Sorting out winners, losers in business tax plan

I hadn't posted this and it lays out who is affected by Gov. Perry's proposed business tax. The rub right now is with recapture (or "Robin Hood") with wealthy districts not wanting to share the wealth. Another problem is with some legislators wanting most or all of the funding from the business tax to go to lowering property taxes rather than to schools (see previous post). -Angela

79TH LEGISLATURE: SPECIAL SESSION

Sorting out winners, losers in business tax plan

Proposed changes would shift burden from capital- to labor-intensive industries

By Corrie MacLaggan, Jason Embry
AMERICAN-STATESMAN STAFF
Sunday, April 30, 2006
In the past 13 years, prices on the menus at Maudie's Tex-Mex have risen just twice.

But items such as Skinny Sheryl's enchiladas ($6.50) soon could cost more at the five popular Austin restaurants because of a state business tax now working its way through the Texas Legislature.

The tax wouldn't automatically initiate price increases, but it would cause menu prices to go up sooner, said Joe Draker, owner-operator of Maudie's.

"You add this to the rising cost of energy . . . you tack a couple of these together, and you have to go up on prices," Draker said.

As legislators work on the details of the tax plan pushed by Gov. Rick Perry, some Texas businesses say the new tax penalizes them, while other businesses predict they'll come out ahead. The levy would replace the corporate franchise tax and require restaurants, retailers and wholesalers to pay one-half percent of most of their revenue; other businesses would pay 1 percent.

Capital-intensive industries such as oil and gas, manufacturing and utilities stand to benefit most because the new levy will be offset by large cuts to property taxes — a tax that has hit them particularly hard. Most major business organizations in the state are supporting the plan.

Labor-intensive businesses, such as law firms, engineering firms, hotels and barber shops, are more likely to pay higher taxes under the plan. And because the tax is based on total revenue, not profit, some owners of businesses with low profit margins fear it could hurt them.

"Frankly, there could be winners, and I've already heard from the losers," said Will Newton, state director of the National Federation of Independent Business, whose 34,000 small and independent businesses in Texas are divided on whether to support the tax plan. "Small-business owners are starting to wake up to what's going on, and a bunch of people out there are really upset."

The business tax is part of Perry's larger effort to raise enough money to reduce school property tax rates by about one-third.

The plan, already approved by the House and sent to the Senate for consideration, is a response to the Texas Supreme Court's order that the Legislature give local school boards more leeway in the property tax rates they set.

The court has given lawmakers until June 1 to change the tax system or else it will cut off state money for schools; lawmakers are about halfway through a 30-day special session to respond to that order.

A higher cigarette tax and money from the state's budget surplus are also part of the plan.

A panel of business leaders from across the state wrote the Perry plan. Its supporters have never shied away from the fact that businesses, including some that actively lobby at the Capitol and support Republican candidates, had substantial input.

"Some of the language in the bill reflects the unique situation of certain industries," said Dale Craymer, a former official in the comptroller's office who is now with the business-backed Texas Taxpayers and Research Association. "But, generally, those provisions were to prevent the tax from being too burdensome relative to their profit level."

Craymer said the capital-intensive industries that would benefit from the plan currently pay about two-thirds of all business taxes yet represent about one-third of economic activity.

Extending tax's reach

Not all businesses would pay the new tax. Juan in a Million, for example, a Mexican restaurant in East Austin, would be exempt because it's a sole proprietorship.

General partnerships and sole proprietorships would be exempt, as would businesses that gross less than $300,000 a year. General partnerships and sole proprietorships do not receive lawsuit liability protection from the state, the common thread among businesses that would pay the new tax.

The plan would replace the state's corporate franchise tax, which exempts even more types of businesses. About 150,000 of the state's 2.4 million businesses pay that tax, and many more have restructured to avoid it.

About 50,000 additional businesses would pay the new tax, so about 2.2 million businesses would still be exempt, largely because they are small businesses and sole proprietorships.

Although some major corporations have organized themselves as partnerships to avoid the current franchise tax, that would be less likely to happen under the Perry proposal, Craymer said. Businesses that avoid this tax will lose some state protection from lawsuits, and Craymer said that protection is fairly valuable.

"This tax is so broad that the planning opportunities are few and far between," Craymer said. "There may be some small businesses that will convert to sole proprietorships, but those are not businesses that account for much of the state's economic activity. In general, this tax is going to capture over 90 percent of the economic activity in the state."

By comparison, he said, the current franchise tax applies to about 75 percent of economic activity.

Perry has vigorously touted the support of business groups — including those representing restaurants, nurses, airlines, retailers and manufacturers — as proof that his plan will not hurt the economy.

"You can't make a perfect tax plan," Perry said. "And to those that would criticize it for not being perfect, I guess we'll stand up and say, 'We are not perfect, but this is the closest to perfect that the vast majority of the business community and these legislators have ever seen.' "

Several large companies declined to discuss how the plan would affect their tax bill and instead spoke in general terms.

"We've long advocated a fair and broad-based tax, and we think the House bill accomplishes that," said Colleen Ryan, a spokeswoman for computer maker Dell Inc.

Wal-Mart Stores Inc. spokeswoman Lisa Elledge said, "We do realize more of a tax burden (under the plan). But at the same time, we realize it's important for the state to move in this direction."

From none to some

Maudie's, which has 240 employees, grosses about $10 million a year, Draker said. A tax on gross receipts (about $35,000 under the formulas laid out) probably would be considerably higher for the business than what it pays in franchise taxes now, he said.

Businesses such as Maudie's could pass the tax increase on to customers, but doctors don't have that option, said Dr. Bruce Malone, an Austin orthopedic surgeon.

Malone estimates that his six-doctor practice, Austin Bone & Joint Clinic, which currently pays no franchise tax as a professional corporation, would pay about $17,800 per year under the 1 percent tax that physicians would pay.

That would be an increase in overhead costs that the practice couldn't charge patients because insurance companies and government programs usually foot health care bills and set the rates, he said. To compensate, the practice could decrease employee benefits or put off buying computer equipment.

Doctors should pay taxes to support public schools, Malone said, but he wants to see exemptions for charity care — free care for uninsured patients — remain in the tax plan.

The clinic, which sees about 1,400 patients each month, provides about $40,000 to $50,000 in charity care each quarter out of a sense of community obligation, he said.

"Not many other professionals are required to give their products to people," said Malone, who used a calculator on the Texas Medical Association Web site to estimate his tax liability. "It's a little different if you're the Exxon Corporation and you have gasoline and in order for someone to take the product, they have to pay."

The Texas Medical Association initially came out against Perry's plan but then endorsed it after the governor tweaked it to allow doctors to exclude from their tax base the government money they get for uncompensated care, Medicare, workers' compensation and military insurance programs, as well as 150 percent of reimbursements provided under Medicaid and the Children's Health Insurance Program.

The version of the business tax that passed the House this week does not contain all those tweaks.

A shift with no change

Dry cleaners, barber shops, pest control or lawn services and other service businesses could see sharply higher taxes under the tax plan, Comptroller Carole Keeton Strayhorn has said.

That's because those firms, unlike retail businesses, would pay the higher 1 percent rate and may own little or no property, so they wouldn't benefit from property tax breaks.

But Democrat John Sharp, a former comptroller Perry appointed to draft the tax plan, said he doesn't think such firms would see the tax increase Strayhorn predicted. "I've long ago since given up trying to figure out where the comptroller comes up with things," he said.

Bobby Jenkins, president of the ABC Pest and Lawn locations in Austin, San Antonio and College Station, said he's still calculating how the tax could affect his business but thinks his tax bill might be similar to what he already pays in the franchise tax. "On first blush, we're hoping it's going to be about a wash," he said.

Bob Landreth, an independent oil and gas producer who operates about 80 wells in West Texas, is a sole proprietor, so he would not be subject to the new tax. But he said many in his business who would pay the tax worry that the tax rate will increase in the future or that the property tax cuts will soon evaporate.

The House changed Perry's proposal to say any increases in the tax must be approved by the public in the future, but many have questioned whether that provision is legal.

Newton, of the National Federation of Independent Business, said his state group is asking lawmakers to add a provision protecting businesses in hard times. "They have to put in that if some business is going out of business that the tax liability is mitigated in some way," Newton said. "You don't want to kick a man while he's down."

As for Maudie's, Draker said he's "certainly willing to pay my share." But he's relieved that the full 1 percent tax won't apply since Maudie's, like other restaurants, has a relatively low profit margin.

If he had to pay the 1 percent tax?

"Oh, I think I'd have to get out of the restaurant business," he said.

cmaclaggan@statesman.com; 445-3548

jembry@statesman.com; 445-3654

Additional material from staff writer W. Gardner Selby.

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http://www.statesman.com/news/content/shared/tx/stories/04/30biztax.html