TSCPA Governmental Affairs

Coalition calls for margin tax fixes

TSCPA members are certainly no strangers to the myriad problems with the revised Texas franchise tax, but it looks like other business groups are taking notice as well.

In today's Quorum Report, editor and TSCPA friend Harvey Kronberg files the following report.

FOUR ASSOCIATIONS JOIN NFIB IN CALL TO FIX MARGINS TAX

Group even advocates a special session

In the face of what they believe is unfair treatment of small businesses in Texas, the leadership of the state chapter of the National Federation of Independent Business called today for a series of reforms in the new business margins tax that would blunt the tax’s impact on its members.

Among the reforms highlighted today at a press conference were many that were debated but not included in the original 2006 legislation creating the tax or the cleanup bill passed last session. Those include measures exempting non-profitable businesses from the tax, allowing businesses to deduct money paid to contract laborers, halving the margins tax rate for businesses with less than $20 million in gross receipts and requiring a two-thirds vote for lawmakers to raise the margins tax rate.

Another proposal to exempt more businesses from the margins tax was substantially different from past iterations. NFIB originally backed a straight-up exemption for businesses making less than $1 million. In the final legislation, lawmakers included a lower exemption of $300,000 but included a "stair step" approach in which businesses would pay a graduated portion of the tax until revenues hit $900,000. NFIB again suggested today that the full exemption be raised to $1 million. Will Newton, NFIB-Texas’ executive director, said that businesses should pay on a graduated scale beyond that. For example, businesses making between $1 million and $1.5 million would pay 20 percent of the tax, those making between $1.5 million and $2 million would pay 30 percent of the tax and so on.

Finally, the NFIB proposed that for businesses that paid into the old franchise tax system, the amount owed on the new tax should be no more than double the highest tax bull under the old system.

Joining the NFIB in the call for business tax reform was: the Independent Electrical Contractors of Texas, the Texas chapter of the Air Conditioning Contractors of America, the Texas Courier & Logistics Association and the Plumbing-Heating-Cooling Contractors of Texas.

It remains to be seen whether these proposals will gain traction or whether they will remain non-starters. A big concern for lawmakers would have to be balancing the books. The reforms proposed above would take revenue away from the state. Lawmakers would presumably have to find money elsewhere to pay for the reforms.

Newton said he was more concerned by what he thought was lawmakers’ lack of attention to the effects of the new tax. In a survey of its members, NFIB reports that a little more than half of the respondents said they were paying more under the new margins tax than the old franchise tax. More than a third said they experienced an increase of up to 200 percent in their tax bill over the old system; slightly more than that said they experienced an increase greater than 500 percent.

Several business owners at today’s press conference also said the rules on the new tax were only recently finalized and that many of their accountants don’t seem up to speed yet on the rules. Between the higher tax bills and the confusion over how to file the new tax, the old franchise tax system – reviled as it was – is looking better and better. In the NFIB survey, nearly three-quarters of the respondents said they’d prefer to pay the old tax.

"I think it’s a boondoggle that has nailed small business to the wall," said Kurt Summers, chairman of NFIB-Texas’ Leadership Council. "And we need to let our legislators know we’re not happy and we’re not tolerating it, all the way to the top. I think we need to let our Governor know he needs to fix this."

Gov. Rick Perry could call a special session to address reform of the margins tax. Newton did not go so far as to ask Perry for a special session but said in a press avail afterward that he wasn’t ruling out doing so. "We can come back and fix this thing," he said.

Perry spokeswoman Allison Castle said this afternoon that the new business tax has yet to be collected, so "they’re putting the cart before the horse." Lawmakers will have the opportunity to make necessary changes next session, she said. The Governor backed changes in the business tax because it ensured that more businesses paid into the system so it was the right thing to do, she said.

Meanwhile, she said that Perry has voiced support for changes in the tax if the revenue raised is substantially greater than anticipated or if there are "unintended consequences on segments of the economy."

Chris Cutrone, a spokesman for Speaker Tom Craddick, said that several members have voiced concerns over the business tax issue. "We are here to listen," he said, adding that a Business Tax Advisory Committee was studying the effects of the new margins tax on Texas businesses.

Lt. Gov. David Dewhurst spokesman Rich Parsons said, "Until the state collects the tax, it’s premature to discuss what changes might be necessary. But the Lieutenant Governor is watching the issue closely and as with any tax, he wants to ensure it is as low as possible and fair and equitable to everyone."

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.