TTRC considers new business tax proposal

Get ready to gird your loins: the Texas Tax Reform Commission is gearing up to propose a new business tax to replace the state's antiquated franchise tax.

[Former state Comptroller John Sharp] said the Texas Tax Reform Commission is zeroing in on a replacement for the current business franchise tax that would help raise the revenue needed to cut school property taxes by an estimated $5.8 billion a year – a reduction of about a third.

The new franchise tax could be kept at a low rate because it would affect virtually all businesses except for sole proprietorships – a notable contrast to the current franchise tax, which Mr. Sharp estimated that more than 90 percent of businesses avoid through loopholes.

"You can drop the franchise tax from 4.5 percent to 1 percent if everybody participates in the system," said Mr. Sharp, whose panel will make recommendations to Gov. Rick Perry and the Legislature. Their proposal will also include a mix of consumer and business taxes.

At the same time, Mr. Sharp added, the new business tax would be friendly to companies that invest in the state and hire a large number of Texans.

"We're looking at a tax that lets you base your deductions either on the cost of goods sold or on the personnel you employ," he said. "For every person you hire, your taxes would go down."

"If you're out of state and you sell products in Texas but you manufacture those products in California, you're going to pay higher taxes than if you had built a plant in Texas and hired people in Texas," he said. "If all your buildings and employees are sitting up in Chicago, you're going to pay more."

That approach, the former state comptroller noted, means that a business tax based on payroll – such as was considered in the Legislature last year – is "not on the table."

According to the Statesman, that may not be all.

[Sharp] also said the commission is looking at broadening the state's 6.25 percent sales tax. The tax now excludes some goods, such as bottled water and newspapers, and some services, such as legal work and haircuts.

The business tax idea sounds fine. Frankly, it's the sort of thing that I'd be advocating if I were on the TTRC. The broader your base, the shallower the tax can be. Makes all kinds of sense, and in theory it should be acceptable to everyone. In the DMN story, Sharp claims it will be:

While opposition from business groups helped kill a proposed new franchise tax in the Legislature last year, Mr. Sharp said an increasing number of business leaders "are coming up to me and saying it's time" to revise the state's tax system so that all companies pay their fair share.

I'll get back to that in a minute. For now, the devil is in the details. What loopholes will various special interests seek? What effect will the broadening of the sales tax (another thing which makes sense in theory) have on the people who won't see any benefit from property tax reductions? When will we see a Legislative Budget Board analysis of this? And finally, what effect will it have on school finance? You remember school finance, right? Is this all being done under the assumption that the level of school funding is fine as it is, or under the assumption that it needs to increase?

As to the issue of support for this broader-yet-shallower business tax, I'm not convinced that the usual suspects won't try to kill it in favor of more regressive measures. As the Statesman story notes, that's what they're already saying:

Byron Schlomach of the Texas Public Policy Foundation, which advocates for smaller government and lower taxes, said he hopes the commission keys in on consumption taxes, such as the sales tax and the roughly $3.5 billion in surplus money now sitting in state coffers, to replace property taxes.

"We have to ultimately judge this policy by what it's long-term effects are likely to be," Schlomach said. "The fact is that a business tax taxes innovation, work effort, investment and job creation."

My interpretation of this statement is that the TPPF will oppose any "new" business taxes. This is Rick Perry's base. I cannot think of a single example of Perry going against them. As I said before, Perry has some hard choices ahead of him. Until I hear the words that John Sharp is currently saying come from Rick Perry's mouth, I'm not at all convinced that Perry believes in them and will advocate for them.

Finally, both stories refer to this new tax as possibly being on "gross receipts" for businesses. I received the following email from John Sharp (which is what spurred me to find these stories), which he sent to various real journalists plus me, to clarify this:

Just as a quick point of clarification, there have been several references to the third option of taxes that I and my commission are considering as a gross receipts tax. That particular option can no more be called a gross receipts tax than a sales tax can be called an income tax. Although they use a similar basis, a gross receipts tax to business connotes a tax on the entire gross receipts of a company. That is far from the case with this option. It is accurate at this stage to say it is an option under consideration. It is also accurate to say it is a revision of the state's franchise tax and some people have referred to it as a tax dealing with margins, but it is not and never will be a gross receipts tax. Thank you for your time.

So now you know.

UPDATE: Aaron Pena thinks the sales tax will also be raise a half-cent. I'd think that might be a problem for some folks. We'll see.

Posted by Charles Kuffner on February 01, 2006 to Budget ballyhoo | TrackBack