Legal Challenge to Business Tax Fades
Fri February 2, 2007 11:31 am

I happened to run into Norman Adams, the anti-tax activist and outspoken critic of the business tax that passed during the spring 06 special session, and he was mighty glum about the prospects for his lawsuit against the tax. He said that Mark Lanier, the mega-litigator with GOP ties, had pulled out of the case. Adams, whose business is insurance, expressed his amazement that he has been unable to find another law firm willing to take the case. "It's clearly unconstitutional," he said of the tax, referring to a provision in the Texas Constitution that prohibits an income tax unless it is authorized by a vote of the people.

Another Adams attack on the tax is likely to bear more fruit. In a letter to lawmakers before the vote last spring, Adams indicated how the tax would affect various small business:

This is a project of Conservative Republicans of Texas, PAC -- is a coalition of small-business owners, community leaders and concerned citizens of Texas who oppose the Perry Business Tax and any new business tax. This tax scheme was passed by the State Legislature during the 2006 Special Legislative Session. When it becomes effective this tax scheme will deliver a crippling blow to Texas by imposing a disastrous tax burden upon the small- and medium-sized businesses that drive the engine of our state's economy.

"This tax will:
* Tax small businesses which may not even be making a profit;
* Force small- and medium-sized businesses out of existence, destroying jobs and putting thousands of Texans out of work;
* Be passed on to the consumer in the form of higher costs for good and services;
* Become a liberal money grab from small- and medium-sized businesses to generate new revenue for additional growth in state government;
* Circumvent the Texas State Constitution's prohibition against a state income tax.

The reasons I am fighting this tax should be self-evident to any principled conservative. The problem with this tax is that I have found myself fighting against a Governor, who was elected because of his support for lower taxes. He has claimed that this is "fairer" business tax because it eliminates "tax loopholes" in the franchise tax.

As a conservative, I see nothing wrong with engaging in legal means to avoid paying additional taxes. Apparently, our "conservative" Governor was offended by such behavior. In addition, this new tax taxes gross margins. This is significant because it does not take into account whether any profit has been made. The tax is owed regardless. Such a tax will be a killer for small businesses and entrepreneurs. Finally, many businesses will pay several multiples of what they had formerly paid under the franchise tax. Do this sound like a fairer tax to you? See for yourself!

The figures Adams provided are stunning:

Electrical Contractor
2005 Gross Revenue: $3,619,631.00
IRS Profit or Loss: -28,910.00
Old Franchise Tax: $0
Tax Due: $15,084.55
Net Tax Increase: $15,084.55

Plumbing Co.
2005 Gross Revenue: $19,368,420.00
IRS Profit or Loss: $503,480.00
Old Franchise Tax: $22,656.00
Tax Due: $94,653.17
Net Tax Increase: $71,997.17

Const / Landscape
2005 Gross Revenue: $8,753,122.00
IRS Profit or Loss: $ -15,159.00
Old Franchise Tax: $1,031
Tax Due: $55,042.81
Net Tax Increase: $54,011.81

Insurance Agency
2005 Gross Revenue: $4,150,000.00
IRS Profit or Loss: $43,600.00
Old Franchise Tax: $1,962.00
Tax Due: $18,729.20
Net Tax Increase: $16,767.20

Paving Supply Co.
2005 Gross Revenue: $58,624,642.00
IRS Profit or Loss: $1,150,921.00
Old Franchise Tax: $51,791.00
Tax Due: $90,812.90
Net Tax Increase: $39,021.90

Party Rentals Co.
2005 Gross Revenue: $13,741,264.00
IRS Profit or Loss: -957,496.00
Old Franchise Tax: $0
Tax Due: $80,796.32
Net Tax Increase: $80,796.32

The party rentals company, above, lost almost a million dollars and still had to pay more than $80,000 in taxes. These examples suggest that the Legislature will be under intense pressure to change the business tax so that it is not punitive toward small business.

More Texas Monthly

Loading, please wait...

Most Read

  • Viewed
  • Past:
  • 1 week