Senator Patrick e-mailed me his response Saturday to my post (6/18) defending the business tax. I didn’t notice it at the time. I will repost my six reasons why the business tax was the right thing to do, followed by Patrick’s comments. My comments about Patrick’s observations appear in italics following his points. Six reasons * If the Legislature hadn’t reduced the reliance on property taxes, the courts would have closed the schools. * The property tax fell inequitably on businesses. A big box store paid lots of taxes to the state even though it might have small profit margins. A big law firm paid no property taxes to the state. * The old corporate franchise tax brought in less money every year because of loopholes that allowed companies to reorganize as partnerships. (A commenter posted figures showing that this statement was inaccurate; however, the loopholes did.) * The reliance on property taxes was based upon an economic model — that heavy industry was the backbone of the state’s economy — that no longer existed. Manufacturing has a shrinking share of the Texas economy. Professional services have a growing share of the Texas economy but paid little to nothing in property taxes. Consequently, oil and gas, petrochemicals, utilities, and technology plants bore the burden of the tax system. * The businesses that are complaining now avoided paying taxes for decades. Doctors, lawyers, architects, CPAs, consultants, engineers, financial advisers, insurance agencies, real estate agencies — they didn’t need land for their businesses, just offices, and so they paid very little in local school property taxes. * Business has a huge stake in the schools. The schools help educate and train their employees. Business ought to contribute to the cost of that education. Senator Patrick’s response As one of the first to appreciate the value of blogs many years ago, I’m an avid reader of many blog sites. I like to know what people are thinking. I eliminate the extremists views from all sides as their point of view is usually so biased it is not helpful to the general dialogue. I focus on what the majority of people write who are not on the fringes. I find their thoughts and opinions informative as to what many Texans are thinking on the many issues that face us in the legislature. With that said, I am going to briefly answer some of the more extreme views briefly and spend most of my response to the issues surrounding the business tax. First, to those who like to attack me only because I’m a businessman, a radio talk host, a Republican or a conservative, let me say that you clearly do not understand my position on issues or my motives. We have serious issues facing our state which I would break down into four major categories. These four are all impacted by the most critical issue facing us, illegal immigration. As far as me not supporting the new tax because of my business that is simply non sense. Like many business owners I already pay a huge amount in taxes each year. My opposition is not about me; it is about the businesses and millions of workers in our state who will be negatively impacted by this tax. People are going to lose their jobs, or not get a pay increase or a bonus because of this tax. This is not a partisan issue, it is an economic issue that impacts everyone. The Key Issues that this new business tax will not resolve. Issue one is education. We have an education system that is failing our students. Only 8% of those who enter kindergarten end up with a 4 year college degree. And depending on whose stats you trust, between 35-45% of those entering the 9th grade do not graduate. The business tax is not intended to change the education system. It is intended to comply with the Texas Supreme Court mandate to provide revenue that can be used to “buy down” property taxes and fix a school finance system that the Court said amounted to a statewide property tax. Issue two is the property tax burden on homeowners and business owners due to ever increasing appraisals. Property taxes have absolutely no link to a person’s ability to pay. Business owners in many urban areas are facing 30-60% increases in just one year on their properties. This cannot continue. Except when banks go crazy and make subprime loans to buyers who can’t afford to pay them off, property taxes do bear some relationship to a person’s ability to pay. Home buyers have to qualify for their loans. If your property appraisal is high, it probably means that you have an appreciating asset. A lot of the people who are complaining want to have their cake (appraisal caps) and eat it too (low property taxes). I can understand how they feel, but that doesn’t make it good public policy. Issue three is government spending. Our state has many needs that must be met. We must always provide for children and those adults who are in true need. However, we cannot afford to do everything for everyone. Our budget was $99 billion in 1999 and last year the legislature passed a budget of $164 billion. (I voted against it.) Does anyone really believe that government runs at 100% efficiently? Of course not. The state’s portion of the budget is approximately $80 billion over two years. If we can find just 8% of waste, fraud and unneeded programs we could save over $6 billion which is the expected haul from the new business tax. If waste, fraud, and unneeded programs are common in Texas, then why does Texas rank 49th among the 50 states in state spending per capita? Why do we have such a shortage of prison guards that we have to close sections of prisons? Why do the DPS and TxDOT complain that their computer systems are antiquated? Issue four is the cost of health care and the shortages we are facing in that industry. Texas has the best health care in the world but it is not accessible or affordable to everyone including many hard working people in Texas. We also have a current shortage of 30,000 nurses in our state. If you get sick and have insurance there still may not be anyone to give you care in the next decade. Even if the state leadership wanted to use the business tax to improve access to health care, or fund the schools more generously — which they don’t — the revenue can only be used for property tax relief. Republicans will not vote to raise revenue unless the revenue is used to cut taxes by a corresponding amount. These four issues are the main issues we must address in the next session. There are many other issues we must resolve as well, crime, infrastructure, transportation and many others, but we must focus on these four key issues first. However, the biggest issue we must resolve is the issue of illegal immigration because it impacts every other issue we face. Last year 43% of jobs in the U.S. were created in Texas and 17% of all jobs were created in Houston alone. We need workers, but we have to have control of who comes here to work. We must secure our border and secure our economy at the same time. We cannot control spending, health care or education if hundreds of thousands of illegals and their families continue to pour into Texas. Our population will double by about 2030. That means we only have 11 sessions to address these issues. The longer we wait to take on these issues the harder and more painful it will be to solve them. Despite all of the stories and comments to the contrary, my goals are simple. I want to work with both Republicans and Democrats to solve these problems for Texas. Reasonable people can disagree on the solutions, but we can resolve these issues. I make no apology for being a conservative. I believe in conservative values and principles. I also respect others who have a different point of view, but in the end I have to stand for what I believe is best for all Texans. We need elected officials from both parties who focus on the next generation instead of the next election. This brings me to the business tax. The purpose of the tax was to lower property taxes, fund schools and close loopholes in the old franchise tax model. This plan has turned out to be a disaster for all concerned. Property taxes will continue to increase due to appraisal creep on both homes and businesses. Schools are facing deficits over the next few years, (some are facing deficits now) and the new tax only created a new level of unfairness among various businesses. Let’s talk about loopholes. Does anyone pay a tax they are not required to pay? I think not. If the former tax was levied only on corporations don’t blame a business for not volunteering to pay a tax if they could avoid it. Most citizens don’t volunteer to pay the IRS more. In fact most people try to lower their tax debt by using every deduction possible. I don’t call that finding a loophole. A tax is an expense for a business and most businesses try to lower expenses where possible.The idea that businesses don’t pay taxes is absurd. Many pay huge taxes on actual land and buildings. Others pay property taxes that are passed on through the rent they pay to the landlord and on their personal property each year. The problem with this new margin tax was that is was flawed from the very beginning by creating winners and losers in the business community. There are approximately 2.5 million businesses in Texas. Approximately 750,000 paid the old tax as corporations. The new margins tax will bring in about 200,000 additional businesses. The other 1.6 million businesses are either very small businesses or sole proprietors who are not covered by this tax. All taxes create winners and losers. The losers under the old tax structure were manufacturing and minerals. The winners under the old system were providers of professional services. Most paid no property taxes except as a portion of their rent. Yet, they are the largest segment of today’s Texas economy. Their success depends upon well educated employees. They ought to pay school property taxes. 6 Reasons why I oppose the business tax 1. The legislature could have focused on those mega companies who were not paying the franchise tax and not hit thousands of small and mid size businesses with the new tax. This tax was not about closing loopholes. This tax was about transferring the tax burden from many major businesses who paid huge property tax bills to mid and small business. The large property holding businesses thought they were going to get huge reductions in their property taxes in exchange for this new tax. In the end they were fooled as well. Many of these big companies saw their appraisals increase so much many are now paying more in tax or will be paying more in the near future. I don’t think that this sentence is accurate: “This tax was about transferring the tax burden from many major businesses who paid huge property tax bills to mid and small business.” Former comptroller John Sharp has said that 90% of the tax revenue would be paid by the largest 10,000 taxpayers. 2. The tax should never have been due on May 15th which is only 30 days after the April 15th federal filing deadline. Accountants work 15 hour days completing those tax returns for their clients. Their clients often have to write significant checks on April 15th for federal taxes. The May 15th deadline was obviously established by those who do not understand accounting or by those who have never had to write a check to the IRS on April 15th. In addition, the new Texas tax did not mirror the federal tax. Many deductions allowed by the IRS were not allowed by the state and vice versa. These differences created a nightmare for accountants and their clients. The new state forms were not released until late March or April for accountants to review. There are still many questions about what is and what is not deductible under the new tax. In short, it is an accounting nightmare for all concerned. I also don’t want to create another Texas agency like the IRS to audit these taxes. It won’t be long before the Comptroller is going to want hundreds of new employees to monitor this tax. Of course the new Texas tax did not mirror the federal tax. The federal tax is an income tax. If the margins tax mirrored the federal tax, it would be an income tax. It doesn’t, and it’s not. 3. Many businesses that paid the old tax as a corporation were shocked to see their taxes increase 5 to 10 times the old tax. Many businesses saw no major impact and some saw a reduction, but many saw huge increases.The trucking industry and many service industries saw big increases due to the unfair treatment of deductions between industries. e.g. a trucking company cannot deduct for contract drivers. A company can deduct for shipping costs into their business but not deduct for the shipping costs to their customers. This new tax is filled with inconsistencies, confusion and unfairness. 4. The threshold for businesses that should pay the tax should have been much higher. Businesses that don’t owe the tax should not have to file the paperwork. Those businesses are small and should not have to pay an accountant to file a report that says no tax due. And businesses that don’t make a profit should never have to pay the tax. I have a constituent that lost $8,000 last year and owes $5,000 for the new tax plus his accounting fees. It is not unusual for tax liability to occur in the absence of a profit. In fact, there is only one tax that, if you don’t make a profit, you don’t have to pay it. That’s an income tax. Every other tax — excise taxes, property taxes, sales taxes, gross receipts taxes — you have to pay whether you make a profit or not. 5. Anyone who does not own a business likely works for one that will pay this new tax. All business taxes will either be passed onto the consumer or the employee. So, anyone who thinks this is a good idea should remember they will likely end up paying the tax in the end. I know of companies that suddenly are facing taxes of $25,000 to $100,000 more that last year. They may choose not to hire a planned employee, cut or reduce their planned pay increases, reduce company bonuses or buy something from another business for their business. We are seeing a 6 billion dollar or more transfer of money from the private sector to the government. The business tax transfers money both ways. It raises an estimated $6 billion, but that money doesn’t end up in government programs. It is used to reduce the property tax rate. Not one penny goes to grow government. 6. Before establishing a new tax we must first look at reducing spending where we can. If we need additional revenues we should focus on increasing and expanding the sales tax. 55% of our state tax collections come from sales taxes. Our population is going to double in 20 years or so and this is the best way to increase our revenues. We can protect the poor from this tax and protect the necessities of life from an expanded sales tax. Every penny increase is worth about 3 billion before expanding it to other goods or services. The fairness of a sales tax is that it is based upon a person’s ability to pay. Property taxes on your home or business or this new business tax is not based upon the ability of a person to pay the tax. I’m not sure what Senator Patrick means by “an expanded sales tax.” If he means that he would expand the base of the sales tax — by taxing services and by repealing exemptions — he is entering dangerous territory. The professional services sector of the economy would rather have an income tax than an 8.25 add-on to their billings that would put them at a disadvantage to service providers in other states. As for exemptions, there is a reason for them. Some are political (does anyone want to vote for repealing the exemption for household electricity?) and some are economic (the exemption for industrial machinery is designed to attract business to Texas; most states have a similar provision). Businesses are facing a perfect storm of skyrocketing property appraisals, increased fuel costs and the new margins tax. Many businesses are seeing their cost of doing business increasing at amounts they simply cannot sustain for very long. The last thing the state should be doing is adding to the burden of business. Small and mid size business employ about 80% of the workers in our state. The vast majority of businesses are not owned by selfish or greedy owners. they are owned by people who work hard everyday just trying to survive. In summary, there are only three major ways to fund government; property taxes, sales taxes or income taxes. Texas has been a great environment for business and I want it to stay that way. History has proven that the best environment for business is a low tax environment. The business tax is not about business of any size, it is about you, your job and your future. Our current system of property taxes providing funding for our schools will put people out of their homes and businesses. I want a person to be able to pay off their home and afford to live in it when they retire. I want business to prosper creating jobs for a growing Texas. If we do not repeal this tax and find a better way to fund education and all of our needs, Texas will one day find itself in the position of another big state, California, which is broke and facing massive cuts in government services and an exit of citizens and businesses. I appreciate Senator Patrick’s comments and views. I’m sure that the business tax could stand some tweaking. But I think we have to recognize that the reasons the tax became law are (1) the Supreme Court was holding a gun to the Legislature’s head, and (2) this tax was, to paraphrase Churchill’s observation about democracy, the worst possible system, except for all the others.
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