measure, House Bill 3. "By closing loopholes, the plan broadens the franchise tax base, and extends a lower rate to all Texas businesses—effectively treating all businesses equally under state tax law. Texas businesses will have a choice of paying either a low-rate revised franchise tax or a payroll tax," the release says.

In that session and a summer session, however, the House and Senate did not reach a compromise, leaving the overhaul of the franchise tax to be resolved in a different way in 2006.

For outside perspective, we shared the description of the 2005 Senate-approved plan with Richard Pomp, a University of Connecticut law professor who has written extensively on state and local taxation. By telephone, Pomp said he would say the first option in the Senate plan had a payroll tax element, while the second option was a pure payroll tax. "It doesn’t get any less ambiguous than that, does it?" Pomp said.

We contacted Dewhurst’s campaign about this topic and didn’t hear back.
Our ruling

During the state’s mid-decade tax debates, the Senate under Dewhurst’s leadership -- and to his praise -- incorporated payroll taxes in a proposal to replace the existing business franchise tax.

Featured Fact-check

No payroll tax passed into law. Still, it’s incorrect to say Dewhurst never supported a payroll tax. We rate his debate claim as False.

Our Sources

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More by W. Gardner Selby

David Dewhurst says he "never" supported a Texas payroll tax

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