Posted on 05/07/2006 10:22:29 PM PDT by anymouse
Todd Johnston's Aztec Party & Tent Rental in Houston is by most standards successful, but last year it did not turn a profit.
Under the state's current business franchise tax, Aztec owed no state taxes. But under a new business tax that has been approved by the Texas Legislature, Aztec would have owed $81,000 in taxes because the tax is based on gross revenues, not net profit.
Johnston said the new tax would not have put him out of business. However, it would have hurt his ability to weather a bad year, purchase new equipment or hire new employees, he said.
"This (new tax) is pretty significant, and there are a lot of businesses out there that are not aware of it," Johnston said.
The new business tax has been pushed through the Legislature by Gov. Rick Perry as part of a plan to cut public school property taxes by more than $6 billion.
The new business tax, which must be signed by Perry before it becomes law, would not be collected until 2008. But in that year alone, it would raise an additional $3.4 billion in taxes from Texas businesses.
In its simplest version, the taxable margin is calculated by taking a business's total revenue and subtracting either employee compensation or the cost of goods sold, whichever is greater. Most businesses will pay a tax of 1 percent. Retailers, wholesalers and restaurants, because of historic low profit margins, would pay a tax of a half percent.
While almost all businesses in Texas would pay some additional taxes under the bill, there are definite winners and losers in the legislation.
The biggest losers will be service-oriented firms — ranging from doctors and architects to dry cleaners and builders — currently organized as partnerships rather than as corporations so they do not pay the state franchise tax. Those businesses will pay $1.1 billion in new taxes in 2008 after factoring in any property tax relief they receive.
Some of the biggest winners will be petroleum and chemical companies that will get substantial property tax relief on their refineries and big box retailers such as Wal-Mart that also will see major property tax relief on its stores.
Big savings for some
If the governor's overall tax plan is fully implemented and school operating taxes are lowered to $1 per $100 valuation, Shell Oil Co. would save about $6.5 million a year in property taxes on its Deer Park refinery alone. Shell did not respond to a request for comment.
Wal-Mart would save $15,415 a year in property taxes just on its South Gessner store.
Lisa Elledge, senior manager of public affairs at Wal-Mart, said the company would pay more business taxes under the plan but supports it in the belief that property tax relief will "offset the burden of the new business tax."
The partnership that owns the Houston Chronicle currently does not pay the franchise tax, but it would pay the new business tax. However, under Perry's tax trade-off, the partnership also would get a property tax cut of more than $100,000 a year to offset a portion of the new taxes.
But all businesses are not treated equally under the new tax.
The tax excludes sole proprietorships, general partnerships owned by individuals and certain unincorporated passive entities, which is the way many oil and gas exploration operations are structured.
Businesses with less than $300,000 in total revenue also would be exempt.
"You've got some special rules in there for particular industries," said Rep. John Smithee, R-Amarillo, an opponent of the new tax. "You look at what happened with the doctors, and there were clearly political considerations to get them to support the bill."
Perry made concessions to doctors to allow them to deduct payments they receive under government insurance for the poor or elderly as well as any uncompensated care in exchange for support from the Texas Medical Association.
The Texas Realtors Association has been a major backer of the business tax, paying for radio commercials to support its passage. The Realtors believe lower property taxes will prompt home sales. But they also get another benefit — real estate commissions will not be taxed under the bill except for that portion retained by a brokerage company.
A boon to home buyers
Austin Realtor Joe Stewart said getting a property tax cut through the Legislature is important, because many potential home buyers cannot qualify for the monthly payments because of taxes.
Stewart said the commission split between most Realtors and brokerages ranges from 70-30 to 50-50. Also, most Realtors will not pay the tax because they are sole proprietors. He said if the brokerage firms had to pay the tax on the full commission, they would pass the cost along to home buyers.
But many small-business owners share the fears of Johnston that the new tax will catch them even when they make little or no money.
Lenin Juarez and Terri King have a partnership in Houston that runs Action Gypsum Supply Co., a drywall supply firm with $30 million a year in sales. They would pay state business taxes for the first time under the bill. The company leases its lands so no property tax relief is expected.
Juarez said he can afford the $33,000 a year now, but it might have killed the business when they started it three years ago.
"Three years ago, it would have been a significant impact, an onerous impact," he said.
King said she worries about how the firm will pay the tax when construction goes into one of its cyclical slowdowns. "I don't know that we'll be able to absorb it."
Bill Sadler owns two Houston restaurants: Arturo's Uptown Italiano and Beso. He said the new tax will cost him $30,000 to $50,000. One restaurant is very successful and can easily pay the tax, he said, but the other is a "labor of love."
"It could put me in a position where I don't think it's worth paying on a marginal restaurant, which would put 60 people out of work," Sadler said. "There will be some businesses closed because they are just scraping by."
Perry spokeswoman Kathy Walt said the new tax does not account for profit or loss, because that would make it an income tax prohibited by the state constitution without a vote of the people. She said businesses also need to consider the positive impact of the property tax cuts, because that also is a tax they pay even if they are not profitable.
Walt said many businesses are not calculating the tax correctly. She urged businesses with questions to contact the staff of the Texas Tax Reform Commission at 512-463-8209.
With most of the state's business organizations backing the new business tax and property tax relief bills, legislators turned a deaf ear to such concerns from businesses.
Tony Bennett, chairman of the Texas Association of Manufacturers, noted that his sector of the state's economy will pay $916 million a year more in new taxes under the plan. The association is supporting the plan, though, because broadening the business tax to include all businesses appeared to be inevitable and plans discussed in failed special sessions last year were pretty "horrendous."
Bennett said there also are positive elements of the tax, including the deductions for employee health care, which will give some businesses an incentive to buy health insurance for workers.
Most businesses affected
Bill Allaway, president of the Texas Taxpayers and Research Association, which represents mostly large corporations such as Shell, said that despite some of the apparent loopholes, almost all businesses in Texas will be covered by the tax. He said that was not true under the franchise tax.
But Allaway said business support for the plan could evaporate if the Legislature does not guarantee a future reduction of public school property tax rates to at least $1 per $100 of valuation. He said that level of property tax savings is needed to offset the new business taxes.
"Almost everybody did their calculations at a dollar," Allaway said.
The special interests got their exemptions and the rest of us get to pay through the nose.
But Allaway said business support for the plan could evaporate if the Legislature does not guarantee a future reduction of public school property tax rates to at least $1 per $100 of valuation. He said that level of property tax savings is needed to offset the new business taxes.
Bait and switch. If the Texas Legislature doesn't come through with the property tax reduction and just spend, spend, spend - they might as well take their name off the ballot as Texas Republicans will vote them out of office or just not vote.
"taxes because the tax is based on gross revenues, not net profit. "
==
How awful!
Need for Federal and STATE FairTax -- overtaxing businesses ping.
"But under a new business tax that has been approved by the Texas Legislature, Aztec would have owed $81,000 in taxes because the tax is based on gross revenues, not net profit."
BUMP
Need for Federal and STATE FairTax -- overtaxing businesses ping.HUH?"But under a new business tax that has been approved by the Texas Legislature, Aztec would have owed $81,000 in taxes because the tax is based on gross revenues, not net profit."
Fairtax rate:
`(1) FOR 2005- In the calendar year 2005, the rate of tax is 23 percent of the gross payments for the taxable property or service.
The problem with business turnover taxes is they cascade throughout the economy laying tax on tax creating an ever growing exponential burden on all production. These taxes were so bad, they were removed in Europe and replaced by VATs as an fix to correct the cascade of the tax from business to business growing without bound. A credit voucher system was introduced into the turnover tax to cause a pass through of the tax to end consumers retaining the control features over business to enhance governments ability to extract high levels of revenue from business activities. The result is what is now commonly called the a VAT.
A bit of history and the VAT and how it came about can be found here in a discussion of VATs, and teh Australian GST to there forerunner the turnover tax.
http://www.uq.edu.au/economics/johnquiggin/news/GST9806.html
| "The VAT was introduced in France in 1954, to replace a system which relied a highly distortionary turnover tax on sales to supplement a rather ineffectual income tax system. The problem with a turnover tax is the 'cascade' effect arising from the fact that goods are taxed every time they change hands. The effective rate of tax on a good therefore depends on the length of the marketing chain from producer to final consumer. At even modest rates, cascade taxes are highly distorting. The VAT solves this problem elegantly, by allowing firms to credit the tax already paid on their inputs against the tax imposed on their sales. The net tax payable is therefore a fixed proportion of value-added. ..." "Like the metric system, the VAT was adopted by other European countries, and the use of a VAT was made a condition of membership of the European Union. Once again, the English-speaking countries had less need to make the change, and were slower to do so. Their income tax systems were more effective, and their wholesale and retail sales taxes were less distorting than cascade taxes. ..." |
Another argument for the simplicity of the FairTax. Need lots more public support. FairTax.org is bringing FairTax training to Texas in May.
See this link for dates:
http://fairtaxgroups.com/index.php?topic=110.msg3753#msg3753
FairTax (retail sales tax) in Texas would be 10-11% to replace all property taxes and business taxes according to a study by the Texas Public Policy Foundation. I'd sign up for that in a minute.
Changing Texas
A Fair Tax for Texas?
By Richard Vedder, Ph.D. and Byron Schlomach, Ph.D.
http://www.texaspolicy.com/publications.php?cat_level=6
(scroll down on this page to find the study)
FairTax (retail sales tax) in Texas would be 10-11% to replace all property taxes and business taxes according to a study by the Texas Public Policy Foundation. I'd sign up for that in a minute.
That would be a good move for a lot of states. with the combination of state income, property and existing sales taxes that percentage represents a typical rate for most places.
A Taxreform bump for you.
If anyone would like to be added to this ping list let me know.
On the federal level, John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright and replace them with with a national retail sales tax administered by the states.
H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.Refer for additional information:
FairTax (retail sales tax) in Texas would be 10-11% to replace all property taxes and business taxes according to a study by the Texas Public Policy Foundation. I'd sign up for that in a minute.Sure, "replaced" for how long? 'Till the next legislative session when the children need more school money?
Couple that idiocy with the Fairtax dream rate of 30% national and you have a 40+% sales tax rate...
Texans oughtta go for that. 40+% sales tax would be great for their economy too.< /sarcasm >
fair tax bump
My taxes will go down with this, pretty substantially too. The problem is we will have created an income tax. A few years down the road, some sleazbags in Austin will decide they need more money to buy votes with and they'll up the percentage a little. And then they'll do it again a few years late. Rinse and repeat.
They need to simply cut proprty taxes by the amount of our surplus and leave it at that. If they need more money they can cut spending.
This new tax has nothing to do with property tax relief. That is part of the sales scam that has been promised to the homeowners. By the time this kicks in appraised value increases will have eaten up any proposed savings. These same Republicans, legislature and other elected officials, refused reasonable limits on tax increases during the previous session.
There will never be a shortage of stupidity. If we could figure out how to run electric generators on it, we'd have an energy source that would never run out.
It sounds like Perry has grabbed all the worst aspects of any tax scheme -- apply it selectively, let it compound through every level of production, and hide it from the consumer that will ultimately pay for it.
All of these things make it very different from the FairTax, but you just know there are yahoos that will equate the two.
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