June 17, 2008
Coming attractions on the business tax

From last week, the Chron's Alan Bernstein notes a problem the Republicans will be have to deal with for November and beyond:

[Thursday], across Discovery Green from the downtown convention, two Democratic state House members and Democratic candidates for the state House used a news conference to bash the state margins tax on businesses -- the tax pushed by Gov. Perry and adopted by the Republican-controlled Legislature.

Rep. Scott Hochberg, for instance, said the tax was supposed to a fair levy, but that in the end, "if you didn't have a lobbyist in the room, you didn't get your deal." He said the tax burden falls too heavily on small businesses. And many Republicans agree with him.

Dave Mann of the Texas Observer homes in on that:

The party platform, finalized yesterday, calls for repeal of what one delegate termed "Perry's unconstitutional business tax." Many believe the business tax is a de facto income tax and thus violates the Texas Constitution. "Gov. Perry and the Legislature broke their promise on taxes," said another delegate. "It's the largest tax increase in the history of the state."

Eye on Williamson provides some context:

If we can for a second hearken back to the special session(s) of 2006, it may help a little. Texas' GOP controlled government had to do something, no matter how bad the "fix" was, or schools wouldn't open on time. Because of a judge's ruling that a new funding mechanism had to be in place by June 1st of 2006, they were boxed. The margins tax was the best the fractured GOP legislature and a besieged governor - with three challengers nipping at his heals - could come up with. If schools didn't open on time that could have fatally damaged Perry's reelection and they may have had even deeper losses in the legislature. That many in the Texas GOP are now trying to run away from their plan, and put it in Perry's lap, is not surprising. Responsibility and accountability is not in the GOP's DNA after all. This was a short-term political solution, not a permanent long-term fix to the school finance problem, and they knew that back then. Shortly after it was passed the Lt. Gov. was already talking about "tweaking" it.

"We're going to look at tweaking, re-examining the tax," said Dewhurst, who holds out hope that instituting technical corrections in the tax package could solve imbalances without having to adjust tax rates. Unfortunately, long-running controversies involving school finance and tax reform in the state have shown that painless solutions are few and far between.

Put in proper context it's now easy to see how this is going to be Exhibit A against Perry by all his GOP cohorts that will try to unseat him in 2010 - Dewhurst, Hutchison, Patrick. This GOP-invented tax has become anathema to the GOP base. This new tax is hitting businesses, in particular small businesses, especially hard and the Republicans are responsible for it. Heading into the 2008 general election that's really bad timing and it's tarnishing the GOP brand even further.

There were then, and still are now, other ways to fix this problem, permanently. But that would take leadership, which is lacking in Texas right now. At this point and time if we want to lower property taxes, permanently, and do away with the worthless tax swap of 2006, then we have two options. Jack up the state sales tax, which would increase the already large tax burden on the poor and middle class, or institute a modest progressive state income tax, which would reduce the tax burden on the poor and middle class, and increase tax fairness across the board.

I think there's going to be a lot of pressure to repeal the business tax and raise the sales tax to cover the lost revenue, rather fixing the problem with the business tax, which is that it hits smaller businesses much harder than big ones. While the opportunities to bash Governor Perry and the Republicans for this tax will be plentiful, Democrats are going to need to exercise some care in how they do it, lest they wind up making the case for a sales tax hike for Perry and Speaker Craddick, who has wanted to swap property taxes for sales taxes all along. Watch how the issue gets framed - see the extended entry for the full statement from Rep. Hochberg and his colleagues for a good example - and get ready for a fight in 2009.

Finally, it should be noted that yesterday was, at long last, the first day that the new business tax needed to be paid. Sherrie Matula put out a press release that made some sobering observations:

Small business owners in House District 129 have come to me, expressing their concern about this new business tax because of the increased tax burden they are facing. The owners of a Seabrook company that provides products for offshore drilling is seeing an increase in their business tax from $350 in 2007 to $3500 in 2008. An anchor company in Nassau Bay is facing an increase from $1800 to $38,000. A school architecture firm is seeing their business tax bill rise nearly $115,000 this year. A space industry firm is facing an increase of over $30,000.

Yeah, that sounds like a problem to me. Today's Chron has more:

The tax is bad news for thousands of business owners, said Will Newton, executive director of the Texas office of the National Federation of Independent Business.

A survey by the group, he said, found that 84 percent of small-business owners saw their tax bills increase by more than 100 percent under the new levy. Many of the respondents didn't have to pay the old franchise tax, which the new tax replaced.

The new tax is 0.5 percent or 1 percent -- depending on the type of business -- of a company's gross receipts for 2007 minus certain deductions.

All sole proprietorships are exempt.

An estimated 900,000 partnerships and other businesses are subject to it, but businesses with gross receipts of less than $300,000 or a tax liability of less than $1,000 don't have to pay. According to some projections, only about one-third of the affected businesses actually had to pay the tax.

"Today, on the day this tax is being collected from hundreds of thousands of business owners, our state officials still don't know how much this tax will bring in, which sectors of the Texas economy will be hit the hardest, how many jobs will be lost or how many businesses will be forced to close," Newton said.

His organization wants Gov. Rick Perry, who lobbied for the new tax in the face of a Texas Supreme Court order for school finance changes, to call a special legislative session to revise it.

Spokeswoman Allison Castle said Perry wants to wait for the regular legislative session to convene in January before considering any changes.

"If this tax brings in more revenue than anticipated, then it may be tweaked," she said.

You can tweak all you want, but that's not going to fix the underlying problem. Have fun with that.

Democratic State Representatives Scott Hochberg (Dist. 137) and Ana Hernandez (Dist. 143) and legislative candidates Sherrie Matula (Dist. 129) and Joel Redmond (Dist. 144) held a press conference today to discuss the devastating affect of the Republicans' revised franchise tax on small businesses. On June 15th, businesses will be required to pay the new tax for the first time since its passage in 2006, and now that it's due, many small business owners are discovering that their taxes have grown exponentially, while big corporations were rewarded.

"At a time when small businesses are facing skyrocketing health care costs and record gas prices, this Republican tax hike may be the last straw for many small business owners," said Rep. Scott Hochberg. "Governor Perry and the Republicans in the legislature let lobbyists write loopholes to protect their big business clients, and left the tab for small businesses to pick up. That may be business as usual for this administration, but it's bad policy for Texas."

When the Legislature attempted to "reform" the franchise tax in 2006 as part of a school finance plan, the stated goal was to close tax loopholes on certain corporations to make everyone pay their fair share, but the Perry/Republican plan failed to achieve that goal, and now small business owners are the ones shouldering the burden. The overly complicated tax threatens the financial viability of small employers and is heavily tilted toward multinational corporations, Wall Street investment firms and big industries like oil and gas.

"Small businesses are a crucial sector of our economy, but as I travel around my district, I hear from business owners who are struggling to keep their doors open under this heavy tax burden," said Sherrie Matula, Democratic candidate in State House District 129. "Every one should pay their share, but we need a tax system that is fair, equitable and serves the public interest, not special interests."

The new franchise tax is also opposed by a number of business groups, including the Texas Chapter of the National Federation of Independent Business, Independent Electrical Contractors of Texas, the Air Conditioning Contractors of America Texas Chapter, the Associated Plumbing-Heating-Cooling Contractors of Texas and the Texas Courier & Logistics Association.

Posted by Charles Kuffner on June 17, 2008 to Budget ballyhoo

I agree: "Democrats are going to need to exercise some care in how they [bash Perry], lest they wind up making the case for a sales tax hike."

The Ds need to start taking alternatives (like a higher sales tax or once again spending the Rainy Day Fund for ongoing expenses) off the table before they get boxed in. As Eye on Williamson said, sooner or later Texas is going to run out of alternatives and have to talk honestly about a personal income tax. Ds should be helping accelerate the process, even at the cost of passing up some easy political shots.

Posted by: David Siegel on June 18, 2008 12:35 PM