House approves new tax on business

April 25, 2006, 1:47AM

SPECIAL SESSION
House approves new tax on business
Legislators also OK separate bill to tap the surplus for small tax cut

By JANET ELLIOTT and CLAY ROBISON
Copyright 2006 Houston Chronicle Austin Bureau

AUSTIN - The Texas House Monday night approved a sweeping new business tax that is the cornerstone of Gov. Rick Perry's proposal to cut school property taxes and meet a June 1 court deadline for avoiding a potential shutdown of public schools.

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The $3 billion measure will now go to the Senate, with supporters hoping the two chambers will finally be able to agree on a tax overhaul. Four previous efforts in the past two years failed.

"The (tax) system is broken. It's time to fix it. This is a fair bill," said Rep. John Otto, R-Dayton, a co-sponsor of the measure that passed 80-68.

But Democrats attacked it as underfunded and complained that it wouldn't raise any additional funding for the public schools.

"It is the largest tax bill in Texas history, and it doesn't give one penny to the public schools," said Rep. Jim Dunnam, D-Waco.

A procedural problem with the proposed $1 per pack cigarette tax hike caused it to be sent back to the Ways and Means Committee for further consideration.

Perry wants to use the expanded business tax, an increase in the state cigarette tax and a portion of the budgetary surplus to cut school operating taxes by about one-third over the next two years.

The House also approved another bill, a fallback measure, that would pay for smaller cuts in school taxes by simply using a portion of the budget surplus and not raising state taxes. The sponsor said it would meet the Texas Supreme Court's order for changes in the state's school finance system

Dozens of amendments

Several dozen amendments, many proposing special tax breaks for an assortment of industries, were offered to the business tax bill. Most were withdrawn or defeated, but one amendment, an accounting provision designed to soften the financial blow for current payers of the franchise tax, could cost as much as $40 million in tax collections in the first year.
Altogether, Speaker Tom Craddick said, amendments that were adopted cut $58 million from the $3.45 billion that the bill, as approved by the House Ways and Means Committee, would have raised for the governor's proposed property tax buy-down.

The bill would replace the loophole-ridden corporate franchise tax with an expanded tax applying to all corporations and limited liability partnerships with more than $300,000 in annual revenue.

As such, it would bring many law firms and other professional service providers under the state business tax for the first time.

GOP lawmakers had been under heavy pressure from conservative, limited government groups not to enact new taxes to pay for a property tax cut. And many Democrats were opposed to the business tax because all of the revenue would be dedicated to property tax reductions, rather than providing a new funding source for education.

The House adopted 141-1 an amendment to prohibit companies from deducting the costs of hiring undocumented immigrants from their taxable income. The provision also would give the state comptroller the authority to enforce the restriction.

Rep. Rafael Anchia, D-Dallas, the amendment's sponsor and the son of immigrants, said he was attempting to crack down on the "thousands and thousands" of Texas businesses that hire illegal workers.

"Without a demand, there's really no supply," he said.

"I'm tired of hearing the demagoguery out in the marketplace," he said, referring to the current political debate over immigration. "Unfortunately, it's Texas business that is breaking the law on a daily basis."

Otto questioned how effectively the state would be able to enforce the provision, but only Rep. Ryan Guillen, D-Rio Grande City, voted against it.

The bill would allow a company to deduct either its compensation or production costs from its gross receipts. Wholesalers and retailers would be taxed at one-half of 1 percent on the remaining base. Other companies would pay a 1 percent tax.

All sole proprietors and general partnerships and other companies with less than $300,000 in annual revenues would be exempt.

The House adopted an amendment by Rep. Larry Phillips, R-Sherman, that would remove the tax liability from any company owing less than $1,000 in taxes a year.

Rep. Corbin Van Arsdale, R-Tomball, won approval of a provision that would require Texas voters to approve any subsequent increase in the new business tax rate.

The House voted 146-2 to approve a safety net bill that could allow the schools to remain open if Perry's tax plan fails to pass. House Bill 1 would use $2.4 billion of the state's $8.2 billion surplus to cut school operating taxes by 11 percent.

Bill sponsor, Rep. Warren Chisum, R-Pampa, said the tax cut would meet the minimum requirements set by the Texas Supreme Court, which found the current school tax system unconstitutional.

Final passage is expected today.

Perry has dubbed the bill the "get outta Dodge" plan because it could allow lawmakers to enact a short-term fix without the broader tax restructuring the governor wants.

The vote on Chisum's bill came after several hours of debate, during which the House stripped a controversial provision that could have allowed a few wealthy districts to keep all of any additional taxes levied for local enrichment.

Two Houston Democrats, Reps. Garnet Coleman and Harold Dutton, voted against the fallback bill.

Coleman said it would not do anything to improve the schools.

Chisum's bill would lower school operating taxes by about 17 cents per $100 valuation.

Local school boards could raise them three cents this year and as much as 14 cents next year with voter approval.

Higher tax on cigarettes

That tax reduction is only about one-third of what the governor is seeking.
Perry's deeper, proposed cuts are dependent on passage of the business taxes and higher cigarette taxes, which would go up by $1 a pack.

The House approved another measure — part of a five-piece package of tax legislation — that will dedicate all the revenue from the higher state taxes to pay for the school tax cuts.

Another bill is designed to make sure that buyers of used cars don't lie about the purchase price when calculating sales tax.

It would use the vehicle's "blue book" value as the basis for determining tax.

janet.elliott@chron.com clay.robison@chron.com

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