Texas Businesses Studying Governor’s Proposed Tax Structure

March 31, 2006

As the owner of his family’s 28-year-old company, Kurt Summers is one of the few Texas businessmen that pay state business taxes.

The roughly $8,000-a-year that he pays on Austin Generator Service is a tax that Gov. Rick Perry recently called “voluntary.”

For years, lawmakers have been trying to fix the loophole-ridden franchise tax that most Texas businesses, including Dell and SBC, don’t pay.

The latest attempt, endorsed by Perry, will likely be the starting point for a 30-day special session on the issue set to begin next month.

Summers, who took over the north Austin business when his father retired in 2002, said he pays the tax because he feels “an obligation to do my part.”

His hope for a new tax is that it would level the playing field so that the 6 percent of companies that do pay will “no longer shoulder it by ourselves.”

Under the new plan, Summers calculated that he would come out even after savings from an accompanying property tax cut.

“Those of us that have been paying the lion’s share should definitely see some savings,” said Summers, 47. “I don’t think that’s necessarily an equal and fair treatment.”

In the last three years, lawmakers have repeatedly stumbled over how to structure a new business tax. They worried that proposals would not apply equally to different business structures. And business-friendly Republicans have been hesitant to levy a new business tax that could be harmful to job creation and economic growth.

Perry said this proposal finally has “broken the code on how you get the capital-intensive companies and the high volume, low margin companies – the restaurateurs, the HEBs, supermarkets – into a system that treats them fair and equitably.”

If adopted, the new structure would tax businesses at 1 percent of gross receipts, giving each company the option of deductions for either employee benefits such as salary and health care or cost of goods. Retailers would pay 0.5 percent. Businesses structured as a sole proprietorship or general partnership would be exempt.

For more than 80 years, the state’s main business tax has been based on a company’s net assets. It fell heavily on oil and gas companies, utilities and others with a lot of land and equipment. In the 1980s, companies successfully sued over the tax, forcing the Legislature to change it in 1991 by making it more like a corporate income tax.

Legal loopholes and a changing Texas economy have caused the tax to dwindle with age. What was once an oil- and agriculture-based economy is now more service-oriented.

This tax proposal recognizes that shift, Perry said.

“This is a once-in-a lifetime opportunity,” he told a crowd of reporters and business lobbyists as he introduced the new plan.

Opposition from the state’s high-powered business lobby contributed to lawmaker’s past failures on the issue.

The state’s two largest business groups are withholding criticism, but have not yet endorsed the plan.

“I would characterize it as a very serious proposal to deal with a real world problem and we’re going to take a look at it,” said Bill Hammond, president of the Texas Association of Business.

Will Newton, state director of the National Federation of Independent Business, said he has concerns – like what would prevent future lawmakers from raising the rate on businesses as a source of more state money during tough budget years.

“There is some concern, of course, on those details that are coming out,” Newton said. “If it is a tax based on gross receipts, is there a mechanism that will ensure that if you’re losing money during hard economic times, that you don’t still have a tax liability?”

For Summers’ business, which provides backup electricity generators to hospitals and nursing homes, the current tax formula drops his tax liability when the company takes a loss. That’s what happened the year following the Sept. 11 terrorist attacks.

He worries that this plan would not allow for those tough economic times.

“We did see a decline in ’02, it was a difficult year for us,” he said. “We saw a sharp decline in revenue and therefore a sharp decline in the franchise tax.

“Trying to survive had that been the full burden of five- to 10-grand, it could have been the one straw that put us under.”

The bill exempts companies with annual gross receipts of $300,000 or less. Hammond estimates that would apply to about half of the businesses in Texas.

Was this article valuable?

Here are more articles you may enjoy.