January 29, 2007
The business tax needs to be fixed already

Looks like the new business tax may need to be fixed even before it gets put into effect.

The law dramatically expands the number of business taxpayers. But it's also riddled with errors and in some cases created new loopholes that, if not fixed, could cost the state dearly in lost revenue; in other cases it's been drawn so tightly that companies' tax liabilities could go from almost nothing to thousands or millions of dollars, experts say.

In one glaring error, lawmakers botched the fix to one of the most popular tax shelters: Limited liability partnerships that doctors and lawyers often use to avoid business taxes were left off a list of taxable entities. State officials say such partnerships can still be taxed. But without a rewrite, that part of the law could invite a lawsuit.

"If they can clearly put that in a statute, then it may save us a court case down the road," said Jerry Oxford, supervisor of the franchise tax policy section in the state comptroller's office.


"The devil's always in the detail," said state Sen. Steve Ogden, R-Bryan, who describes keeping the tax law intact as his most important job this session. "What exactly do you mean by 'technical problem'?"

For example, one glitch -- the product of what has been described as a typographical error -- gives certain real estate investors a huge tax break by granting them deductions no other entity can get.

Other passages give breaks to one industry but not to others doing virtually the same thing. [Bob Owen, a legislative expert at the Texas Society of Certified Public Accountants], said that in one case manufacturers can take deductions for subcontractor payments that the service industry cannot.

In another section, he said, a "flow-through" provision unfairly allows only a handful of industries to exempt from taxes certain revenues that pass in and then pass right back out.

Lawyers who win a legal judgment, for example, could use the provision to remove from the taxable equation the award given to the client and the money paid to outside attorneys -- leaving only their fees. But travel agencies, which get a lot of money that goes right back out to airlines, tour operators and the like, would have to include the entire amount they took in, Owen said.

"I think it is a major issue," he said. "It will probably have a major revenue impact."

Would have been nice to have known this, oh, I don't know, maybe last year sometime. Like, you know, when the bill was being voted on. Well, you know what they say: There's never time to do it right, but there's always time to do it over. Link via Eye on Williamson.

Posted by Charles Kuffner on January 29, 2007 to Budget ballyhoo