Quorum Report: Margins Tax Cleanup Bill Would Double Exemption for Small Businesses

This article can be found at Harvey Kronberg's Quorum Report.

Change in the way apartmental rental income is counted would pay to exempt another 60,000 small businesses; NFIB says margins tax still doesn't do enough for marginally profitable companies.

Mothers are fond of saying errors have consequences but the authors of patch legislation on the business margins tax are finding that correcting errors can have positive fiscal consequences.

In fact, setting those errors right will net enough revenue to exempt about 60,000 more small businesses from the impending tax. Reps. Jim Keffer (R-Eastland) and John Otto (R-Dayton) told House members that they were able to do this by raising the revenue level to qualify for the small business exemption from $300,000 to $600,000.

The cost of excluding the 60,000 extra small businesses would total $72 million in the first year of the biennium and $74 million in the second year. That cost will be more than offset by an error in the way that apartment rental revenue was treated under last year’s margins tax legislation.

Those changes didn’t appear enough to appease the state’s primary advocate for small businesses. NFIB/Texas has long pushed to raise the exemption to $1 million. Under HB 3928, businesses that generate $600,000 or less would be entirely exempt from the margins tax while those above the threshold would be on the hook for the entire tax bill. NFIB spokeswoman Laura Stromberg said, "Our reaction is it’s a start but (the exemption) needs to be higher."

She added that the margins tax also needs to factor in profitability, noting that businesses that are barely breaking even or even losing money face the same tax burden as profitable companies. "We want to see profitability factored into the equation," she said.

The Senate could make those changes, but under the House version, "It’s a sad day for small businesses in Texas," she said.

According to Keffer and Otto, tax writers in last year’s special session erred in writing that section by making net income rather than gross income subject to the tax. Otto signaled at the time that the language was an error and would be corrected at a later time. But in the meantime, the Comptroller determined that to change the apartment rental clause back to its original intention would net the state nearly $200 million annually.

That revenue window allowed Keffer to do a few things, including raising the business tax exemption. According to Otto, members were already asking to raise the exemption so this seemed an easy way to anticipate the subject of several amendments.

The representatives use the rest of the $200 million to keep current rules on apportionment, which allows businesses to exempt the portion of their revenue raised outside of the state.

Overall, the changes almost entirely cancel each other out. Summing up the pluses and minuses in HB 3928 yields a net gain for the Treasury of $93,000 for the biennium.

House members also adopted calendar rules for floor debate on the bill, which is expected to happen Tuesday. Amendments are due Sunday by 5 p.m. Also, the amendments can raise revenue but they can’t create a net loss for the margins tax.

In other words, the rule creates a floor but not a ceiling. Keffer hastened to point out, though, that any net increase in the revenue side of the franchise tax is highly unlikely. If it were to happen, he added, by statute the added revenue would go toward the state’s property tax reduction fund.

This article is copyrighted material and reprinted with permission of Quorum Report.