Last Week in the Legislature

May 24, 2019 | Issue #19

By John Sharbaugh, CAE
Managing Director of Government Affairs

Sunset Bill Still at the Governor’s Office

At press time, the Sunset bill on the Texas State Board of Public Accountancy (TSBPA), HB 1520, was still at the governor’s office awaiting his signature or veto. We do not anticipate a veto and the governor only has 10 days to sign the bill or it becomes law anyway without his signature. That deadline will happen over the weekend. The effective date on the legislation is September 1.

The Sunset legislation will continue TSBPA for another 12 years, until 2031. Some of the other major changes the new legislation will make to the Texas Public Accountancy Act (TPAA) include:

• A requirement that all licensed CPAs and non-CPA owners undergo a one-time, fingerprint-based state and federal background check as part of their renewal process. This was a recommendation of the Sunset Commission. The requirement does not apply to CPAs who hold a “retired or disability status” with TSBPA. TXCPA lobbied for that exemption during the Sunset process. The state of Texas is requiring this type of background check for all licensed professionals and occupations, not just CPAs. TSBPA will be implementing this new background check requirement after September 1. You can read more about it in the latest TSBPA newsletter (PDF).
• Expanding the firm mobility provisions in the TPAA to include audit and attestation services. This will allow CPAs licensed in other states to provide any professional services in Texas utilizing the firm license they hold in their home state as long as they do not operate an office or have a physical presence in Texas. Since 2007, Texas has permitted out-of-state firms to provide all other services besides audits and attestation services under its firm mobility provisions. This change will include those formerly prohibited services and bring Texas in line with the provisions of the AICPA/NASBA Uniform Accountancy Act (UAA) and is consistent with the accountancy laws in most other states. TXCPA lobbied to add this provision to the Sunset bill while it was in the House.
• Changing the provisions in the TPAA related to Office Resident Managers to allow CPA firms to decide who should hold this position within the firm. The current Act requires each office of a CPA firm to be under the supervision of a licensed CPA. This change will allow firms to designate any owner, partner or employee to hold the position. The TPAA will continue to require that all attest services provided by a firm must be under the supervision of a licensed CPA. This was a recommendation of the Sunset Commission and supported by TXCPA. This change brings Texas into alignment with the AICPA/NASBA UAA and a majority of other states on this issue.
• Removing the education and CPE requirements for non-CPA owners in CPA firms. This was a recommendation of the Sunset Commission. The TPAA will continue to require non-CPA owners to, among other things: register with TSBPA, be actively involved in the CPA firm by providing services to clients or to the firm, and pass an examination on the rules of professional conduct of TSBPA.
• Requiring TSBPA to seek approval from the attorney general before engaging any outside legal counsel. This was a recommendation of the Sunset Commission.
• Requiring TSBPA to include an opportunity for public testimony or comment at every Board meeting. This was a recommendation of the Sunset Commission.

There were several other changes recommended by the Sunset Commission that relate to the operations of TSBPA. Most of these will be accomplished through management action by TSBPA or through rule changes TSBPA will make to implement the recommendations. You can read the final Sunset Commission Report that includes all of its 21 recommendations here.

Nonprofit Bill Dies in the House

I reported last week on SB 1463, a bill that would modify the record sharing requirements for nonprofits in Texas. TXCPA was supporting the bill. The Senate passed the bill on May 9; it then went to the House and was passed out of the House Committee on Business and Industry last week and was sent to the House Calendars Committee.

Under the rules of the House, all Senate bills in the House had to be voted on by the end of the day on Tuesday, May 21. Unfortunately, SB 1463 did not get scheduled for a vote by the Calendars Committee and thus the bill is dead in this session. There did not appear to be opposition to the substance of the bill. Rather, it got caught up in the volume of legislation that was vying to get on the agenda for a House vote. Thus, efforts on this issue will have to be renewed in the 2021 legislative session.

Bill to Deal with Anti-Trust Issues for Texas Boards Passes

I reported several weeks ago on proposed legislation intended to provide relief from potential anti-trust claims against Texas licensing boards that have a majority of licensees serving on them, including TSBPA. SB 1995, sponsored by Senator Brian Birdwell (R-Granbury), was passed by the Senate back in April and this week, it finally cleared the House on Wednesday.

SB 1995 creates a process and a division within the Office of the Governor to review all proposed rules by licensing agencies controlled by licensees or “active market participants” that could affect market competition. The governor’s office would have to approve the proposed rule before it could be adopted or implemented. The legislation provides the “active state supervision” that the U.S. Supreme Court discussed in a 2015 decision involving the N.C. Dental Board as a safeguard against possible anti-trust claims that could be lodged against a licensing board in Texas.

Birdwell is also the chairman of the Texas Sunset Commission, where this issue surfaced during the Sunset Review process this past year. The initial Sunset Report on TSBPA included a recommendation to reduce the number of CPAs on the Board and to increase the number of public members to a majority. The Sunset staff made this recommendation as a means of trying to deal with the Supreme Court case and the potential anti-trust issues.

TXCPA presented testimony against that type of change and instead encouraged the Sunset Commission to look to a solution that included some type of “active state supervision.” SB 1995 accomplishes that goal.The legislation only applies to those licensing boards, like TSBPA, that have a majority of licensees on the Board (38 in total) and only applies to proposed rules that could have an effect on market competition. Under the legislation, the governor’s office would have to conduct the review and respond to the Board within 90 days. The legislation now goes to the governor, who is expected to support it.

A Deal is Reached on the Major Issues – Budget, School Finance and Property Tax Reform

Yesterday afternoon, the state’s top leaders – Governor Greg Abbott, Lt. Governor Dan Patrick and Speaker Dennis Bonnen – held a press conference to announce that the House and Senate had finally reached agreement on several of the major issues that were still pending at the legislature. Conference committees of the House and Senate had been working to resolve their differences on those issues over the past few weeks. At the press event, Abbott said that an agreement was reached Wednesday night on the school finance bill, completing the trio of proposals that defined most of this year’s legislative session. Abbott also praised the members of the legislature saying, “We would not be here today, making the announcement we are about to make, without the tireless efforts of the members of the Texas House and Senate.”

The issues that have been resolved include the budget for 2020/21, school finance and property tax reform. Both chambers will now need to sign off on the three negotiated bills – House Bill 1, the proposed budget; Senate Bill 2, the property tax bill, and House Bill 3, the school finance bill – before the regular session ends on Monday. But it is anticipated that with this recent agreement, approval will happen sometime over the weekend and before the legislative session ends on Monday, avoiding any need for a special session to be called.

As of the time of the press conference, all three bills are in document production and not yet available. The leadership did, however, provide a basic outline of the key points of the legislation on school funding (HB 3), which you can read here (PDF).

According to this handout detailing some of the components of the compromise reached Wednesday night, the school finance bill will include funding for full-day pre-K and an increase in the base funding per student, which hasn’t changed in four years. It also pumps $5.5 billion in to lower school district taxes up to 13 cents per $100 valuation on average by 2021 – though leaders dodged questions yesterday on exactly how and where the extra money would come from.

The compromise bill would reduce recapture payments that wealthier school districts pay to support poorer ones by $3.6 billion, about 47 percent. At the press conference, Bonnen said the state could not afford to eliminate recapture, also known as “Robin Hood,” because it would cost too much to completely reimburse school districts from state coffers alone.

The bill will also include funding for districts that want to create a merit pay program, giving more to their higher-rated teachers. Though the House decided to nix this from its initial version of the bill, the Senate put it back in and apparently won the fight to keep it in. Teachers associations and unions argued a merit pay program would open the door to school districts using the state standardized test to decide which teachers receive bonuses. However, the compromise bill does not require districts to use that standardized test.

Will a Bill Directed at the Income Tax Affect the Franchise Tax?

Since 1993, the Texas Constitution has required voter approval for the state to impose an income tax. But under the current law, lawmakers could pass a resolution asking for such an election with only a simple majority in the House and Senate. This week, the Senate passed a measure (HJR 38) initially introduced and passed by the House, that would raise the bar on such an amendment resolution and require two-thirds approval from both chambers of the legislature before it could be put to voters. The final votes on the measure were 100-42 in the House and 22-9 in the Senate.

HJR 38 proposes a constitutional amendment to bar the state from imposing or collecting an income tax, thereby requiring that any future imposition of an income tax be accomplished by constitutional amendment, requiring a two-thirds vote of each house before ratification by a vote of the people. The amendment would provide that the legislature may not impose a tax on the net incomes of individuals, including an individual’s share of partnership and unincorporated association income. The proposed amendment will now be on the ballot in the November 2019 election.

But when HJR 38 was up for a vote in the Senate this week, Democrats sounded the alarm on the proposed amendment, arguing its use of the term “individual” instead of “natural persons,” which is used throughout the Texas Constitution section on taxation, could open the door to legal challenges to the Texas franchise tax that is levied on businesses. The risk, some observers say, is that a savvy business attorney could argue in court that the word “individual” in the income tax amendment could extend to corporations or business partnerships, putting the franchise tax in jeopardy.

Senator Pat Fallon (R-Prosper), who sponsored HJR 38 in the Senate, said his proposal had everything to do with banning a future state income tax and nothing to do with the current franchise tax on businesses. “Let me be very clear here for the members of the body,” he said during the Senate’s deliberations. “The legislative intent of HJR 38 is that an individual is just like what it sounds: a single human being.”

However, the Legislative Budget Board (LBB), a nonpartisan state agency that tracks how state funds are collected and spent, seems to agree with the concerns raised by the Democrats. The LBB found that the measure “could result in a significant loss of state franchise tax revenue, depending on potential future legal decisions.” You can read the LBB revenue impact statement here.

Unlike most legislation, since the measure involves a proposed amendment to the Constitution, it does not require the approval of the governor. Instead, it will next move to the secretary of state’s office to be put on a statewide ballot, giving voters the final say in an election to approve or reject the constitutional amendment. A spokesman for the governor did not respond to questions this week about whether Abbott views the constitutional amendment’s language as a threat to the franchise tax.

No More Red-Light Cameras, But We’re Sticking with Daylight Savings

I reported earlier in the session about a couple of bills that would eliminate red-light cameras in Texas and allow Texans to decide what “time” they prefer Texas follow. One of those proposals recently saw success, while the other died for lack of a vote.

HB 1631 cleared the Senate on a 23-8 vote last week. It will ban the use of red-light cameras in Texas. The House passed the bill several weeks ago by a 109-34 vote. The Senate left in place a key provision in the bill to allow local governments to continue operating cameras until they finish out any contracts in effect as of May 7. The bill was sent to the governor on Tuesday, who is expected to support it.

Meanwhile, HJR 117, a resolution to put to the voters the question of whether Texas should continue to follow Daylight Savings Time or stay on Standard Time all year long, failed to make a deadline for consideration in the Senate this week, so the idea is dead for this session. As there has been proposed legislation of this type for many legislative sessions, I’m sure we will see this concept resurface again in 2021.

Picking Up the Pace in the Waning Hours

With the clock running out on the session, this weekend will be an extremely busy one for legislators, as they will burn the midnight oil to pass as many bills as they can before the legislature adjourns Sine Die on Monday. If you watch the proceedings of the House or Senate at this stage, it almost sounds like an auction where they rattle off bills as fast as possible to get as many votes on measures as they can before the time runs out.

As of today, around 7,300 bills have been introduced in the House and Senate and around 750 have been passed. With a historical pass rate of around 20 percent, that means we are probably going to see about the same number of bills passed in the next few days that we saw passed during the past five months since the legislature convened on January 8.

No one ever said that legislating was a pretty process. In fact, there is an old saying that there are two things you do not want to observe – the making of sausage or legislation. But there is also the old saying that as bad as our democratic system of government is, it is still better than all the alternatives.