TSCPA Governmental Affairs

NASBA Opposes AICPA’s FRF for SMEs

How’s that for alphabet soup? It means the National Association of State Boards of Accountancy (NASBA) doesn’t like the American Institute of CPAs' (AICPA) new Financial Reporting Framework for Small- and Medium -Sized Entities (FRF). NASBA seems to think the FRF is some kind of professional challenge to the Financial Accounting Foundation’s (FAF) recent establishment of the Private Company Council (PCC) to recommend exceptions to Generally Accepted Accounting Principles (GAAP) for private companies. The PCC makes those recommendations to the Financial Accounting Standards Board (FASB), the entity which normally sets US GAAP, and FASB must approve, change or reject the recommendations. In fact, on the same day the FRF was issued, the FASB announced approval of the initial PCC recommendations.

According to AICPA the FRF is not intended to replace GAAP, but is offered as another comprehensive basis of accounting that is less complex than GAAP and adequate for some business entities. The rub for some critics is in that last part, i.e. they don’t think the FRF is adequate for all business entities that might be eligible for its use. Other comprehensive basis of accounting (OCBOA) is a term familiar to accountants. The term includes cash basis financials, modified cash basis of accounting, tax basis of accounting and modified GAAP based on contractual provisions. Professional literature already provides guidance to CPAs on how they should report on OCBOA based financial reports. Private companies can and do already choose to use OCBOA for their financial reports. FRF is intended be one more accounting framework that is available as one OCBOA alternative, perhaps with more substance and guidance available than exists for the existing OCBOA presentations.

NASBA issued a press release enumerating their concerns. FAF appears to have only modest concerns about FRF, earlier commenting that the FRF project was “important and complimentary” to its own efforts with the PCC. After the FRF release FAF indicated it wanted to be sure everyone understands that FRF is not GAAP. In a message to state CPA society CEOs responding to NASBA’s press release, AICPA makes several points:

• Companies have used various OCBOAs for over 40 years without any objections raised by NASBA or other parties.
• The use of the FRF for SMEs is a decision to be made between private companies and users of their financial statements. Owners of private companies, working with users of their financial statements, will decide what reporting framework best answers their needs. Any binding limitation on CPAs reporting on a form of OCBOA would have to be subject to a rule by a state board of accountancy and no board has ever taken action to prohibit CPAs from utilizing OCBOAs.
• In addition, NASBA points out three principal concerns it has with the FRF for SMEs. Below are responses that may put these concerns in context:
  • “[The FRF for SMEs] represents non-authoritative guidance and therefore will be very difficult to regulate or enforce.” The FRF for SMEs designation as non-authoritative is no different than other OCBOAs that have been issued and are also non-authoritative (e.g. modified cash, tax basis). CPAs remain regulated by boards of accountancy for the work that they do and will be expected to comply with the high expectations of their regulators and their clients.
  • “The scope, ‘small and medium size entities,’ is undefined. As such, any private company, regardless of size or financial backing, could potentially adopt the FRF.” The private market can determine which basis of accounting is appropriate. For many small and medium-sized enterprises, GAAP (including modifications for private companies) will be appropriate, but for others, the FRF for SMEs and other OCBOAs will be more appropriately suited. The AICPA believes that decision is best resolved between businesses and those that use their financial statements, without interference from outside parties.
  • “It allows the use of GAAP financial statement titles, yet does not require disclosure of differences with GAAP, which will cause confusion and invite fraud and abuse.” The FRF for SMEs framework uses neither the term balance sheet nor income statement in the framework; in fact, the framework uses titles that are not typically considered GAAP. Additionally, the framework requires disclosures that very clearly state that it is not GAAP and therefore will not be confused by a user – whether that user is a private business or a potential lender. Also, because any report (audit, review, or compilation) on the framework by a CPA will also state in the report that the FRF for SMEs is not GAAP, it is difficult to understand what NASBA means when it says this will “cause confusion and invite fraud and abuse.”

For additional reporting you might check out this Accounting Today article.

Talking with people behind the scenes that have knowledge of the NASBA concerns reveals some major issues that are not addressed in the press release. Those are:

• The FRF development and maintenance does not have the robust procedural and constituent development used for GAAP, and the fear is that AICPA is actually pushing this as an ultimate replacement for GAAP for privately-held companies.
• There is do definition of SMEs. Evidently in other countries that allow GAAP departures for SMEs, such entities are defined.
• While current reporting standards would require a CPA to note the statements are not in accordance with GAAP, there is concern that AICPA will ultimately change those reporting standards to eliminate the requirement. Supposedly there is evidence of this intention in the FRF material.

My first reaction to the NASBA press release was that this was one of largest molehill mountains I have seen in a long time. It seems to be more of a turf battle between two professional associations than a substantive issue. NASBA says this is an attempt by AICPA to undermine the FAF’s PCC and is a result of the FAF not choosing the AICPA’s preferred method of delineating GAAP for private companies. AICPA says NASBA is opposed to the FRF just because it was AICPA instigated. Both claims have a ring of truth to these ears.

For a humorous look at the controversy, check out AICPA Knows NASBA Is Mad But It's Okay, NASBA Gets Mad Sometimes.

Franchise Tax Legislation on the Governor’s Desk

The 82^nd Texas Legislature passed substantial franchise tax reform during its regular session, all of which is now on Governor Perry’s desk for consideration. The major franchise tax bill was HB 500 by Rep. Harvey Hilderbran (R-Kerrville), sponsored in the Senate by Sen. Glenn Hegar (R-Katy). HB 500 makes the following changes to the franchise tax:

Temporary rate reductions:

• For returns due in 2014 franchise tax rates will be 0.4875% for retail and wholesale entities and 0.975% for all others
• For returns due in 2015 tax rates will be 0.475% and 0.95% respectively, provided the State Comptroller certifies that sufficient revenues will be available
• Rates return to the current 0.5% and 0.1% for returns filed after 2015

The $ 1 million revenue exemption has been made permanent and a $1 million deduction from revenue has been made one of the options to calculate taxable margin.  A taxpayer can select to deduct the statutory $1 million in lieu of deducting cost of goods sold or compensation. The $1 million is also adjusted for inflation every two years.

The compensation deduction limitation of $300,000 per person is also inflation adjusted.

Some new industries are now identified as retail/wholesale, eligible for the lower tax rate:

• SIC 753 – Automotive repair shops
• SIC 7353 – Heavy construction equipment rental or leasing
• SIC 7359 – Equipment rental and leasing, not elsewhere classified
• Rental-purchase agreement activities as defined in Chapter 92, Business and Commerce Code

Retail/wholesale electric utilities may not be part of a combined group that includes other types of retail/wholesale entities.

New flow-though revenue exemptions include:

• Pharmacy network rebates
• Landman services for Landman companies
• Transportation or delivery costs incurred by:

Aggregate transporter
Barite transporters
Waterway transporters for waterway transportation costs

• Cost of vaccines
• Taxes and fees incurred by registered motor carriers
• Relocation costs for entities moving to Texas

New cost of goods sold deductions:

• Cost of transporting non-owned petroleum products through petroleum pipelines.
• All costs of renting or showing movies for movie theaters.

The sections requiring a taxable entity that is a combined group to report information regarding the gross receipts of group members who do not have nexus with Texas (the so-called Finnegan method) are
repealed.

For Internet hosting companies, Texas receipts will be only those receipts from customers located in Texas.

Insurance companies that pay a gross receipts tax will be exempt from the franchise tax.

Certain political subdivision corporations will be exempt from the franchise tax.

A new franchise tax credit is available for cost and expenses to rehabilitate certified historic structures.

Three other franchise tax bills await the governor’s signature:

• HB 800 by Rep. Jim Murphy (R-Houston) and sponsored in the Senate by Sen. Bob Deuell (R-Greenville) which provides for both franchise tax credits and sales tax exemptions for certain research and development expenditures.
• HB 2451 by Rep. Tracy King (D-Batesville) and sponsored in the Senate by Sen. Glenn Hegar (R-Katy) which provides a cost of goods sold deduction for crop dusters.
• HB 2766 by Rep. Todd Hunter (R-Corpus Christi) and sponsored in the Senate by Sen. John Whitmire (D-Houston) which provides for a flow-through revenue exemption for real estate construction subcontractor payments and includes remediation as a qualified real estate construction service.

While the effective dates of most of the above provisions are September 1, 2013, certain provisions have different effective dates.

CPA Sunset Review Postponed

CPAs are safe until 2019. The law establishing and regulating CPAs will remain intact at least until then.

Every 12 years, state licensing agencies and the laws that established them expire unless they are renewed by the legislature. There is a sunset review process performed by the Sunset Advisory Commission (SAC). The SAC makes recommendations on whether to renew the legislation, frequently proposing changes to the laws to make an agency more efficient or to better protect the public.  The public is invited to provide input and the SAC holds public hearings before finalizing the recommendations. This review takes place immediately before the session during which the legislature must renew the enabling legislation. CPAs are a creation of the legislature and the law establishing CPAs is administered by the Texas State Board of Public Accountancy (TSBPA).

The normal expiration date for the Accountancy Act and the TSBPA is 2013 -- 12 years from the last authorization. In one of the last bills passed by the legislature, HB 1675, the sunset review date was postponed until 2019. The postponement was one of several and was done to balance the workload of SAC. Since SAC just reviewed and renewed the SDSI provisions of TSBPA, they obviously saw enough to be comfortable with the six-year extension.

Until 2019 CPAs should be operating under the existing law.

Senate Passes Budget

This afternoon the Senate passed SB 1 the appropriatons bill for the next two years.  The House has already adjourned and will not reconvene until 2:00 PM Sunday, when they will also address the state budget.  There are other moving parts to the picture as we mentioned in our earlier post http://tscpa.typepad.com/my_weblog/2013/05/budget-roadblocks.html.

Budget Roadblocks

As the 83^rd session of the Texas Legislature winds down, the only bill that must be passed, the state’s budget, is still in limbo.  On this last day for action, according to the rules (which can be broken if almost everyone agrees) there are still many moving and unresolved parts to a final budget bill.

• SB 1 is the appropriations act to fund the government for the next two
  years.  It’s the ultimate resolution but can’t be finalized until other elements are complete.
• SJR 1 is the proposed constitutional amendment to establish a constitutional revolving fund to be used for water conservations.  The House missed a midnight last night deadline for appointing a conference committee to meet with the Senate appointed conference committee to finalize the resolution.  The Quorum Report says that the “wheels still appear to be on, nonetheless.”  Remember, rules on timing can be overruled by a significant majority of the body.
• HB 7 is a bill that includes a refund of monies from the System Benefit Fund.  The System Benefit Fund is a fee charged to utility customers to fund utility bill assistance for needy families.  CPA Sen. Williams (R-the Woodlands), and Rep. Darby (R-San Angelo) both authored bills to refund the almost $800 million of unused funds to utility customers.  Democrats objected to not using the money for
  its intended purpose.
• HB 1025 is a supplemental appropriations bill that is in conference and until last night was in danger of failure.  The bill includes tapping the states Rainy Day fund as the funding source for the water fund proposed in SJR 1 and for significant public education funding. The
  education funding piece is critical for Democratic agreement with any budget deal.  The Senate version of the bill said it would not be effective unless HB 7 (above) was passed.  Democrats said they would not vote for HB 1025 as long as it was dependant on passage of HB 7.
• This morning Sen. Williams announced a new plan whereby the unused System Benefit Funds would be used to reduce
  future electricity bills for needy families over the next three years and the System Benefit Fund fee on utility bills would be ended in 2017.  Rep. Sylvester Turner (D-Houston), the only Democrat on the budget bill House conference committee, said he supported the new compromise.  One significant roadblock block removed.
• Then Gov. Perry announced his opposition to taking money from the Rainy Day Fund for education as provided in HB 1025.  Will that kill the legislative deal?  If not, will Perry veto the budget and call a special session?  Perry has previously said he want $1.8
  billion in tax refunds.  Will the System Benefit Fund payments for needy families’ utility bills and the ultimate demise of the $150 million annual fee count towards Perry’s quote?
• HB 500 is the franchise tax relief bill that is supposed to deliver around $600 million of the tax relief demanded by Perry.  The conference committee to work out the substantial differences between the House and Senate versions of the bill was appointed yesterday.

Today could be the day when the budget comes together or
falls apart.

TSCPA Member to be appointed Texas State Board of Public Accountancy Presiding Officer

At the Texas State Board of Accountancy meeting today it was announced that TSCPA member Thomas G. Prothro, CPA from Tyler will be named the next presiding officer of the board. Prothro has been a member of the board since 2009 and his current term expires in 2015. He currently serves as the Rules Committee Chairman. Prothro is the Managing Partner of the firm of Prothro Wilhelmi & Co PLLC. Congratulations to Tom for this significant appointment.

Congratulations also to TSCPA member Carlos Barrera, CPA from Brownsville who is completing two years of service as Presiding Officer and six years of service on the board. Carlos is a partner with Long Chilton, LLP. Barrera has done an excellent job leading the board in fulfilling its responsibilities to the public and the profession. TSCPA applauds Carlos for a job well done!

Earlier Governor Perry announced four other board appointments, which included TSCPA members Steve Pena of Georgetown and Donna Hugly of Dallas.

TSCPA Member named to Board of Accountancy

Donna Hugly, CPA and TSCPA member, has been appointed by Governor Perry to serve a 6-year term on the Texas State Board of Public Accountancy. TSCPA was proud to recommend Donna for this important position.

A partner in the Addison offices of Sanford, Baumeister and Frazier LLP, Donna has served on many of TSCPA's volunteer committees. She is a Past President of the Dallas Chapter.

TSCPA member Steve Pena of Georgetown has been re-appointed to the Board of Accountancy. Steve is a partner in Austin's Maxwell Locke & Ritter.

Governor Perry has appointed two public members to the Board as well. Click here for the press release.

Accounting and Licensing Bills Passed and Defeated

We’re done! The bills we wanted to pass have passed and the bills we opposed have died. While we are still watching a few bills along with the progress in franchise tax legislation, our primary objectives of the session have been met.

SB 228 by CPA Sen. Tommy Williams (R-The Woodlands), our primary legislative focus for this session should become law tomorrow with or without Gov. Perry’s signature, absent a veto, which we do not expect.

HB 1685 by Rep. Four Price (R-Amarillo) renewing the SDSI status for the Texas State Board of Public Accountancy (TSBPA), which we have also been actively supporting, passed the Senate yesterday and will be on its way to the governor shortly.

HB 1756 by CPA Rep. Phil Stephenson (R-Wharton) to eliminate peer review requirements for CPAs who prepare only compilation reports died in the House Licensing and Administrative Procedures committee Monday. We actively opposed this bill and are glad to see it rest in peace. It would have reduced quality controls and standards and place the public at risk for poor quality financial statements.

HB 1757, also by Stephenson, also died in the House Licensing committee. This bill never received a hearing because Stephenson agreed not to pursue the bill after we explained our concerns. The bill would have mandated that two solo practitioners be on the TSBPA at all times and would have eliminated the opportunity for CPAs in industry or academia from serving on the board.

HB 87 by Rep. Bill Callegari (R-Katy) died in the Calendars committee on Wednesday. While we tried to work with Callegari to modify the bill, the modifications did not eliminate all our concerns and we actively opposed the bill. This is the bill that would have weakened licensing enforcement, especially in the enforcement against the unauthorized practice of public accounting.

HB 2851 also by Callegari is the bill we suggested he pass instead of HB 87. We supported this innocuous change to agency rule development. The bill passed the House.

Another of our objectives was to be sure there was no sales tax on professional services enacted. No one even filed such a bill. I like it when it’s easy! This is one we will have to continue to watch in case there is a special session to deal with public school funding, or other revenue raising issues.

Proposal Would Tap Rainy Day Fund for $6 Billion

CPA Sen. Tommy Williams (R-The Woodlands), Senate Finance Committee Chairman, has offered SJR 1 to his committee today to establish constitutionally-dedicated funds for water and roads with initial funding of $6 billion from the Economic Stabilization Fund, commonly referred to as the Rainy Day Fund (RDF). The water fund would get $2.5 billion and roads $3.5 billion. Additional legislation would be needed to deal with the use of the funds.

HB 4 by Rep. Allan Ritter (R-Nederland) establishes a state water plan, and that bill is predicated on the $2.5 billion RDF funding. SJR 1 was voted unanimously from the committee, but some members indicated they might try to amend the resolution on the Senate floor to include public education funding. Sen. Royce West (D-Dallas) suggested that $2.5 billion be added, expressing the belief that public education was as important to the voters as water and roads.

Ever since Governor Perry suggested using the RDF for water and roads in his State of the State speech, legislators have embraced the idea. Then entered the budget cap dilemma. The Texas Constitution limits the growth of the state budget from one biennium to the next to the growth rate of the economy. The budget bill as passed by the House is about $600 million shy of the constitutional budget cap; the Senate version is a little over $1 billion below the cap. Expenditures from the RDF count towards the budget cap. By using a constitutional amendment, the budget cap issue is avoided. The proposal must be passed by a two-thirds majority in the legislature and must be approved by the voters.

CPA The Most Conservative Texan in Congress

TSCPA member U.S. Rep. Michael Conaway (R- Midland) has been recognized, along with Rep. Jeb Hensarling (R-Dallas), as the most conservative Texan in Congress according to the National Journal. “That places them in a five-way tie for fifth place in the whole 112th Congress,” according to the Houston Chronicle’s Texans on the Potomac blog.

What about the Senate? Sen. John Cornyn ranks as the second-most conservative senator. But remember, this is before Texas’ new Senator Ted Cruz was a member of Congress.

Would you favor franchise tax repeal?

Mention of the margin tax brings frowns to CPAs' faces. “It’s too complicated,” they bemoan.

TSCPA recommendations for simplification and consistency have been politely received by legislators but not enough of them have been interested in rocking the boat.

Small business taxpayers complain about the complexity, the inconsistency between taxpayers and the horror of paying the tax even when losing money. Big business, while not enamored with the tax, seem to be more content to leave it alone for fear of what might replace it.

Now that the tax has been declared constitutional and it is clear a business income tax would also be constitutional, some hope we could return to the “earned surplus” franchise tax model. This legislative session there is talk of reducing the tax and even repealing it; several bills have been filed to eliminate or phase out the franchise tax.

While meeting with a freshman legislator this week to talk about TSCPA’s recommendations for improving the tax, the legislator was more interested in repeal than in making changes. He wanted to know: “Would the TSCPA support franchise tax repeal?”

Would we? Would you? It’s a question that we have never discussed, and I’d like to get some feedback. Please enter your responses as a comment on the blog. Would you support repeal and perhaps a sentence or two about why or why not.

Are Tax Reductions in the Future?

In Gov. Perry’s remarks on the opening day of the session and in his State of the State address on Tuesday he suggested tax reductions were appropriate to return the excess revenues collected over the state’s budget expenditures. In the latest address he suggested returning $1.8 billion to taxpayers. He suggested that taxpayers go to a website he has created to opine as to which taxes should be reduced. The franchise tax (margin tax) is front and center among the considerations and the Texas Association of Business had made some specific tax reduction recommendations, most of which are related to the franchise tax.

Others suggest that there is no surplus in the state coffers, pointing to the need to restore education funding cuts, potential education funding required because of the school finance lawsuits underway, requirements to fund Medicaid for this year and the Medicaid enrollment growth anticipated over the next two years, not to mention funding needs for roads and water. Some argue that all of these needs overshadow any temporary over-collection of state revenues.

This environment will likely allow legislators to at least consider modifications to the franchise tax this session. Last session virtually all franchise tax legislation was DOA in the House Ways and Means committee; it appears that will not be the case this session. Will they do some broad strokes like making the $1 million revnue floor permanent or actually lowering the tax rate; or will they tweak the law to make it more understandable and consistent? They might look at the definition of cost of goods sold or consider allowing the deduction of payments to independent contractors as compensation. If they are open to suggestions, TSCPA has a list that includes changes in cost of goods sold, flow-through revenue exemptions and some changes that are specific to partnership taxation.

At least they are talking about franchise tax changes. We can hope for the best!

Federal Court Throws Out IRS Tax Preparer Regulation Program

The Federal District Court for the District of Columbia enjoined the IRS from enforcing its registered tax return preparer program. The program is being implemented in stages and includes testing, training and other regulations. The court said the IRS did not have statutory authority to implement the program.

The Journal of Accountancy has the details.

Lt. Gov. Dewhurst Appoints Senate Committees

Although Lt. Gov. David Dewhurst had already named Senate committee chairs before the session started, on Friday he completed the process by announcing the committee members.

Senators who had not been named as a committee chair were all named as a committee vice-chair. Three new senators were named as vice-chairs of some very significant committees: Larry Taylor (R-Friendswood) Business and Commerce, Kelly Hancock,(R-North Richland Hills) Economic Development, and Ken Paxton (R-McKinney) Transportation. The Education committee includes members who are more conservative than those serving last session, including new senators Campbell (R-New Braunfels), Paxton and Taylor.

So where does your senator serve?  Here’s the list.

Budgets Filed – Expenditures Reduced

Both the House and Senate announced their initial budgets which hold the line on spending. The budgets are substantially below the Comptroller's revenue estimates and the maximum expenditures allowed by the Texas Constitution. The budgets spend less money than the current biennium, clearly reflecting the conservative make-up of the legislature.

For more details read Despite Surplus, House and Senate Offer Lean Budgets in the Texas Tribune.

House Passes Rules

The House passed the rules for this session on Monday. There were a number of amendments offered by members but most did not pass.

Perhaps the most significant amendment that did pass was offered by Rep. Phil King (R-Weatherford). The amendment makes it more difficult for a bill to be killed on a non-substantive error. The amendment returned the House to a rule that was followed during former Speaker Pete Laney’s tenure who was last Speaker in 2009.

Other amendments were offered to make the House process more transparent. Some passed and some failed.

For a more thorough review of the process see House Rule Change Could Weaken Democratic Minority in the Texas Tribune.

Appropriations Bill to be Filed on Tuesday, Jan. 15

Rep. Jim Pitts (R-Waxahachie), House Appropriations Committee Chairman, announced he would file House Bill 1 on Tuesday. It's the first step for the House to “begin a discussion about Texas’ priorities,” said Pitts.

The numbers:

• $89.1 billion in general revenue; a total of $187.7 billion in all funds
• a $2.2 billion decrease from 2012-2013 levels
• it spends $3.7 billion less than the Constitutional Spending Limit and $5.5 billion less than is available under the Comptroller’s Biennial Revenue Estimate
• it covers the cost of projected enrollment increases in public and higher education for 2014-15
• it funds Medicaid for a full 24 months
• no money is appropriated for new grants to the Cancer Prevention and Research Institute of Texas

See the full press release here (PDF).

Senate unanimously adopts rules with no debate

The Senate adopted rules for the session on Wednesday by a 27-0 vote. The two-thirds rule was maintained without exception, so all Senate bills will need support from two-thirds of senators to reach the floor for debate. For the past two sessions there have been specific exceptions to the two-thirds rules called “Special Orders” to deal with voter ID legislation.

The new rules also changed how sunset bills will be assigned to committees this session. In past sessions all sunset bills have been assigned to the Government Organization Committee but this session they will be assigned to the appropriate subject matter committee.

Before the session started Lt. Gov. Dewhurst changed Sen. Judith Zaffirini’s chair responsibilities from Higher Education to Government Organization. This was described as a demotion by the press, but it was noted Zaffirini would still have significant influence because of the important sunset legislation scheduled for the session. Despite the new rule’s apparent dilution of Zaffirini’s influence, she supported the rule change according to a Texas Tribune article.

The House is not scheduled to take up session rules until next week.

Opening Day of the 83rd Texas Legislature

The 83rd Texas Legislature convened yesterday with appropriate pomp and circumstance. The so-called contest for the Speaker of the House was a non-event with challenger David Simpson (R-Longview) withdrawing and Joe Straus (R-San Antonio) being elected by acclamation. I only saw reports on one lawmaker who proudly and publicly announced he would have voted for Simpson had he not withdrawn. That doesn’t mean there weren’t others, but perhaps they saw no benefit in expressing opposition to the winner. Straus’s acceptance speech called for budget transparency and work on the state’s energy, water and transportation needs.

The Senate ceremony was mostly devoted to the selection and swearing in of Sen. Leticia Van de Putte (D-San Antonio) as the President Pro-Tempore of the Senate. In her acceptance speech Van de Putte called for restoration of education funding cuts and for a true spirit of compromise during the legislative session.

Both the Senate and the House will be adopting rules later this week. The Texas Tribune reports Lt. Gov. David Dewhurst stating that the Senate would retain the two-thirds rule (requiring two-thirds of senators to agree to bring a bill to the Senate floor) although some are still speculating that there may be some specific exceptions to the rule as there have been in the last two legislative sessions.

Gov. Rick Perry gave the same speech to both chambers in which he urged fiscal restraint and tax relief in light of the increased revenue estimates, pushed transparency in budgeting and suggested it was time to address infrastructure issues.

The trend of the session became a little clearer this morning when Perry, Dewhurst and Straus “announced in a press conference that they agree on maintaining an austere budget” according to the Dallas Morning News’ Trailblazer blog. Straus said work could still be done on the infrastructure needs while keeping fiscal discipline.

Comptroller Susan Combs estimates $101.4 billion in state revenue for the 2013-14 biennium

Just as articles appeared in the news today about how Comptroller Combs underestimated the revenue for the current biennium, Combs made her projections for the next biennium today. It breaks down like this:

• $101.4 billion available for general purpose spending
  • $8.8 billion will be the current year ending balance
  • $92.6 billion in net general revenue for the biennium
• $11.8 billion Rainy Day Fund balance
  • $8.2 billion balance at current year end
  • $3.6 billion added during the next biennium
• $208.2 billion total funds available for the next biennium, including estimated federal receipts of $112 billion

These estimates presume that the legislature does not use any of these funds in supplemental appropriations to fund the anticipated $5 billion Medicaid shortfall for the current year, or for anything else. The Rainy Day Fund balances are also predicated on the legislature leaving them alone. The Comptroller’s press release has more details, including a link to the actual revenue estimate report.

The Texas Constitution requires the legislature to appropriate no more spending than anticipated revenue, so the Comproller’s revenue estimate sets the maximum expenditures that can be budgeted for the 2013-14 biennium. Typically the Comptroller will revise the estimate later during the legislative session when she has a few more months of revenue collection data and more information to better project the Texas economic outlook.

NFIB Calls for Elimination of Margin Tax

The conservative makeup of the 83rd Texas Legislature seems to guarantee that there will be no new taxes or tax increases passed during the 2013 legislative session, but until now no one has suggested reducing taxes.

Three organizations are now talking about eliminating the much-maligned Margin Tax.  Sen. Craig Estes (R-Wichita Falls) has actually filed a bill (the only bill he has filed to date) to repeal the Margin Tax effective Jan. 1, 2014. The National Federation of Independent Businesses, the Texas Public Policy Foundation (TPPF) and the Texas Conservative Coalition Research Institute (TCCRI) are all calling for repeal of the tax.

Quitting cold turkey on Jan, 1, 2014 might be too ambitious for some. TPPF calls for a phase-out of the tax by 2018, starting by raising the minimum revenue exemption immediately from $1 million to $10 million. RCCRI suggests a seven- to ten-year phase out. The Texas Association of Business calls it a good idea, but questions whether the state can afford the $5 billion or more revenue loss.

For a more thorough discussion of the possibility, read the Austin American-Statesman’s article Eliminating business tax on the agenda?

A primer for legislative session

You can always count on the Texas Tribune for the latest state political news - that's why TSCPA is proud to be a sponsor.

The Trib just posted a solid analysis of what the legislative session - which starts tomorrow - might hold. Check it out here.

Legislative Dysfunction – Is Redistricting the Cause?

Thanks to Harvey Kronberg’s Quorum Report for calling attention to an article by Nate Silver, who according to Kronberg is “that rare breed of statistician who earned rock star status analyzing polls and predicting just about everything accurately in the last election.” While it seems improbable that even the most astute statistician can approach “rock star status”, it is clear that Silver’s analysis is once again astute and interesting. Harvey’s own description of Silver’s conclusions is that “redistricting has institutionalized legislative dysfunction.” This is not the first article ever written decrying the political polarization caused by redistricting. Anyone following politics closely is aware that redistricting pretty much determines which party will win which district for the majority of the legislative elections. Silver has the statistics to point out how bad it has become over the years.

For example, Silver points out that only 35 out of the 435 House of Representative districts were swing districts, that is districts where there might be a two party contest; that’s only eight percent! Harvey points out that in Texas it’s not the 7.9 million people that vote in the general election that count, but only the 1.1 million that vote in the Republican primary. That’s why there were only about a dozen genuine contested general election legislative races in Texas.

Polarization is likely the biggest factor in legislative dysfunction. The lack of genuine two-party elections leads to more and more polarization. Perhaps former Senator Jeff Wentworth’s continuous campaign for revising the redistricting process wasn’t such a bad idea after all. You can read Silver’s article here: As Swing Districts Dwindle, Can a Divided House Stand?

Broad Tax Relief Included in the American Taxpayer Relief Act - H.R. 8

While the headlines focused on the tax increases for the wealthiest taxpayers, the American Taxpayer Relief Act (probably named that because of the “relief” everyone felt when it was passed yesterday) is full of most of the tax provision extensions that many people wanted with hopeful anticipation. Texans will be glad to know that the federal tax deduction for sales taxes was extended, but just for two years through 2013. The Alternative Minimum Tax fix was made permanent, indexing the threshold income to inflation forever. The tax highlights:

• Top tax rates extended to 39.6% for taxpayers with taxable incomes over $400,000 ($450,000 for married couples filing jointly)
• Personal exemptions and itemized deductions are phased out for taxpayers with incomes starting at $250,000 ( ($300,000 for married couples filing jointly
• Capital gains and dividend tax rates are raised to 20% for those taxpayers with incomes above the top tax bracket threshold
• The estate and gift tax exclusion is set at $5 million, but the tax rate is increased to 40%

The Act also extends unemployment benefits for a year, but does not extend the payroll tax cuts. Physician reimbursement rates are once again saved from the automatic draconian cuts due to take affect yesterday. Sequestration, the supposedly automatic huge federal budget cuts were postponed until March.

There are numerous other tax provisions extended that were due to expire at the end of 2011 or 2012. For a more complete explanation of these changes, see this Journal of Accountancy article.

The Act also includes a provision that allows employees to convert 401(k) plans to Roth 401(k) plans. See the detail in this Investment News article.

Sunset Advisory Commission Recommends Renewal of SDSI

As previously reported, TSCPA representatives gave written and oral testimony to the Texas Legislature's Sunset Advisory Commission (SAC) supporting the renewal of SDSI (self-directed, semi-independent) legislation for the Texas State Board of Public Accountancy (TSBPA).   

TSBPA was one of the agencies that took part in the pilot project establishing SDSI, which allows a state agency to operate outside the legislative appropriations process. Since that time a number of other agencies have been approved for SDSI status. The removal of process redundancies and the legislative temptation to collect license fees without using those fees to administer the profession has proven successful. 

Today, the SAC approved the recommendation to renew SDSI legislation for TSBPA and the other two original agencies.  The next step will be to propose legislation to renew SDSI. The legislation must pass the full Texas Legislature and be approved by the governor for the renewal to become reality. TSCPA will support that legislation during the upcoming Legislative session which begins in January 2013.

TSCPA Member to Chair U.S. House Ethics Committee

Texas CPA Mike Conaway, U.S. Congressman serving the 11^th District centered in Midland was named chairman of the House Ethics Committee by Speaker John Boehner. 

In appointing Conaway, Boehner stated: “Mike has all the tools to be an effective Ethics Committee chairman: he is well-respected on both sides of the aisle; he’s led investigations of public officials in the past; and he understands the importance of both education and enforcement of the rules,” 

Conaway is not only a member of TSCPA, but is a former chairman of the Texas State Board of Public Accountancy and the National Association of State Board’s of Accountancy.  CPAs undergo continuing ethics training throughout their career so who better to chair Ethics than a CPA.  Congratulations to Congressman Conaway.  You can read more about the appointment in the Dallas Morning News and  Roll Call.

 

Texas Ranks as the Seventh Best State for Business

According to Forbes, Texas Ranks as the seventh best state for business activity. The Texas population is almost as large as the first six states combined. All other major population states rank lower than Texas, including New York #23, Florida #27, Ohio #33, New Jersey #36, Illinois #38, California #41 and Michigan #47. Virginia and North Carolina were the most populous states that ranked ahead of Texas at #2 and #4 respectively.

No Sales Tax Deductions for 2012?

In all the consternation over the federal fiscal cliff there hasn’t been much said about the deduction for sales taxes on individual tax returns. In case you have forgotten, the deduction expired in 2011. It has not been renewed for 2012, so as it stands today you can’t take the deduction on your 2012 federal income tax return.

Sen. Kay Bailey Hutchison has been the deduction’s champion for years, but if she can’t get it done by Dec. 31, 2012 it will be up to someone else. Brad Watson with WFAA reports that about 20% of Texans that filed income tax returns claimed the deduction in 2010 “across all income levels, especially the middle class.” Did you buy a new car this year? Were you counting on the sales tax deduction? You’d better call your congressperson. See Watson’s article here.

The Coming Legislative Session

Yesterday TSCPA sponsored a Grassroots Seminar in Austin for legislative volunteers. The program was to make CPAs aware of issues pertinent to the 2013 legislative session and provide suggestions and instructions on working with legislators. The program included presentations by two CPA legislators, Sen. Tommy Williams (R-The Woodlands), Senate Finance Committee Chair, and Rep. John Otto (R-Dayton), Vice-chair of the House Ways and Means Committee. TSCPA legislative consultants Jack Roberts and Rusty Kelley also provided insights into the November election and how its results might affect the upcoming session. Texas Tribune mavens Evan Smith, Editor-in-chief and CEO and Ross Ramsey, Executive Editor rounded out the session with a glimpse of both national and Texas politics.

Participants were treated to an excellent understanding of the state’s budget issues. You may have read that the growth in Medicaid could ultimately bankrupt the state and what we heard yesterday supported that concern. Over the last decade Texas budget growth has been in the 6-8% range while Medicaid growth has averaged 14%. That means all the state’s revenue growth is consumed by Medicaid expenditures. Reminds me of the Federal dilemma where all revenues are consumed by entitlement programs and the government has to borrow to pay for everything else.

Regardless of whether or not Texas participates in the Medicaid expansion of the Affordable Care Act, Medicaid is not sustainable on its present path. It was pointed out that although the feds promise to pay almost all the initial costs, the feds don’t have the money either, so they would have to borrow it. You can imagine how a group of CPAs reacted to all this good news.

State revenues are up in Texas thanks to economic recovery and a booming oil and gas industry. Gas severance taxes are 84% ahead of estimates and oil severance taxes are 48% ahead of estimates. Some even speculated that the Margin Tax might meet original expectations for the first time in 2012. Even so there are significant challenges. For example, enrollment growth in public education along with the Medicaid costs will consume 89% of the state’s revenues over the next two years. That leaves 11% to pay for everything else.

The good news for Texas, at least for the next biennium, is it appears the state is collecting sufficient revenues to be able to adopt a biennial budget without resorting to new taxes, which is a very good thing, especially since most of the legislators ran on tickets promising not to raise taxes. However, Texas revenues will have to increase or the state faces significant infrastructure failures in the not-so-distant future. We evidently have no money for new roads and barely enough to fix the old ones. We are facing some severe water shortages down the line if we don’t do something soon and the long range power generation outlook is questionable.

One proposal discussed yesterday was to increase vehicle registration fees by about $50. Evidently Texas has one of the lowest fees compared to other large states. This fee increase could raise enough funds to tackle most major city congestion problems. Another idea was to dedicate auto sales tax revenue to highway construction. It remains to be seen if this legislature will even consider such proposals.

What about education finance reform? There are six lawsuits underway against the state of Texas claiming the current education funding system is unconstitutional. Despite conventional wisdom that the courts will once again determine the system to be out of whack, some on the program yesterday thought this time it might be different. In any event, it is unlikely that the court’s decision, whatever it may be, will be rendered before the end of the 2013 session. School finance is so significant to the state budget, that it being in limbo is enough excuse for the legislature to not try to do any other major financial or budget reform. If the courts rule as expected by most, the question would be whether or not the governor calls a special session or they just wait until 2015 to reform the system.

The CPAs present were interested in potential tax legislation for 2013. Not much tax legislation is expected. Some thought there might be a few tweaks to the Margin Tax. With so many candidates winning election on a no-new-tax and no tax increase platform, most tax bills will be DOA. One bill has been filed to increase the franchise tax minimum revenue amount from $1 million to $5 million. That would exempt most (98%) Texas business from paying any franchise tax. While a number of legislators might like to lower taxes, the state’s fiscal picture makes that very difficult.

Governor Perry and Speaker Straus have both called for more budget transparency seeking to eliminate the time-honored practice of raising money for a specific purpose but not spending it, which helps balance the budget. There is about $5 billion in such funds (accumulated over about 20 years), so if transparency were restored all at one time the legislature would have to find another $5 billion to balance the budget. It was suggested that they might start with a bill that keeps the $5 billion from growing any larger.

On the operational side of the legislature, it was pointed out that half the House of Representatives will be freshmen or sophomore legislators and there will be six new senators out of 31, which is more at one time than anyone can remember. This means a lot of institutional knowledge on such difficult subjects as school finance reform has been lost and will likely result in some starts and stops throughout the session. All these new legislators also means a more conservative legislature.

Other than the budget (the only bill the legislature has to pass) what will be the hot buttons of the session? The items mentioned yesterday were Voter ID reprise, school vouchers, standardized testing, expansion of charter schools and higher education reform. Possible additional abortion control legislation is also a possibility.

Water concerns were mentioned above. One legislator is considering suggesting a tap tax: a small tax that would appear on your monthly water bill that might raise as much as $25 billion to be used to fund the existing water conservation plan. The water conservation plan was adopted a few sessions back but has never been funded. Another suggestion was to use some of the estimated $8 billion in the Rainy Day Fund to kick start the water plan.

Yesterday’s seminar was informative and entertaining. The presenters were knowledgeable and articulate. We will watch to see if they are also good prognosticators.

Where do you complain about train noise? Not to the Railroad Commission

I know all of our learned readers already know that the Texas Railroad Commission (RRC) has nothing to do with railroads, but instead regulates the Texas oil and gas industry. Evidently some Texans don’t realize this, and the Commission still gets complaints about train noise.

So why not just change the name to something like the Texas Energy Resources Commission? A similar name change has been suggested in several of the last legislative sessions, all to no avail. Utility companies complain that using the term “energy” would also confuse the public to think the RRC regulated public utility companies. One commissioner suggested tradition demands keeping the RRC moniker. Evidently there is more than tradition at stake as some sections of the Texas Constitution refer to the commission by name. Would we have to have constitutional amendments voted on by the public? Maybe the commission just has to put up with the train complaints.

Last session the Sunset Advisory Commission (SAC) recommended the name change along with a number of substantive changes, but the RRC sunset bill didn’t pass so the SAC has a new staff report out for this session. They have abandoned last session's recommendation that the commission be reorganized by eliminating the three elected commissioners and having one appointed regulator -- it’s that recommendation that likely caused the bill to stall last session. The current year staff report makes a number of recommendations, including:

• Limit political fundraising by commissioners: it's “hard to fully divorce contributions from decisions with tens of thousands of dollars donated every month,” said one witness
• Resign to run requirement
• Adopt recusal rules
• Require the use of the State Office of Administrative Hearings for contested cases
• Authorize a pipeline permit fee and ensure fees are sufficient to fund the Pipeline Safety Program
• Improve enforcement
• A better watch on oil pipelines and pipeline safety and construction
• End the commissioners marketing of propane
• More money for oil and gas clean-up

For more on the SAC report on the RRC check out this NPR article, which includes links to the full SAC staff RRC report.