Foundation: Texas economy will benefit from business tax relief

AUSTIN – The Texas Public Policy Foundation applauds the leadership of Gov. Rick Perry, Sen. Dan Patrick, Rep. Rene Oliveira, and all of the legislators whose efforts led to today’s signing of House Bill 4765, which increases the exemption for the state’s gross margins tax.

“Small businesses are responsible for most of the jobs in our modern economy,” said Talmadge Heflin, Director of TPPF’s Center for Fiscal Policy. “This period of economic difficulty makes it all the more important to support them, and we applaud Gov. Perry and our legislators for rising to the challenge.”

During the last several years, Texas has led the nation in job creation, exports, and business climate. Recent analyses indicate that Texas was one of the last states in the country to enter the national recession and will be one of the first states to emerge from it.

“Our research indicates that low taxes are vital to a vibrant private sector,” Heflin said. “Texas’ economy is the envy of the nation because our state leaders have kept taxes and spending low, which has enabled businesses to use more of their resources for job creation.”

The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation. Heflin served 11 terms in the Texas House of Representatives and chaired the House Appropriations Committee in 2003, leading the Texas Legislature’s successful efforts to close a $10 billion budget deficit without a tax increase.

The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin, Texas.

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Foundation: Taxpayers fared well in 2009 legislative session

Key wins are adoption of conservative budget and defeat of higher taxes

Taxpayers fared well this legislative session, according to the post-session assessment of the Texas Public Policy Foundation.

“The Legislature adopted a relatively conservative budget, needed eminent domain reform, and improved public school accountability, while cutting taxes for small businesses,” said Justin Keener, the Foundation’s vice president of policy and communications. “To taxpayers’ relief, they defeated the expansion of government-run health insurance and several tax increases. Texas remains poised for a bounce back from the global recession thanks to lawmakers’ actions to maintain our state’s competitive edge of low taxes and a reasonable regulatory environment.”

Keener praised the Legislature’s action to reduce the bite of the gross margins tax on small businesses. “While we would have preferred a rate reduction for all businesses, increasing the exemption to $1 million for the next two years and to $600,000 permanently will be a great benefit to the small and startup enterprises that are the backbone of the modern Texas economy,” he said.

While there was not much forward movement on taxpayer protections such as improving the state’s expenditure limit and building upon Texas’ position as a leader in financial transparency, taxpayers dodged several bullets in the forms of billions of dollars in proposed new taxes and fees. The Foundation cited the failure of local-option transportation taxes and the unemployment stimulus legislation as the two biggest bullets that taxpayers dodged.

“During difficult times, Texas families expect their governments to scrutinize their budgets and set priorities in the same way that they have to,” Keener said. “This is not the time to ask citizens to raise taxes and fees, especially when other alternatives are available. The House showed true statesmanship in vetting the tax plans and rejecting them.”

The Foundation also cited the defeat of legislation that would have expanded unemployment eligibility, thereby accepting federal stimulus dollars in return for a likely permanent business tax increase.

“Our research has shown that one-time federal unemployment funds often come with conditions that permanently increase employer taxes,” said Talmadge Heflin, Director of the Foundation’s Center for Fiscal Policy. “Gov. Perry was right to reject these funds, and thankfully the Legislature ran out of time before it could overrule him.”

Heflin praised the Legislature for adopting a budget that stayed within population growth plus inflation, and for not tapping the Economic Stabilization Fund. “The state should have almost $9 billion set aside next session to pay for any emergency situations or tax relief initiatives,” he said.

According to the Foundation’s Bill Peacock, director of the Center for Economic Freedom, eminent domain reform moved forward for the first time since 2005 with passage of HJR 14.

“If adopted by Texas voters, this constitutional amendment will stop local governments from using blight designations to condemn blocks of perfectly good homes and businesses for economic development projects,” Peacock said. “While work still remains to fully address the ramifications from the Kelo Supreme Court decision, private property owners came out ahead this session.”

Texas public school students and taxpayers saw improvements. “The Legislature made considerable strides in education by preserving and expanding Texas’ teacher merit pay program, as well as providing for a meaningful accountability program to better prepare children for work or college,” according to Foundation education policy analyst Brooke Terry.

Despite these advances, Terry said many public school children will suffer due to the Legislature’s inability to lift the arbitrary cap on charter schools.

“More than 17,000 Texas children are on a waiting list to enter a charter school and we are very disappointed that the Legislature failed to lift the cap,” Terry said. “Texas charter schools have demonstrated amazing results by inventing new models to educate students and prepare them for success in college and the workplace.”

Charter schools are public schools supported by legislators in both parties. However, legislation to raise the arbitrary cap on charter schools and to help effective open-enrollment charter schools expand was vehemently opposed by the teacher unions.

"Major bills fail every session leaving work unfinished, yet industrious Texans still go about their business. This session will be no different," Keener said of the sunset legislation for the Texas Department of Insurance and the Texas Department of Transportation. "The governor and the Legislature have several options before them and we encourage them to take a measured approach when evaluating them."

Justin Keener is Vice President of Policy and Communications for the Texas Public Policy Foundation.

The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation. Heflin served 11 terms in the Texas House of Representatives and chaired the House Appropriations Committee in 2003, leading the Texas Legislature’s successful efforts to close a $10 billion budget deficit without a tax increase.

Bill Peacock is Director of the Center for Economic Freedom at the Texas Public Policy Foundation.

Brooke Terry is an education policy analyst at the Texas Public Policy Foundation.

The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin. More information can be found on the Foundation’s website, www.TexasPolicy.com.

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TPPF COMMENTARY: No margin for error

By The Honorable Talmadge Heflin

Just how much money should Texas businesses pay under the newly revised franchise tax? That is the question many legislators are trying to answer and one that will soon be up for serious debate.

Calls for re-examining the revised franchise tax (a/k/a the margin tax) have been growing in number as the economy retracts and more Texans lose their jobs. But the economic decline is only part of the reason people are taking a second look at the new business tax.

According to the Comptroller’s latest revenue estimate, the margin tax collected $4.5 billion from Texans after only its first full year – a whopping 46 percent increase over the amount collected from the old tax the year before – making it the second costliest tax in the state.

And while an increase in business taxes was expected to some degree, the higher taxes were supposed to be offset by lower property taxes. While school district property taxes did decline by $2.3 billion from 2005 to 2007, according to the Texas Taxpayers and Research Association, Texans’ total property tax bills still increased by $1.7 billion – making for higher taxes on two fronts.

Making matters even worse is that all businesses with at least $300,000 in total revenue are subject to the margin tax, whether or not a business made money. Since the tax is based on gross receipts rather than profitability, many businesses above the $300,000 threshold that were unable to turn a profit have been forced to make an impossible choice: close up shop, or take out a loan to pay their tax bill and hope that their business improves.

Hit with a gigantic first year tax increase, continually rising property taxes, and an added “do-or-die” pressure, it’s no surprise that many Texas businesses are crying foul.

Fortunately, a number of lawmakers from both sides of the political aisle seem to have taken notice of the issue and have made it a top priority this session. Among some of the more promising proposals that have been filed:

* Four legislators have filed identical bills that would exempt businesses with $1 million or less in total revenues from the margin tax. Presently, only businesses with $300,000 or less in total revenue are exempt.

* Another proposal would amend the constitution to require a three-fourths super-majority vote from each house to increase the margin tax rate any further.

* The boldest proposal would move the business tax exemption threshold from $300,000 to $600,000 starting in 2010; $1 million in 2011; and repeal the tax altogether in 2014.

Reforming the margin tax is the first major step the Legislature can take to help businesses and consumers weather the ongoing economic storm, but it is only the first step.

Beyond lowering taxes, the Legislature needs to tighten its belt and rein in spending. Remember, if legislators can’t keep budget growth in check today, then taxes will have to be raised tomorrow.

As the margin tax debate grows to a climax over the next three months, you can be sure that businesses everywhere are watching closely – not because businesses are greedy or don’t want to pay their fair share. They are watching because their very livelihoods depend on it. They are watching because for them, there is no margin for error.

The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He is a former Chairman of the Texas House Appropriations Committee.

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TPPF commentary: Employment statistics highlight need for more pro-growth policies

By James Quintero

Finding a job in Texas just got harder.

Last month, the Texas Workforce Commission reported that the state’s economy shed 25,700 jobs in December 2008. Among the hardest hit industries were manufacturing and trade, transportation, and utilities which lost a combined 16,100 jobs.

The state’s unemployment rate rose to 6 percent, its highest level since July 2004, and is projected to reach 6.6 percent later this year.

December’s sour employment figures mark the second consecutive month that seasonally adjusted non-farm employment fell. The national recession and falling oil and gas prices, it seems, have finally begun to take their toll on the Texas economy with more trouble on the way.

Comptroller Susan Combs’ recent assessment of the Texas economy warns that 111,000 jobs will disappear over the first two quarters of this year before the job market begins to rebound in the fourth quarter. The economic recovery, however, hinges on whether or not businesses have the confidence to begin hiring again in the months ahead. Based on the results of one recent survey, things aren’t looking too good.

The Federal Reserve Bank of Dallas’s Texas Manufacturing Outlook Survey, which polled over 100 Texas manufacturers, found that 47 percent of business executives felt their companies faced a “dismal outlook” moving forward while 55 percent of respondents were concerned about “worsening market conditions.”

With employers skittish and unemployment certain to rise over the next few months, the need for more pro-growth policies couldn’t be more real. The economy is going to need smart public policy that frees Texas businesses, workers, and families from the costs of big government.

Fortunately, a number of promising bills are working their way through the Legislature.

Several legislators have already filed proposals to increase the exemption for the state’s new margin tax from $300,000 to $1 million, allowing more small businesses and entrepreneurs – the heart of the state’s economy – to keep more of what they had earned. The timing of this bill couldn’t be better as many small businesses are just trying to keep their doors open.

Another encouraging piece of legislation is House Bill 508, authored by Representative Lois Kolkhorst. The bill would authorize the Comptroller’s office to investigate the effects of replacing Texas’ property taxes with a broad-based sales tax. Although the bill would only authorize a study and does not guarantee any future tax relief, alternatives to the property tax system need to be reviewed.

Texas businesses and homeowners pay some of the highest property taxes in the nation – the state ranked 13th nationally in per capita property tax collections for fiscal year 2006, according to the Tax Foundation. If Texas is going to successfully attract businesses and jobs, we must address the issue of ever-escalating property taxes.

One of the most important bills in the upcoming session is House Bill 994 by Representative Ken Paxton, which would change the state’s constitutional spending limit away from the growth in personal income to the sum of population growth plus inflation.

This measure is important because it effectively caps the cost of state government per person. Growth in the state’s budget must be closely guarded to avoid higher taxes in the future, and let businesses who are looking to relocate or expand know they are welcome in Texas.

Bringing jobs back to Texas is going to require smart, forward-thinking public policy that emphasizes low taxes, fiscal discipline, and limited government. How closely lawmakers choose to follow that model will dictate much of the coming economic recovery and how quickly all of us see an improved job market.

James Quintero is a fiscal policy analyst at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.

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TPPF COMMENTARY: The importance of business friendliness

Earlier this week, Comptroller Susan Combs issued preliminary estimates on the first batch of receipts from Texas' new margins tax. While the elected officials wring their hands over whether the tax brings in as much revenue as expected, TPPF Senior Fellow William Murchison writes in this week's commentary that they ought to also concern themselves with how the tax affects its long-standing positive relationship with businesses.

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The importance of business friendliness

By William Murchison

We understand desirability well enough in human terms. Don’t we?

Want a friend, be a friend, is the rule. Figure out the relationship in terms of mutual satisfactions. OK?

Why is it so hard, in that case, to apply the rule of thumb to governments and the ways they order, or disorder, their relationships with businesses whose job-creating, tax-paying potential they can’t live without? A state (or a city or a county or a country) that wants to be loved, economically speaking, must make itself lovable, by implementation of business policies that business loves.

Which brings us, with some satisfaction but just a bit of trepidation, to the question of how we’re doing in Texas along those lines.

So far, so good, is the immediate answer. But there’s the future to think about.

Texas likes business. Its fiscal and regulatory policies generally inspire business to like Texas in return. Forbes magazine calls modern Texas the fourth-best state for business. Not bad – except a year earlier, it was second best; falling this year behind No. 1 Virginia, No. 2 Utah, and No. 3 North Carolina. Hmmm.

Let’s see what the Washington, D. C.-based Tax Foundation has to say, based on its analysis of our state’s tax policies. Yes, again, we’re doing reasonably well: No. 8 in the country for “tax climate.”

The top three – Wyoming, South Dakota, and Nevada – aren’t strictly comparable to a semi-industrialized state with 24.1 million people and 254 counties, so let’s not start getting jealous. Let us note instead that Texans pay only 9.3 percent of their income to state and local government, compared with a national average of 11 percent. No small reason for our standing, as practically all Texans know, is the absence of a state income tax. Only six other states enjoy that blessing.

So what’s the problem here? Is there a problem?

A new feature of life called the Margins Tax – a 1 percent gross receipts tax – has begun to haunt those who ponder the state’s economic future. Enactment of the Margins Tax, in 2006, as replacement for Robin Hood property tax reductions, caused Texas’ drop to eighth place in tax climate from a consistent sixth dating back to 2003.

Where’s this thing going? That’s the question we have to ask with intensity and persistence. The last thing Texas should want at this stage is the inadvertent shaping of tax policies that undermine its relationship with business – that make our state not a more, but rather a less, desirable place to set up shop and hire people and send goods to market.

As the Tax Foundation observes, “The modern market is characterized by mobile capital and labor. Therefore, companies will locate where they have the greatest competitive advantage. States with the best tax system will be the most competitive in attracting new businesses and most effective at generating economic and employment growth.”

Whining and sniveling – the “don’t they love us anymore?” stuff – won’t help a bit. A relationship of mutual satisfactions entails projection of those satisfactions in both directions. When, for one reason or another, those satisfactions wane, new considerations take over. Suddenly the friends, the pals, the running mates, see each other as strangers.

A “business friendly” environment depends directly on acts of friendship: like saying, through specific tax policies, hey, we want you here. It’s harder than it sounds. A state growing as fast and as unpredictably as Texas finds itself challenged to expand essential services at prudent cost. What has to drive budgeting in Texas, at all governmental levels, is scrupulous consideration not of what we might want if we had all the money in the world, but rather of what we need most, and how we might most prudently pay for it.

We’ll never quit wrangling over taxes. No society does. We’ll know we’re getting somewhere when our political leaders signal with one heart and one accord their understanding of tax policy as a two-way street: as even and well-paved for those who pay the taxes as for those who consume the services.

William Murchison is a Senior Fellow at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.

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