Where the business margins tax money came from

I'm sure this will spark a lot of debate.

At a time when the oil and gas industry was reaping record profits, producers got a break under Texas' new business tax, according to a draft report from a state advisory committee.

Oil and gas producers paid nearly $411 million last year under the new business tax, down from nearly $489 million in 2007. The industry also separately pays state levies including severance taxes, which skyrocketed with 2008's higher oil prices.

Most other industries ended up paying more last year than in 2007 under the business-tax expansion, according to a draft of the Business Tax Advisory Committee's report to the Legislature due to be released within days.

[...]

The receipts studied for the report, which were not complete, yielded $1.36 billion more to the state than the $2.97 billion collected under the old tax in 2007. But last year's collections were more than $1 billion smaller than projected.

Of 27 business categories listed in the report, the only sectors that paid a smaller dollar amount under the new tax were oil and gas, agriculture, wholesale trade and rail transportation.

The remainder paid more. Among the largest percentage increases were those in the telecommunications industry, whose tab rose 298.3 percent from $24.5 million to $97.6 million.

The figures compiled by the State Comptroller's Office also indicated that despite reports from small business owners that they were hammered by the new tax, they weren't hit harder than others.

More than 85 percent of the new tax is paid by firms with more than $10 million in gross receipts, compared to more than 81 percent under the previous tax, according to the report.

That's one way of looking at it. Another is to say that since $3 billion was collected under the old tax and $4.7 was collected under the new tax, then it broke down as follows:

Old Tax

Firms with over $10 million in gross receipts paid $2.43 billion
Firms with under $10 million in gross receipts paid $0.57 billion

New Tax

Firms with over $10 million in gross receipts paid $3.995 billion
Firms with under $10 million in gross receipts paid $0.75 billion

So the share declined but the absolute amount went up. Whether you consider the ratio of the burden to be fair or not for smaller businesses, the reason for their complaints should be clear.

Of course, who's paying how much for this tax is only part of the equation. Remember, even though the Business Margins Tax does collect more money than the generally ineffective franchise tax used to, its job was to help pay for the massive property tax cuts that the Legislature passed in the 2006 special session. Here's what the Legislative Study Group said about HB2 from the 2007 legislative session, the bill that allocated the money for the property tax reduction, which I blogged about at the time:

HB 2 is bad public policy because it uses money for other state priorities to pay for an under funded tax cut. An inadequate amount of revenue has been raised by the tax package that was passed during the 3rd Called Special Session of the 79th Legislature. Only $8.1 billion is available in the property tax fund to pay for the $14.2 billion needed to buy down local school maintenance-and-operations (M&O) tax rates from $1.50 per $100 of property valuation to $1.00.

HB 2 spends $6.1 billion in current General Revenue to make up the amount lacking on tax cuts before the Legislature has the opportunity to review and debate the state budget. According to estimates from the Center for Public Policy Priorities, the $8.1 billion in the Property Tax Relief Fund would only buy down property taxes to $1.20 for the coming biennium instead of $1.00.

To fund the property tax cuts for 2008, HB 2 spends $4,231,466,000 from the Property Tax Relief Fund and an additional $2,724,934,000 from General Revenue. For 2009, HB 2 spends $3,846,492,000 from the Property Tax Relief Fund and $3,846,492,000 from General Revenue.

We were expecting $5.9 billion from the margins tax, some of which was for the property tax cuts and some of which was for general revenue; we got $4.7 billion. The rest was paid for by surplus funds from the last biennium. Thanks to the demands of reconstruction and insurance due to Hurricane Ike, as well as the general downturn in the economy, we shouldn't expect much of a surplus this time around. Yet the idea was to make the property tax cuts even deeper in this biennium. Something has to give.

Posted by Charles Kuffner on January 08, 2009 to Budget ballyhoo