TSCPA Governmental Affairs

Comptroller changes health care provider calculation for revenue and uncompensated care

Click here for the Comptroller's revised interpretation.

Texas businesses pay a hefty share of Texas taxes

In a recent electronic newsletter the Texas Association of Business referenced a study by Ernst & Young LLP and the Council on State Taxation that shows Texas businesses pay over 60% of all state and local taxes. And that's before the new margin tax. There are only five states with businesses carrying more of the load, including neighbor Louisiana and such major industrial states as Alaska, North and South Dakota, and Wyoming. California comes in at 41.4% and New York at 42.4%.

Before you get exorcised, though, remember that most other states have a personal income tax, and such taxes in New York and California are steep. That's one way to bring the business tax percentage down: institute a personal income tax in Texas. Of course that requires an amendment to the state constitution, so don't hold your breath.

Will State Sen. Shapiro run for Hutchison's seat?

Speculation is ramping up that if U.S. Senator Kay Bailey Hutchison steps down to run for Governor, State Senator Florence Shapiro (R-Plano) will run for her open seat in the U.S. Senate.

The Dallas Morning News analyzes the rumors here.

State budget surplus? Depends on who you ask.

TSCPA friend Harvey Kronberg is noting in his outstanding Quorum Report that Speaker Craddick, Comptroller Combs and other players appear to have different interpretations of the state's budget surplus amount.

COMPTROLLER COMBS DOWNSIZES SPEAKER'S BUDGET SURPLUS ESTIMATE TO $10.7 BILLION

The Speaker had estimated a $15 billion surplus going into next session; Comptroller says today, "I think that there was a misread of a number."

Comptroller Susan Combs was asked today at the close of her presser on her new comprehensive energy report on the validity of a $15 billion budget surplus estimate floated recently by Speaker Tom Craddick.

Her answer: The Speaker overshot the estimate by a little more than $4 billion.

"We've talked with his staff and I think there was a misread of a number," she said. "I believe if you count in the Rainy Day Fund, I believe we're at about $10.7 (billion). And I believe that his office would agree with that number."

Craddick's office explains the numbers way: At the end of last session, the Legislature set aside $3 billion for future property tax cuts. At the time, lawmakers noted it was with the understanding the revised franchise tax might not be enough to cover the anticipated $13 billion cost of the 50-cent tax cut over the next biennium.

Add to that an estimated $4 billion that was left in the state's rainy day fund. That's $7 billion. Good economic numbers and solid sales tax collections have pushed those totals to a collective $10.7 billion. Those numbers were certified by Combs late last year.

Continued strong economic numbers -- especially given the fact the sales tax is exceeding its 3 percent growth rate -- could push the final tally toward $15 billion. Given the fact Texas often lags one to two years behind recession trends in other parts of the country, it might be assumed the current economic growth would be solid going into the next session, said Craddick's office.

Misread or no misread, the total likely will be between those two numbers, given that the initial assumptions were conservative.

But let's look at what the property tax cuts are going to take from that $10.7 billion -- or $15 billion -- figure. Talking to experts from both sides of the equation -- the school finance experts at Moak Casey and the tax analysts at the Texas Taxpayers and Research Association, the property tax cut is expected to take at least a $6 billion bite out of that excess revenue going into next session.

First, you look at the anticipated franchise tax collection numbers out of Combs' office. Initially, collections were pegged at $6.7 billion a year, and then they were scaled back to $6.1 billion. That may still be somewhat conservative. Combs' office said a good estimate of franchise tax revenues -- with appeals and such -- may not be available until August.

Remember that we have to subtract the old franchise tax totals from the new franchise tax totals. The old franchise tax was $2.8 billion a year. So that means that the state actually has an estimated annual $3.2 billion.

Let's add the cigarette tax to that. Current estimates are that the cigarette tax -- pegged early at $1 billion per year -- should be between $700 and $900 million in revenue a year.

So if you look at a price tag of the tax cut at $7.5 billion a year -- and revenue of about $4.1 billion annually -- then you're going to have to pull an additional $3.4 billion out of general revenue.

If the surplus going into the session is $15 billion -- as Craddick has suggested -- it's actually $8.2 billion on the table. If we go conservative and use Combs' $10.7 billion, then we're looking at $3.9 billion.

The caveat here is that the more property values go up, the more that 50-cent tax cut is going to cost. That's probably the only reason to hope for a soft housing market going into the upcoming session.

Did you ask Senator Patrick to extend the margin tax deadline?

Saying he's been "bombarded by questions from CPAs and business owners," Senator Dan Patrick (R-Houston) sent a letter to Comptroller Combs asking that the margin tax deadline be moved to October 15.

I guess none of the CPAs who "bombarded" him with questions mentioned that October 15 is already a major tax deadline.

Read Senator Patrick's letter here.

Combs's response was predictable - read it here.

Comptroller-approved software for Margin Tax calculations

Click here for the list of software vendors the Comptroller's office has approved for the new franchise tax forms.

It's better than nothing: Combs offers an extra month for filing Margin Tax returns

Read the Comptroller's announcement here.

Senator Brimer unfairly accused

The Fort Worth Star-Telegram says Senator Kim Brimer followed all the rules and his political opponents are trying a smear campaign. The facts are reported in the paper’s article here.

Craddick’s Democratic opponent is ineligible; or is he?

The Republican party is shouting for joy over the ruling of a federal judge than Midland City Councilman Bill Dingus is ineligible for the race because he did not resign his city council seat before registering as a legislative candidate. But Dingus says the judge did not order him removed from the ballot, so he's still running. Confused? The Houston Chronicle article explains it all.

Taxpayers are waking up to the tax bite of the new Texas margin tax

Being April 15th, you would think all the focus would be on federal income taxes. Not so, says one CPA:  "I’m getting more calls from my clients about the margin tax than the income tax.”

That’s because the Comptroller just sent out letters and forms reminding taxpayers of the new tax and telling them how to file and pay. Check out this Austin American-Statesman story.

Democratic wins help Speaker Craddick ...

... or so says an editorial in the Dallas Morning News.

Read their prediction that Craddick will return as Speaker of the House for the 2009 session.

The Speaker’s race post-primaries

The most common question I get: Will Tom Craddick continue as Speaker of the House in 2009?

I’m honored that anyone thinks I could answer that question. Until last Tuesday, I could respond: Maybe we will know more after the primaries. And maybe we won’t. Much like the race for the Democratic presidential nomination, Craddick’s position seems to depend on who's doing the analysis more than the analysis itself.

Here are a couple of viewpoints from around the state ...

• Fort Worth Star Telegram: Craddick appears to weather primaries
• And from the Houston Chronicle: Election's effect on Craddick unclear

A billion dollar *accounting* error?!?

TxDOT claims their current budget crisis is a result of accidentally double-counting more than a billion bucks in bond revenue.

Senator Tommy Williams - a TSCPA member - has called for an immediate audit.

Read the Austin American-Statesman's coverage here.

Untruth in government

Legislators frequently pass legislation that dedicates certain state taxes or revenue to specific purposes. However, unless the legislature also appropriates the money, the funds cannot be spent on their intended purpose.

For example, this past session Sen. Carona (R - Dallas) passed a bill that makes the cities that have red light cameras share the take with the state, ostensibly to be used to fund trauma care centers. But the legislature failed to appropriate the money, so it now sits in a state bank account. For more information about lack of state government transparency, check out this Houston Chronicle article.

Beginning inventory allowed for margin tax

TSCPA's State Taxation Committee wrote a letter to Comptroller Combs disputing her assertion that a beginning inventory should not be allowed in the COGS calculation under the new margin tax.

TSCPA's feedback - and that of several other groups - was apparently taken to heart, because the Comptroller has reversed her position.

Read TSCPA's analysis here (member login required).

Will the Speaker controversy affect local elections?

Whether or not the Speaker of the House controversy will affect local elections or not seems to depend on your point of view, but there is no doubt the local elections will influence the Speaker's race in the next legislature. With Craddick having something less than a 12-vote margin in the existing House, it wouldn't take too much change to upset the current House leadership.

There are 150 seats in the House. 72 of those seats have contested general elections and 40 have contested primaries. Check out Gary Sherrer's analysis in the San Antonio Express-News.

2008 is here, and so is the new Margin Tax

It seemed like a long time into the future when the Texas Legislature passed the revised franchise tax - affectionately known as the margin tax - to take effect in 2008. Well the future is here and State Comptroller Susan Combs will soon be collecting the first revenues from the revised tax. According to the NFIB, many taxpayers remain unaware of what's coming.

The Houston Chronicle published a timely article warning the uninformed: the taxman cometh and he cometh where he has not gone before.

Avoiding GAAP will cost governments

During the last legislative session, a bill was passed allowing Texas state and local governments to prepare their financial statements ignoring GASB 45, the requirement to account for post-employment retirement benefits, such as health care. Such reporting makes the statements non-compliant with generally accepted accounting principles. TSCPA and others warned legislators that such action would likely have negative results for Texas local governments.

Check out this editorial in today's Austin American-Statesman, which reports higher interest rates for non-GAAP reporters.

Austin American-Statesman: "Business groups' ads critical of lawmakers' new tax"

Today's Statesman features a story about the National Federation of Independent Business and their opposition to the margin tax.

Read it here.

Taxable squash (not kidding)

Iowa taxman chooses trick over treat

DES MOINES, Iowa (AP) -- The taxman in Iowa is going after jack-o'-lanterns this Halloween.

Most pumpkins are used as decorations, making them taxable, Iowa has ruled.

The new department policy was implemented after officials decided that pumpkins are used primarily for Halloween decorations, not food, and should be taxed, said Renee Mulvey, the department's spokeswoman.

"We made the change because we wanted the sales tax law to match what we thought the predominant use was," Mulvey said. "We thought the predominant use was for decorations or jack-o'-lanterns."

Previously, pumpkins had been considered an edible squash and exempted from the tax. The department ruled this year that pumpkins are taxable -- with some exceptions -- if they are advertised for use as jack-'o-lanterns or decorations.

Iowans planning to eat pumpkins can still get a tax exemption if they fill out a form.

The new policy, published in the department's September newsletter, has some pumpkin farmers feeling tricked this Halloween.

"I don't mind paying taxes, but let's get real here, people," said Bob Kautz, owner of the Buffalo Pumpkin Patch in Buffalo, just west of Davenport.

Tax cut = tax increase opportunity

Huh?

Since the legislature was kind enough to reduce property taxes, some school districts see that as an opportunity to raise rates on a different property tax. Evidently the school districts think they are entitled to the money the legislature is trying to give back to the taxpayers.

The Fort Worth Star-Telegram explains here.

Bureaucracy runs amok

According to the Austin American-Statesman, it has been discovered that the state legislature requires more than 1,600 reports from various state agencies and commissions, 400 of which "are obsolete, duplicative or not needed as frequently as currently required."

Legislation frequently includes some reporting requirements, but seldom does it include a provision to stop reporting even after it's no longer needed. Last session we reported on the elimination of the County Hides Inspector position, which hadn't been used in over fifty years. Sounds like taxpayer's dollars could be saved just by eliminating obsolete reporting requirements.

Read the Statesman article here.

Austin American-Statesman: "What happened to the tax cut?"

Likely coming as a surprise to no one, the highly publicized cut in property taxes passed by the legislature in 2006 has not exactly met the hype.

Read the Statesman analysis here.

Texas Taxpayers and Research Association on property tax relief

Top-notch political analyst and TSCPA friend Harvey Kronberg covered the Texas Taxpayers and Research Association’s (TTRA) annual meeting last week. In-depth analysis of the discussions is available on Kronberg's Quorum Report, well worth the subscription for those interested in behind-the-scenes info from Austin.

In the item below, Harvey reports on a discussion from the TTRA meeting that should be of particular interest to TSCPA members: insiders' analysis of the property tax relief package passed during the 2007 legislative session.

POLITICIANS OVERSOLD PROPERTY TAX CUTS SAY PANELISTS
For most, tax savings will be a fraction of what they were told

A panel of lobbyists at the Texas Taxpayers and Research Association’s annual meeting yesterday called last session’s property tax relief package "oversold" by politicians and its effects of relief for taxpayers fleeting, at best.

Despite the promise the recent property tax relief package was the biggest in the country - or possibly the world or the universe, the panelists joked - it is unlikely to deliver long-term relief, either in taxes or in avoiding another school finance court challenge, the speakers agreed during an afternoon panel session on property tax relief.

Asked whether the new tax package had accomplished the property tax relief promised, Jim Ramsey of CenterPoint Energy said the tax package was working just as it was intended to do, which was to buy down the tax rate for a temporary period of time.

"If your definition of ‘working’ is a permanent solution, clearly it’s not. It’s not a permanent solution, even if it was championed that way by some politicians," Ramsey said. "I think anyone who expected this to be $2,000 in tax relief to the average homeowner was clearly asking too much."

Do the numbers, Ramsey said. The school tax burden is 60 percent of the total bill. The tax rate cut applies to maintenance and operations, which is 90 percent of the total school district tax bill. If you look at the statewide average, that means that the 50 cents shaved off the school district tax rate amounts to only 18 percent of the total tax bill.

"Those tax cuts certainly were welcome, but most people probably expected it was going to be bigger than that," Ramsey said. "A couple of years of value increases, and those tax cuts are carved away."

And as John Nichols of Dow Chemical Company pointed out, if history serves as a yardstick, that tax increase won’t last more than six years. The increase in taxes between 1999 and 2004 was about 50 cents. And, beyond that, the margin tax revenues will only cover 60 percent of the current tax cut. That puts pressure on state revenues to "backfill" the current promised property tax cuts, even as the growth in the Texas economy and real estate market may be leveling off.

"My prognosis is that, in the future, possibly as close as the next session, we’re probably going to see the business taxpaying community asked to pick up more of the tab," said Nichols, who did agree that the margins tax had been good to capital-intensive industries like his, especially from the perspective of those already paying franchise tax.

George Allen of the Texas Apartment Association said last year the property tax cuts had little impact on his industry, which has been hammered by significant value increases, especially in Harris County. He added it remains to be seen whether property tax benefits will flow through and may depend on how his people fare in contesting appraisals. Allen said it was impossible to see real benefits from property tax relief until meaningful appraisal district reform was addressed by the state. He added that the new margins tax would have a dramatic impact on his industry because of the inclusion of partnerships - a typical business structure in the apartment industry.

Those pressures are combined with the current inequities of the school finance system, which were outlined by Dan Casey of Moak Casey. The current system is carrying $6.4 billion in "hold harmless" funding - what it will take to keep all school district budgets whole under the current finance system - which is a sign that formula funding must be addressed. Did last session’s margins tax add a great deal of discretion to school district budgets? Not much, given inflationary pressures, was Casey’s opinion.

Moderator George Christian pointed out that continued compression of tax rates by the state is somewhat dependent on surpluses and the general economic performance of the state. The buy-down also is based on the wave of increased property values in the state that, under the current formula, benefit the state far more than the local district.

Casey added that the current $8.5 billion surplus won’t last long, and added that his sense is that the current tax promises are a "do or die" proposition for most lawmakers.

Asked what appraisal reforms were necessary, Allen said it was not simply - contrary to popular expectations - sales price disclosure. TAA, of course, is opposed to sales price disclosure. The goal, instead, should be same fairness and equity in the system across appraisal districts, Allen said. Property owners need to sense they are getting a fair shake and a true distance between taxing districts and appraisal review boards.

TAA supports many of the reforms suggested by a recent task force: a truly independent regulatory body rather than self-policing for appraisal districts; proper specialization for appraisal review boards, especially dealing in commercial property; and increasing the arbitration limit from $1 million to as high as $25 million.

Nichols suggested the only way to guarantee that property tax cuts are going to work is to limit the amount of revenue growth that local taxing jurisdictions have, even if such limits have led to a serious gnashing of teeth among local government officials. Cities and counties that intend to exceed a rate of growth, plus 5 percent, should be required to seek approval of the voters, Nichols said. Otherwise other controls won’t work.

"You’ve got to limit, somehow, the demand for revenue," Nichols said.

Ramsey said there was no way avoiding the fact that the state relies too much on property tax for almost every form of government. Anything done by government now only extends the life of an overtaxed system. Ramsey said he found the Texas system one of the most equitable in the country, but that didn’t negate the fact that the only way to provide long-term relief was to find a new revenue source for taxation.

Digest: Combs estimates budget surplus at $1.5 billion

Austin American-Statesman: State surplus grows by $1.5 billion

Dallas Morning News: Texas collected $1.5 billion more than projected

Fort Worth Star-Telegram: State has extra $1.5 billion leftover from last year's budget

Margin tax suggestions from the Texas Association of Business

The Texas Association of Business held a meeting here in Austin yesterday. Billed as the TAB Tax Summit, the group used the event to announce their own recommendations for changes to the margin tax.

TSCPA pal Harvey Kronberg posted the following report to his Quorum Report. Consider a subscription to his fine publication if this kind of behind-the-scenes reporting is meaningful to you.

TAB LAYS OUT PROPOSED CHANGES TO MARGINS TAX
Pyramiding, caps, federal contracting on the table for discussion.

The Texas Association of Business laid out a number of resolutions this morning intended to tighten up the new margins tax and make it more equitable to business.

What one might have hoped to take from this forum – the temperature of the business community – was difficult to gauge from today’s TAB Tax Summit at the Hyatt Regency. The room was packed this morning, but the majority of attendees were House and Senate staff members, along with scattered members of various major business industries and a handful of interested state legislators.

TAB members will vote on the proposals. Attorney Jennifer Patterson of McGinnis Lochridge & Kilgore presented an overview of the margins tax and the improvements suggested by TAB. Among the points that Patterson initially made about the margins tax: The first year’s payment is "backwards looking," based on 2007 tax returns. That means it may be too late to make adjustments for those businesses filing on a calendar year, rather than the fiscal year.

Patterson also walked through some of the specifics: those who are expected to report; implications of combined reporting; and the E-Z computation method intended to benefit small businesses that will not be taking a cost of goods or compensation deduction. The first annual margin tax return is due on May 15, based on the prior year.

TAB has laid out a number of proposals on the margins tax that will be voted on by TAB membership. Patterson outlined pluses and minuses on these positions:

Exclude all flow-through funds from total revenue. Lawmakers attempted a basic, if somewhat limited, attempt to limit taxation of flow-through funds in order to avoid the "pyramiding" effect of taxing the same good more than once.

TAB wants to consider some type of blanket language for all flow-through funds, which could range from settlements paid out to clients to payments to subcontractors to simple client settlements. The current bill takes a "laundry list" approach to flow-through exceptions. Whether language can be crafted to address all flow-through issues could be "a challenging drafting problem," Patterson told the audience at this morning’s forum.

Raise small business exemption from $300,000 to $1 million in total revenue. Raising the cap on exemptions – those businesses up to $300,000 now owe no margins tax – could encourage small business growth, Patterson said. It also acknowledges that revenue doesn’t always correlate to business size or profitability. For instance, you could be attempting to sell one expensive mink coat or a hundred pieces of costume jewelry.

What lawmakers likely were trying to do with the tax – especially through the option of either cost of goods or compensation – was to attempt to tap into a business’ ability to pay the tax, how profitable that business is or recognize that some businesses may be using more state services than their peers, Patterson said.

Raising the cap disassociates small businesses from the tax system while leaving their bigger brethren to pay the burden. Yes, a higher cap could be a goodwill gesture, but it also implies that the tax is implicitly bad, Patterson said. A sound tax system – in Texas or anywhere else -- should make sense and mirrors the economy. To exclude additional businesses implies the tax doesn’t work. "If we say that the tax doesn’t work for small business, aren’t we saying this tax doesn’t work?" asked Patterson.

Allow small businesses to include independent contractors in compensation. Patterson said she could think of no good reason to exclude independent contractors from the totals combined to calculate the compensation deduction. One argument that has been presented is that businesses would go ahead and hire people to avoid the margins tax. Patterson points out, however, incurs federal taxes that far outweigh the margins tax. The advantage is that the addition of independent contractors in the compensation exemption puts the compensation exemption on a more even playing field with cost of goods.

Create a 10-year business loss carry-forward. The goal is a noble one – recognizing that businesses that run in the red should not be subject to a tax – but it runs counter to the concept of a margins tax, Patterson said. It’s a mismatch between a negative net income and a positive gross income. A margins tax is based on a business having a margin of profit. That margin is what is being taxed.

The carry-over concept, while good in concept, is outside the scope of what the tax is intended to do. If the goal was to give tax relief to an unprofitable business, then the easiest way to do that would be to exclude or exempt businesses having a federal income tax loss. Of course, that also could lead to gaming the system, Patterson said. Such a proposal would require additional safeguards be considered.

Allow federal contractors to subtract the cost for the sale of goods or services to the federal government from the taxable margin. This may be good economic development policy, but it’s not so good as tax policy, Patterson said. It would allow taxpayers to exclude goods, even though the taxpayer does not own the goods. It also provides deductions for the cost of services, which would be a departure from the margins tax. This would clearly give a benefit to capital-intensive industry, but there’s nothing magical in being a contractor for the federal government, Patterson said. It provides an additional kind of benefit to federal contractors.

"No sweetheart deals"

Harvey Kronberg's Quorum Report is an excellent source for the latest behind-the-scenes information from the state legislature, and his coverage of Comptroller Combs's new margin tax rules is just as comprehensive.

Kronberg offers the following:

FIRST REVIEWS -- COMPTROLLER PLAYS IT STRAIGHT ON MARGINS TAX RULES
Dale Craymer of TTARA says no sweetheart deals in proposed new franchise tax rules.

With the announcement this morning from Comptroller Susan Combs that the rules for the new margins tax have now been published, no doubt more than a few folks winnowed through the fine print today looking for evidence of winners and losers in the rulemaking process.

Well, according to Dale Craymer of the Texas Taxpayers and Research Association, those looking for the proverbial "sweetheart deal" lurking in a subclause will be disappointed. Craymer tells QR that after reviewing the proposed rules today, he finds no grand conspiracies and "no sweetheart deals" that would favor one industry over another.

Few in this town are better qualified to suss out questionable language in the new rules than Craymer, a former chief revenue estimator in the Comptroller’s Office. He added that the rules, if anything, tend to be more restrictive than underlying statute on claiming passive income as well as what counts toward the cost of goods sold. That’s important because those two things are exempted from a business’ tax liability. The Comptroller’s rules also appear to be more restrictive on carrying losses forward.

In addition, Craymer said that the Comptroller appears to be moving toward having large businesses file combined returns instead of separate returns for each entity in the business. Such a move would appear directed at cutting down on tax avoidance.

The big takeaway on all this, according to Craymer, is that the new rules are really just the opening salvo in what promises to be a years long process of getting businesses used to the new margins tax. The state will get a better sense of the tax after the first audits and court cases arise.

Combs posts proposed Margin Tax rules

State Comptroller Susan Combs has posted the proposed rules for the Margin Tax. Read them here.

A 30-day public comment period precedes expected adoption of the rules in December.

TSCPA made its own recommendations to the Comptroller regarding the new rules. You can read our report to Combs here (PDF).

Board of Accountancy appointments

Governor Perry announced five appointments to the Texas State Board of Public Accountancy today.

Read the official announcement here.

TSCPA weighs in on the margin tax rules

Comptroller Combs has asked a number of groups for their insight as her office develops rules for the margin tax's implementation.

TSCPA's State Taxation committee recently submitted their suggestions - TSCPA members may read/download/print them here (PDF).