Fixing the fix

BROWNSVILLE — It seemed like a good idea at the time: replacing the state’s loophole-encumbered business tax with one that would get more companies on board and spread the pain around a little more evenly.

Until 2006 when legislators approved a revised franchise tax commonly referred to as the margin tax, only a small percentage of state’s businesses were paying the old franchise tax, implemented during former Gov. Ann Richards’ administration in the early 1990s. Scores of companies had figured out ways to wriggle out of paying the tax, intended as a funding mechanism for public schools, by changing their companies’ legal definition from corporation to limited liability partnership.

Enter the margin tax, the only one of its kind in the country. While it excludes businesses with revenues under $1 million a year, it nevertheless managed to corral a much wider segment of the private sector after once it was implemented in 2007. The purpose was to partially shift public education funding away from local property taxes toward a statewide tax. Meanwhile, the state cut its property tax rate from 1.5 percent to 1.08 percent.

Now “the fix” needs to be fixed, according to critics.

For one thing, the $4.5 billion in revenue generated by the margin tax in 2008 was $1.4 billion short of what the state comptroller office’s had projected, forcing the state to lower projections for 2009 and beyond, leaving a gap between available and needed funding. Also, aspects of the tax appear to impact some businesses disproportionately.

State Rep. Rene Oliveira, D-Brownsville, chairman of the House Ways and Means committee, was among eight lawmakers to vote against the margin tax in 2006. Even so, Oliveira will be among those deeply involved in addressing what he and others see as flaws in the legislation.

A flood of “tweaks and fixes” to the original legislation resulted in billions in lost revenue and an unfair burden on certain businesses – specifically, service companies forced to pay tax on 100 percent of revenue even if it’s mostly “pass-through” revenue used to hire subcontractors.

“The goal was to bring in more businesses and spread the tax burden around, because frankly very few businesses in Texas were paying the business tax,” Oliveira said. “The problem was that there were many compromises made that left some very clear losers in the process. There are several areas of the tax code that really need to be looked at to see if we can fix some of the inequities.”

SGS Industrial Supplies, based in Brownsville, was among the minority of Texas businesses paying taxes every year under the old franchise tax. Bill Connor, the company’s president, was miffed that so many firms were dodging the tax and welcomed the state’s attempt to spread the pain.

“The people who never had to pay it before are really upset,” he said. “My opinion is you treat everybody the same.”

Connors said the margin tax was an improvement in that his company’s capital assets — cranes, trucks, forklifts, etc. — are no longer used to calculate how much tax his business pays. The margin tax is based on revenue.

“(Capital) was a factor in the amount of tax you paid if you had a lot of stuff — even if you weren’t making any money,” he said. “That didn’t seem fair at the time. It’s a different animal now.”

That said, Connor acknowledges problems with the margin tax — such as its complexity, an issue he had with the old franchise tax. A payroll tax, for instance, would have been simpler, though an attempt in the Legislature to enact one was shot down, he said.

“It’s very convoluted,” he said. “I’ll put it that way. I thought a payroll tax seemed very straightforward and simple. Now it’s just like the old franchise tax. It’s another tax return you need to fill out and submit to the state.”

J.J. Garza, Oliveira’s chief of staff, said lawmakers will have to address not just fairness issues but whether the state has enough money to operate. Any chance the margin tax would fill the gap left by cutting the property tax rate evaporated with the recession, he said.

“We were short to begin with,” Garza said. “They promised more than could deliver and then hoped we would make it up in the end. That’s not going to happen.”

The margin tax probably isn’t going anywhere, though fixing it likely will consume a great deal of lawmakers’ time once the next session rolls around. Garza said his boss will be “as deep in it as deep can get.”

“We’re not in session till January 2011,” Oliveira said. “We’ve got 14 or 16 months to study this and see if we can come up with a plan that will be fair and will muster the votes necessary to pass it. It will take a bipartisan effort to change this tax and address these inequities. Writing a tax bill is probably the hardest thing to do in the Legislature.”

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Steve Clark is a reporter for The Brownsville Herald.