State & Local Tax Blog

What the Texas Legislature Hath Wrought

What the Texas Legislature Hath Wrought
We have been saying all along that we thought that Texas legislators didn’t really understand what they were voting for when they enacted this new “margin tax” in Texas. Texas has alway been “business friendly”. It’s a major factor businesses consider when deciding to relocate to this fair state. But the special committee headed by John Sharp that conceived of this tax apparently suffered from California envy. Now Texas has the most onerous corporate income tax in the Union. The legislators who voted for this thing are already hearing it from the Taxpaxers and you can bet the noise will get louder and louder. The Comptroller’s Office is charged with implementing this stinker and they seem to making a huge effort to educate the public. The office of Texas Comptroller is an elected position. How would you like to be the Comptroller responsible for implementing the worst tax ever passed by the State of Texas? Susan Combs is just the messenger, but she’s getting an earful. She could turn into a hero, if she becomes the public champion of the “Let’s Repeal this Tax” committee. Then the legislature would be under a huge amount of pressure. We’ll see how this all develops.

Taxation is not usually headline news, but this tax is drawing a lot of press. Here’s some news from around the state.
First out of the gate is an article by Kate Alexander of the AUSTIN AMERICAN-STATESMAN on Friday, May 16, 2008. Demands for changes to Texas’ new business tax grew louder Thursday from small-business owners who say they will be unfairly burdened. (See this link.)
Speaking at an event to launch the Texas Business Tax Coalition, electrical contractor Keith Bell said the tax bill for his Dallas-area firm will skyrocket from about $3,900 to $50,000 under the so-called margin tax, which is due for the first time in June.
I cannot believe that if the legislators knew that the inequities and the unintended consequences were going to occur … that they would have voted for it,” said Bell, who leads the government affairs committee for the Independent Electrical Contractors of Texas, a trade association.
But now that “the devil has been exposed in the details,” Bell said, the Legislature needs to act.
For most qualifying businesses, the tax is 1 percent of their total revenue minus one of three options: the cost of goods sold, employee compensation or 30 percent of total revenue. Adopted in 2006, the tax applies to about 200,000 more businesses than the franchise tax it replaced.
State Reps are Hearing It 
State Rep. Jim Keffer, chairman of the House Ways and Means Committee, said legislators are sensitive to the concerns about the tax and are open to addressing any problems once more is known about the tax impact.
“Our goal is always to keep Texas business-friendly,” said Keffer, an Eastland Republican. “We will work hard to make sure that no industry is overtaxed and overburdened.”
It is a mess,” said Sen. Dan Patrick, R-Houston, who was not in the state Senate in 2006 when the margin tax was adopted.
The tax is convoluted and confusing, and it punishes many small businesses, Patrick said.
State Rep. Debbie Riddle, R-Tomball, opposed the tax in 2006 and said it continues to be a mistake.
“We need to nuke the tax, we need to repeal the tax, we need to drive a stake through the heart of the margin tax,” said Riddle, who attended the coalition event Thursday.
The Governor is Hearing It
Gov. Rick Perry has said the Legislature should revisit the business tax if it brings in more revenue than anticipated or if there are unintended consequences, spokeswoman Allison Castle said.
Check out this Article in the Dallas Business Journal by Dave Moore. 
“It’s the only tax of its kind in the United States, and perhaps the world… “
This isn’t the type of headline the Comptroller is hoping for.
According to Dave Moore: Beyond the tax measure’s complexity, business owners are hoping to squelch what they claim is the law’s punitive nature.
“It’s not a fairly levied tax,” said Pete Snider, president of Mesquite-based Alco Glass Inc., which does high-rise commercial and residential glass replacement.” It penalizes a businesses when they’re not in a profitable mode. It disregards your net revenue.”
Snider, for example, reported a loss of $18,000 in 2007, but he calculates he’ll owe Texas $6,000 in margin taxes, because the margin tax applies to his cost of material, not his relatively thin profit. Snider said he’ll have to take a loan out to cover the tax bill.
So Who Came Up With this Tax?
Dave Moore names names: Efforts to contact the leading author of the tax, John Sharp, were unsuccessful. Sharp was chairman of the Texas Tax Reform Commission that formulated the margin tax; he was Texas’ comptroller in the 1990s.
Rich Parsons, press secretary of Lt. Gov. David Dewhurst, said it’s likely Dewhurst will wait until after the tax is collected before he decides if it should undergo further reform. As lieutenant governor, Dewhurst sets the legislative agenda for the Texas Senate.
The El Paso Times Weighs In 
The El Paso Times had this article in the May 12 edition. It was a report about a recent visit by Texas Comptroller Susan Combs to El Paso at the invitation of the Greater El Paso Chamber of Commerce, who apparently gave her an earful. She noted that the first year of the tax “is really tough” and that she would furnish the Legislature with as much information as possible about the tax’s effects. That includes some business being hurt.
They make a good point about attracting business to Texas: “Also, a destructive franchise-tax structure would be a huge deterrent to businesses thinking about coming to Texas. We need to be thinking about ways to attract business, not drive it away … So far, Texas is in better economic shape (knock on wood) than most of the rest of the country. We need to keep it that way, and a devastating franchise tax isn’t a good way to do that.” Ouch.
The Service Industry May Be Hardest Hit
Leslie Wimmer of the Fort Worth Business Press had this quote from Cyndy Kimberling, owner of Kimberling, McFarland and Associates accounting firm. “I know of several of our clients who could be put out of business because the new franchise tax is based on gross receipts rather than bottom line profits,” Kimberling said. “It is really going to hurt some of our clients.”
The service industry may be hardest hit, she said.
“The ones who are really suffering are going to be your service businesses such as trucking companies,” Kimberling said. “They have a lot of expenses such as fuel and truck maintenance. The new franchise tax does not consider these expenses as cost of goods sold so they do not get to deduct them from their gross receipts.”
“I think you’re going to see some people get voted out of office because of this…” This was a statement of a business owner quoted in an article in the Dallas Morning News by Terrence Stutz.
Among the disenchanted taxpayers is Dallas businessman Andy Ellard, owner of a machine shop with 28 employees. Mr. Ellard said the size of his tax bill doesn’t match up with the pledges of state lawmakers. “We were promised a number of things, and none of them happened,” said Mr. Ellard. He estimated that he would pay about $8,900 under the new business franchise tax, more than double the $4,200 he paid last year.

“There are going to be some mad business owners [on June 16], and I think you’re going to see some people get voted out of office because of this,” he said.
“Businesses are just waking up to this,” said Will Newton of the National Federation of Independent Business, which has become one of the biggest critics of the new tax. “Texas used to be good for business, but this new tax is making us one of the most anti-business states in the country.”
To top it off, Mr. Newton said, “It’s the most confusing, complicated system of taxation ever devised. Just the cost of compliance [preparing tax returns] has been devastating for some of our members.”
“This tax is going to cost jobs in the long run,” he said. “If you want to make sure the Texas economy tanks, just enact a tax that hits small businesses hard.”
“The way I see it, it’s like kicking a guy when he’s down,” Mr. Snider said, referring to the slowing economy in Texas.

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