State Business Tax Hurts Texans

State Representative Ken Paxton, R-Frisco, authored a column in his weekly newsletter this week. The state business tax is hurting small business owners, forcing them to cut back on services, employees, or close down altogether, simply to render to Ceasar what Ceasar thinks is his.

Please post specific examples of how the business tax has hurt your small business. Only by seeing specific examples will the Legislature respond by rescinding this tax.

The business tax was meant to be a tax swap, an expanded franchise tax for lower property taxes. In most cases, the swap never occured. Local governments have control over property taxes, not the state. When the Legislature appropriated money to give to local governments to lower property taxes, the local governments and school districts lowered property taxes some, but not the full amount at which the Legislature stipulated. Local governments cited unfunded mandates that they needed to pay for, so the full property tax reduction was not given to homeowners in Texas.

What is even worse, these tax-and-spend local government officials took credit for lowering your taxes and then won re-election in the May election. These local government officials kept back up to 1/3 of the property tax reduction and then took credit for a tax reduction on the other 2/3. The property tax reduction was paid for by the business tax.

The tax swap is not working. It is time to end the business tax.

Below is Ken Paxton's Capitol Steps Newsletter, Volumn 6, Number 25, June 27, 2008.

New Tax Hurts Local Businesses

Two years ago, I wrote in this column about the possible effects of our state's new business tax on area businesses, and I used as an example the potential impact of this tax on the Music Conservatory of Texas, a business located in Frisco that provides music lessons for students of all ages and at varying levels (below is a copy of this Capitol Steps from 2006 for reference).

In 2007, the Music Conservatory of Texas taught 33,040 lessons to music students in our area. This business offers fun, innovative classes for young children to help them gain an appreciation for the art of music. It provides jobs for teachers and other staff members. Finally, the Music Conservatory of Texas benefits the community by donating time and money to community organizations, hosting special events and performances, and giving scholarships to students who cannot afford to pay full price for their lessons.

As I mentioned in the article from 2006, this business aims to yield a five to seven percent profit each year (most of the company's expenses include salary costs, rent, utilities, the purchase of instruments, promotional costs and other taxes). After expenses, the total profit this business generated for the year in 2007 was $8,394 (a 25.4 cent profit per lesson), and it will pay over $6,200 to the State of Texas as a result of the new business tax. For the Music Conservatory of Texas, their state business tax rate was nearly 75% of their profit. Additionally, Steve South, one of the owners of this company, pointed out to me that he did not receive the significant property tax relief he was supposed to have in exchange for this new business tax.

Too many Texas businesses are now faced with difficult decisions in order to stay in operation. Some area businesses are paying taxes after earning no profit (this is especially true for some new businesses). Also, I recently met with a local orthopedic surgeon who is now paying approximately $100,000 more in taxes to the state under this new business tax. This doctor used to donate his time and services to uninsured children. However, he no longer has the extra time to donate because he must work additional hours to pay his tax bill.

I maintain that this tax is wrong for Texas. In general, our state's business tax discourages growth, harms employment, increases costs for consumers and hurts business' ability to donate and participate in community activities. I am currently working on a solution for consideration next legislative session to change our state's taxing structure in a way that will help Texas maintain its competitive edge and improve economic growth and investment in our state.

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Special Session Wrap-up #1

Not so Low, Not so Fair: The gross receipts tax impact on business

May 19, 2006

The Special Session called to address the issue of school finance ended this week. I
am extremely disappointed that HB 3, which includes the new tax on businesses, passed both the House and the Senate and has been signed by the Governor. All Texas corporations and business partnerships that receive liability protection and earn more than $300,000 per year will be affected. Sole proprietorships, general partnerships and small businesses with receipts less than $300,000 are exempt from this business tax. Affected businesses will make their first tax payment in May 2008 for the 2007 tax year.

Several weeks ago, I received an email from Steve South, Director of the Music Conservatory of Texas, a business located in Frisco that provides music lessons for all ages and individuals at varying levels. In his letter, Mr. South told me that his business aims for a five to seven percent profit each year. With the business tax created as a result of the passage of HB 3, the Music Conservatory of Texas and a multitude of businesses like it will be forced to make tough decisions in order to stay in business. As a result of this tax, too many businesses will now have to consider increasing rates for services, eliminating personnel, abolishing plans for expansion, or closing their doors altogether.

Below is an outline of HB 3.

· Generally, the new tax is 1 percent on gross receipts, minus a deduction for either employee compensation or the cost of goods, whichever is greater.

· This tax represents a significant tax increase for Texas businesses. The Sharp Commission said the businesses they tested would be taxed somewhere between 4% and 14%. For the average Texas business, it represents a 7% tax on business profits. (The current franchise rate is only 4.5%).

· The new tax will be imposed whether or not a business makes a profit. This will be especially damaging to the creation of new businesses as new businesses frequently struggle on little or no profit during their first years of operation.

· Gross receipts taxes are particularly damaging to high-volume, low-margin businesses, which are usually employers of large work forces. Job loss will almost certainly be a consequence of the implementation of this new tax. The Gross Receipts tax has a number of weaknesses:

· The new gross receipts tax was promoted as being simpler than the existing
franchise tax. However, it is complicated and contains special exemptions for certain
industries.

· It has failed or is failing in many other states.

· To use the old adage from President Ronald Reagan: Businesses don’t pay taxes, people do. Business taxes are hidden taxes and, therefore, more dangerous because they are simpler for government to raise.

· Supporters of the bill argue that only 1 in 16 businesses pay the current franchise tax. Under the new tax plan, the ratio increases to a mere 2 in 16. This attempt at creating a more "broad-based business tax" is barely worth noticing and comes at a tremendous cost to the Texas business economy.

Texas business already bear 60% of the state's tax burden, the 4th highest percentage in the nation (the national average is 43%). Even California businesses shoulder a lower percentage of their state’s tax burden than Texas businesses. Increasing business taxes will damage our competitive advantage, slowing the growth of jobs and investment in the state. I encourage the Legislature to re-consider this plan during the next regular session before it adversely affects Texas business.