New Business Margin Tax: Messes With Texas Business

In 2006, the Texas Legislature faced a school finance crisis. The Texas Supreme Court determined that the state had created a school funding system that was tantamount to a statewide property tax. 

 

Because the State Constitution prohibits the implementation of a state property tax, the Legislature called an emergency Special Legislative Session in 2006 to revamp the entire system. Unfortunately, the Republican led Legislature missed the opportunity to make pro-growth changes that would have encouraged, instead of punished, our business community, with what appears to be an unconstitutional state income tax with the “new” franchise tax AKA The Business Margins Tax (BMT).

 

In order to address the Court's mandate, the Legislature sought to buy down school property tax rates across Texas. During this last Session, more than $14 billion of our tax-dollars were set aside for this purpose. Texas leaders hope to keep the tax rate down this upcoming Session by setting aside $3 billion last Session and relying on future budget surpluses. However, with a struggling economy, growing health and human services expenses and losses from Hurricane Ike, property tax relief is likely to be yet another undelivered promise.

 

Legislators are hoping that a battery of increased taxes will also help pay for the rate reduction. Although this includes small revenue generators like a $1 per pack increase on cigarettes, the primary source of funds is a “new” franchise tax (BMT) that has doubled business tax revenues. The old franchise tax produced about $3 billion annually. The “new” franchise tax (BMT) is designed to squeeze about $6 billion from the business community of Texas.

 

The “new” franchise tax (BMT) was sold to the Legislators of Texas as a way to make the current tax more fair and broad based. In reality, the “new” tax (BMT) has only added about 25,000 businesses to the 155,000 that were already paying the old franchise tax. Legislators were also told that they needed to pass this tax in order to pay for the new property tax reduction, but only half of the “new” franchise tax (BMT) revenues are dedicated to property tax relief. Property tax reductions have also been significantly reduced by continued appraisal increases and unprecedented amounts of school bond package elections. Unfortunately, what has happened is that small businesses are being punished, some severely, under this new BMT system.

 

The State of Texas prides itself in nurturing its business community and pushing for jobs and economic development. The “new” franchise tax (BMT) is not providing the property tax relief that we were promised and it has failed to bring every business in Texas under one tent.

 

Senator Dan Patrick and a few other Legislators are preparing to abolish or significantly reform the “new” franchise tax (BMT) this upcoming legislative Session. Their efforts will include returning to a business tax that is based upon profits instead of flow through revenue. If their efforts to abolish the current tax is frustrated, these conservatives will work to increase exemptions for businesses which fail to make a profit or generate less than $1 million in revenue.

 

Most importantly, Senator Patrick and other leading conservatives believe that the state of Texas must lower the tax burden on business, which create jobs, and rely more upon a better sales (consumption) tax system as the ultimate source of fair, equitable and broad based tax revenue.  To this end, expect a lively Session of our Texas Legislature beginning in January 2009, as they search for a better solution. If you are a small business owner, you need to let both your Senator and Representative know how you feel about your new Business Margin Tax.

 

Click here to identify your State Representative and State Senator who represent you and send both of them a letter or email about this issue before the next Legislative Session begins in January 2009.