Kronberg analysis of HB 3 debate

Political pundit and friend of TSCPA Harvey Kronberg offers an exceptionally insightful analysis of the major sticking points between the House and Senate with respect to HB 3, the tax reform component of school finance. Harvey generously allows us to post his material here on the blog, but for the very best the web has to offer in Texas political analysis, interested blog readers should subscribe to Harvey’s web-based Quorum Report publication.

Here’s what he had to say about reconciling HB 3 last night:

The conference committee on CSHB 3 met in a cordial meeting this afternoon. Neither side appears to have budged much on their position in the last 24 hours, but the House did review the tweaks and changes to the plan it had passed out of the floor in March.

Just for review, here are some of the finer points of the discussion:

What’s new in the House’s reformed franchise tax plan? The House has added a “floating floor” to its proposal. Businesses can pay either 1.15 percent on total compensation or the current franchise tax of 4.5 percent on earned surplus or .25 percent on capital. But a business cannot pay less than half the revenue generated by the larger of the two options under the revised franchise tax proposal.

Rep. John Otto (R-Dayton) also explained that the House has now exempted general partnerships and sole proprietorships, as well as passive investments such as REITs, because “it’s too easy for capital investment to pick up and leave the state.”

Just why are the numbers so different on the Delaware and Geoffrey loopholes in each plan? The House is talking $450 million in new revenue by closing the loopholes. The Senate estimates almost twice that amount, up to $864 million.

Sen. Steve Ogden (R-Bryan) pointed out the benefit of closing the loopholes is dependent upon the tax rates set under each plan. Under the compensation/payroll tax component of the House franchise tax option, the state gets a paltry $140 million from closing loopholes the first two years. To Ogden, this makes the benefit of closing the loopholes negligible, which he attributes to the low rate on the compensation tax.

Ogden prodded the House to try to bring the franchise tax down and the payroll tax up as a way to benefit more from closing the loopholes on the tax system. 

Rep. Charlie Geren (R-Fort Worth) noted that the intention of setting the payroll tax so low in the House plan was to address those businesses that are labor intensive but have low profit margins. Addressing the fairness issues for different industries was a high priority in the House. Geren noted that the “floating floor” on the franchise tax rates could address some of the concerns Ogden raised about the low rates in the House plan.

The lower the House business tax rate, however, the less the state benefits from closing the tax loopholes. And the less revenue the House raises from closing those loopholes, the more it has to depend on sales tax increases. Ogden wants to see more balance.

How did the House set its sales tax proposal and how has it changed? Geren noted that the House sales tax proposal was based, literally, on what can pass the House.

The taxes proposed by the House include a 1-cent increase on sales, plus a sales tax rate of 7.25 percent on motor vehicle and boat sales. Tobacco taxes are set in the plan at $1 per pack on cigarettes, plus 13 percent on other tobacco products and cigars. The sales tax base is broadened to include automobile repairs and bottled water, but cosmetic surgery and snack food taxes are out of the House proposal.

Geren said the snack food tax was abandoned, more than anything, because it’s difficult to collect. Few retailers have the ability to program cash registers to set more than one tax rate, such as 7 percent for one type of product and 10 percent for another. You can collect 7 percent or 10 percent, but you can’t collect both, Geren said.

The House passed on the alcohol tax because alcohol already has excise taxes. Geren said three votes on alcohol had failed by more than 100 votes in the House.

What about that new Brimer proposal? Sen. Kim Brimer (R-Arlington) continues to tinker with a new franchise tax proposal, using different components to create a revised single franchise tax with an incorporated compensation component.

The new Brimer tax option would be a single-rate franchise tax with no gross receipts and an end to loopholes. It would carry a $30,000 deduction per employee and a 20 percent limit on compensation. Comptroller numbers show such a tax rate proposal could generate $2.2 billion, which would bring the proposal closer to the amount of revenue the Senate considers necessary to generate under a business tax, Brimer told the committee.

What look like the non-negotiables? Sen. Judith Zaffirini (D-Laredo) made it clear early in the discussion that the Senate will go no higher than one-half cent on the sales tax increase. Senators have been firm they will not go up to the House’s 1-cent proposal.

Rep. Jim Keffer (R-Eastland) has argued, for the House’s part, that businesses now pay about 57 percent of the state’s sales tax; hence, the House’s view is that sales tax is part of the House’s business tax structure. He adds that the state also is far more generous on exempting staples (and we’re not talking the Senator) when it comes to sales tax.

Brimer did some quick computations on Keffer’s math – pushing off 57 percent of the sales tax increases to business – and still sees the greater portion of the revised tax burden put on consumers. Businesses get a $2.5 billion tax property tax break while paying only $2 billion in taxes.

To the Senate, this gap in taxes for business is self-defeating. The goal is a neutral tax not a tax break for business. Brimer calls this “a half-billion dollars tax shift to the consumer.” The two sides agreed this was “something we need to work on.”

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