The Band-Aid for the Business Tax Bullethole

The business franchise tax doesn't work. But while a Senate leader argues for reform, the House Ways and Means Committee considers making exemptions permanent.
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“None of us were elected to raise taxes on anybody. But the margins tax is different.”

—Sen. Steve Ogden, R-Bryan on the first day of the legislative session.

It was never a secret that the state’s business margins tax didn’t balance. It didn’t balance when the Legislature instituted it in 2006 to make up for a giant property tax cut. Back then, the apolitical Legislative Budget Board explained the math didn’t work—and the state would forever be short on cash. But the governor and the vast majority of the Legislature didn’t believe them, and decided to swap huge property tax cuts for a new tax on businesses. Five years later, that tax swap is heavily responsible for our unprecedented shortfall. It’s part of the reason that the House just passed a budget with drastic cuts to healthcare and education. The tax simply doesn’t produce enough money, and without that revenue, we don’t have enough to balance out the costs of this state. And until we fix the tax structure, the Comptroller’s office has said that Texas will be over $10 billion short every budget cycle.

Senate Finance Chair Steve Ogden, R-Bryan, has been saying state must reform the business tax since the very first day of session. In a lengthy speech on the state’s budget crisis, Ogden implored his colleagues to consider reforming the business tax—even if it might look like they were raising taxes. Bryan, Texas, isn’t known for RINOs, and Ogden is no liberal. But the guy can do math and he thinks things like education are important to the future of the state. Without rewriting the business tax, the state will have to cut more and more from the budget each session—and we’re already scraping bone as it is.

But try as he might, Ogden is just talk. It’s not his fault; any major tax bill must come out of the House, not the Senate. And the House Republicans who make up a two-thirds of the body, have been unwilling to hear any bill that could possibly be construed as a tax increase. On the House Ways and Means Committee, the committee responsible fo tax bills, there’s been little talk of large-scale reform to the broken tax. Instead, they’re considering a permanent exemption for small businesses.

House Ways and Means spent much of their Monday meeting acknowledging that the tax doesn’t work. Not only does it raise less than the state needs, but it particularly burdens small businesses. It taxes a company’s gross intake, and companies can subtract either the cost of employees or products. In practice, that means a business can be in the red and still owe hefty taxes.

“This tax doesn’t care whether you make a profit or not—it’s gonna get ya,” says Will Newton, the Texas state director of the National Federation of Independent Business, when he testified in favor of a permanent exemption.

The original version of the tax exempted companies making less than $300,000, but lawmakers temporarily expanded that to include businesses making less than $1 million. According to some lawmakers, prior to the exemption, some small companies were spending as much on accounting services to pay the tax as it cost to pay the tax itself. Small companies want to make that broader exemption permanent, so they can avoid such dilemmas. If lawmakers don’t act, those small businesses will once again be paying the tax they hate.

“They’re going to feel like we raised taxes on them,” warned committee chair Harvey Hilderbran, R-Kerrville, who authored one of the bills to make the exemptions permanent. Such warnings are the reason that real reform is so tough—just say the words “tax increase” this session and a few skittish Republican moderates will hide under their beds, afraid of potential primary opponents who might lurk in the shadows.

It’s not that the exemption is unreasonable—it’s that the entire system isn’t working. And if the House doesn’t do something about it this session, we’ll be back to cut the budget even more next year. But many representatives are afraid to fix the broken system, particularly after so many Tea Party freshmen got elected on a platform of cutting spending and no new taxes. Many conservatives argue that the state must “live within its means”—a fine point, except that five years ago, we decided to drastically decrease those means.

Rep. Trey Martinez-Fisher broached the topic of whole-sale reform at the Ways and Means meeting. Is there was any chance, he asked Newton, that the business community could “link hands and say, ‘Let’s not do anything until you can fix everything.’?”

It’s not that small businesses wouldn’t like to see the tax reformed entirely. “My members have said loud and clear that they abhor this tax,” said Newton. “There’s a lot of hard feelings in the small business community.” But Newton’s primary goal at the meeting was to advocate for an exemption—not a new taxing system.

Criticism for the measure was mainly directed at the potentional costs of the measure. While the exemption would cost around $75 million per year, Hilderbran says he’ll link it to a new source of revenue, so that there will be zero total cost to the state. Lobbyists in attendance tittered in speculation about just which tax would get replaced, but no one seemed expecting a new approach to businesses taxes.

Timidly, freshman Rep. Lanham Lyne, R-Wichita Falls, asked about the potential for a different type of tax. Instead of taxing on gross receipts, he asked, could the state consider taxing based on a business’ income?  “I know this is blasphemy,” he mused, “and I’ll try not to say it real loud.”

But no one on the committee jumped. Instead, they continued to discuss the need to exempt small businesses from an unfair tax—a reasonable argument that barely touched on the biggest problems with the tax. In the House, the state’s leaky tax system is almost taboo among conservatives—spoken in whispers.

And while members may have trouble hearing such quiet sounds, it’s too bad they can’t hear the speeches in the chamber across the hall—where Steve Ogden is speaking quite audibly.