Newsroom

Report: State business tax falling short of expectations

Thursday, November 04, 2010
by Mike Ward
Austin American-Statesman

On the day after the general election, and after months of official reluctance to talk publicly about the issue of taxes, a task force on Wednesday aired its report on a controversial business margins tax that was designed to help boost state revenue.

It concludes that the tax is generating much less money than expected, adding to a whopping state budget shortfall that could perhaps reach $24 billion.

That means the Legislature will face even more difficult budget choices when lawmakers convene in January, without the prospect of the margins tax bringing in loads more cash.

As Comptroller Susan Combs, the chair of the task force, acknowledged, "There is no cure in this report for the budget."

According to the report, $3.9 billion in margins tax revenue was collected in the past fiscal year, compared with the $6.4 billion projected — a $2.5 billion gap.

Of that difference, state officials attributed about $1 billion to the continuing recession and the other $1.5 billion to businesses paying less than expected.

State Sen. Kirk Watson, an Austin Democrat who is one of 21 members of the task force, said the short collections highlight why the state needs to reform its budget process from top to bottom.

"For some time, we as a state have masked structural deficits in our budget in recent years, and it's time we stopped doing that," he said. "We're going to find ourselves digging the state deeper and deeper into a hole."

Several business executives on the task force suggested that tax reform needs to be up for discussion as well. They noted that many businesses have faced higher taxes under the margins tax, and some questioned whether additional business taxes would thwart economic growth when the economy is still reeling.

"We got maybe one of the three goals we set" for the tax, said task force member Eric Donaldson, an official with Houston courier service Hot Shot Delivery Inc.

As for the state budget crisis, he noted, "in business, when we have less money to spend, we spend less money."

Saying that the current economy is the "worst in 75 years," panel member Dale Craymer, president of the Texas Taxpayers and Research Association, said that although the margins tax has brought in less revenue than hoped, it has put Texas on par with business taxes in many other states — though the overall tax burden in Texas remains less.

Before 2006, the state's business tax, known as the franchise tax, was essentially a 4.5 percent tax on a company's profit.

The new margins tax reduced the rate to 1 percent while broadening its application. Now, it is applied to the annual revenue of qualifying companies minus one of three options: the cost of goods sold, the cost of employee compensation or 30 percent of total revenue.

The business sectors of manufacturing, mining, oil and gas, retail and wholesale trades and professional services pay the biggest share, statistics in the report show.

Though several task force members noted that taxes have roughly doubled for some businesses, officials said it has dropped for many others — many of them small firms.

Even so, state Rep. Myra Crownover, a Denton Republican who is a member of the budget-writing House Appropriations Committee, warned against any assumptions that the solution to the budget crisis might be to raise taxes.

"The voters spoke last night," she told the task force. "We are a low-tax state, and the voters like that."

Combs said the report, which will be published in its final form after task force members make final edits to Wednesday's draft, was never intended to recommend changes to the margins tax. Instead, she said, it was intended to gather data that the Legislature can consider.

"We were not asked to be the tax commission," she said.

Watson suggested that a better approach would be to appoint a special panel including business leaders that could examine the state's tax structure and recommend changes.

"What this report shows is that this mechanism has failed, from the standpoint of what we expected it to do," he said. "It's time that we stop relying on debt, diversions and delay in writing the state budget. We are in dire need of budget reforms."