Political drama surrounding the margin tax

Remember when State Senator Dan Patrick (R-Houston) asked Comptroller Combs to extend the margin tax deadline to October 15? Not surprisingly, the Comptroller declined to grant Patrick’s request.

Now the Senator is pleading his case to the Governor.

Think he’ll have better luck with Perry than he did with Combs? Not likely, given that Perry has already been put on the defensive about the margin tax once already this week: U.S. Senator Kay Bailey Hutchison called the margin tax "an abject failure" in what most reasonable observers would characterize as a campaign speech.

Dewhurst has weighed in on the issue too, telling the Greater Austin Chamber that we ought to throw the whole thing out and go back to the old franchise tax. Harvey Kronberg analyzes Dewhurst’s comments in this excellent dispatch from the Quorum Report:

While Perry and Hutchison trade shots, Dewhurst tells business group he wants to negotiate with Senate, House on possible replacement.

Lt. Gov. David Dewhurst told a group from the Greater Austin Chamber of Commerce yesterday he would like to consider a repeal of the new margins tax and return to the concept of a fair low-rate broad-based franchise tax.

It’s not quite the sparring match that took place between Sen. Kay Bailey Hutchison and Gov. Rick Perry reported in the Austin American Statesman yesterday, in which Hutchison told the Texas Association of Business that the margins tax was an abject failure and Perry’s office responded that Hutchison didn’t bother to raise concerns or offer alternatives at the time of its passage.

Dewhurst probably looks tame by comparison, but he, like Hutchison, is frustrated by what he called the “lack of benefit” from the margins tax.

“Most of you all have seen that from your property taxes,” Dewhurst said. “We thought it was going to be dramatic. We expected to see property taxes reduced by a third, but it hasn’t quite turned out that way.”

The margins tax was supposed to bring in $8.5 billion a biennium to offset the $14.2 billion cost of the state’s property tax cut. Even now – before the tax has been collected – that total has been scaled back to $7 billion per biennium, Dewhurst said.

“The John Sharp gross margins tax was not my first idea, not my second idea or even my third idea,” Dewhurst told the group at a breakfast meeting yesterday.

What to do? Dewhurst wants to talk about a return to the original idea of taking the franchise tax, reducing the rate and applying it across more businesses. One of the biggest advantages to such an approach is that when you make some money, you pay something small. When you don’t make money, you don’t pay at all, he said.

“I’m going to get the Senate to work with me,” Dewhurst said. “And then I’m going to go over to the Speaker and see if we can’t this back to a traditional calculation.”

Dewhurst noted the Senate had passed its own version of an expanded franchise tax twice. Dale Craymer of the Texas Taxpayers and Research Association agreed that the full Senate had signed onto its own version of an expanded business tax early in the 2005 session.

What eventually came out of the Senate, however, was Sen. Kim Brimer’s (R-Fort Worth) proposed choice between a tax on profits that was extended to partnerships or a payroll tax. A floor was added, based on gross receipts. Craymer recalls that proposal was dismissed because it didn’t generate enough revenue.

So what about the benefits of a tax that is more sensitive to economic downturns, one that would not require businesses to pay little or no tax in tough times.

“Anytime you make a tax more sensitive to profits, you do run the risk of being at the mercy of the business cycle,” Craymer said. “Obviously, if the economy turns down, your tax receipts are likely to become more volatile as well. Luckily for us, our economy (in Texas) continues chugging along. It’s not suffering in the same way that other parts of the country are.”

At this point, with no true revenue calculation from the margins tax, it’s difficult which one would be the least harmful way to go, Craymer said.

After the breakfast meeting, Chamber Chair Joe Holt said it was still early to get a good read on the reaction to the business margins tax. Yes, there was buzz out there about the tax, but that was to be expected with any new tax, Holt said. Craymer agreed, saying it was too early to know what effect the tax was having on business.

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