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Business tax not expected to hit goal

Monday, May 17, 2010
by Peggy Fikac
San Antonio Express-News

It was a tax born in a barbecue joint, the story has it, and now it's giving state budget writers heartburn.

The Texas business tax comes due again today, and no one's suggesting it will yield anywhere near the approximately $6 billion it was initially forecast to produce annually.

It yielded $4.5 billion when first collected in 2008, based on the previous year's business activity. Last year, collections dipped to $4.3 billion. State Comptroller Susan Combs predicts the same amount will be collected this year.

“I think it was set up to fail,” said Sen. Kirk Watson, D-Austin, noting the levy was passed to help cover the cost of a cut in property tax rates for school districts. “I think when it was passed, they knew that it would not provide the appropriate swap that they were looking for, that it would not cover the reduction” in property taxes.

Senate Finance Committee Chairman Steve Ogden, R-Bryan, said the school finance package was a net tax cut — back when the state had a surplus.

“To date, it's been very successful in reducing the school property taxes and increasing the state share of funding public education,” Ogden said. “Going forward, it could be a problem because the state's economy is in recession.”

The shortfall in expected collections has made things worse for lawmakers confronting a budget shortfall as big as $18 billion through the next two-year budget period.

The business tax was part of a package championed by Republican Gov. Rick Perry and approved by legislators to meet a court order to revamp school funding in 2006.

Experts cite several reasons why the tax failed to live up to expectations.

It's a one-of-a-kind tax, unique to Texas, and therefore hard to forecast. It's complicated, and businesses have ended up taking bigger exemptions in one area in particular, cost of goods sold, than originally projected. And the lagging economy has played a role.

The reason for the tax's structure is simple, said John Sharp, the former state comptroller tapped by Perry to head a business-based panel that recommended the tax: “Texas is different from all the other states.”

Changes to the state's previous business tax were designed to increase revenue by closing provisions that had allowed many businesses to avoid paying.

Among other points, lawmakers, in extending the tax to business partnerships, wanted to avoid the prospect that it would be construed as an income tax, which would require a constitutional amendment.

Sharp, a Democrat, said he initially sketched out the format of the tax on butcher paper at a barbecue-fueled brainstorming session at Kreuz Market in Lockhart. He kept it for a long time, but “it was so greasy, I finally threw it away,” he said.

The tax is based on gross receipts, and businesses can choose whether to deduct cost of goods sold or employee compensation. Or they can take a standard deduction.

“It's a tax that doesn't exist in nature anywhere else,” said Billy Hamilton, former deputy comptroller.

That's what helped it pass, said Dale Craymer of the business-based Texas Taxpayers and Research Association.

“What made it sellable in the Legislature was not what it was. It was sellable because of what it was not. ... It's not a gross receipts tax. It's not a net income tax. It was somewhere in the middle.”

That's also were some confusion occurs in calculating the tax, Craymer said.

“There are still some gray areas of the tax that have yet to be filled in and won't be filled in until we go through audits and court proceedings,” he said.

Combs' office has increased field audits on the tax. As of March 31, it had completed 1,528 audits, the vast majority of them desk audits. But there were 1,438 audits still under way, and by far the majority of those were field audits.

The comptroller seeks to audit on a rolling basis — generally every four years — all taxpayers whose payments add up to 65 percent of a particular tax paid for the year. For the business tax, that means about 2,050 reporting entities.

Associate Deputy Comptroller Mike Reissig said the agency's on track to meet that goal, with 69 of the 2,050 audited and another 381 audits in progress.

As of March 31, the audits overall had yielded $9 million in extra tax assessments — and $9.6 million in refunds.

“It's critical that they become a respected auditing agency so that the word will get out that you're not going to cheat Texas out of paying the fair share of taxes,” said House Ways and Means Committee Chairman Rene Oliveira, D-Brownsville. “It's been a toothless bear until now, so we're going to still see.”