Interesting tidbits from a Ways and Means hearing

Yesterday the House Ways and Means committee held a hearing in Austin to deal with their Interim Charge: Monitor the revised franchise tax and identify changes to simplify the tax and improve compliance and fairness.  TSCPA was asked to testify at the hearing and we were one of the last to do so.

During the hearing there were suggestions offered as to how to make the revised franchise tax (margin tax) more efficient and fair. Since most of the suggestions would reduce revenues, the weight of the forecasted $18 billion budget shortfall for the next biennium hung heavily over the hearing. Witnesses confessed (not while testifying) that they didn’t anticipate the legislature could implement their suggestions in the current budget environment. One witness even stated during his testimony that he was nervous about opening the franchise tax statute for consideration during a time when more state revenue was needed, clearly fearing that there was more taxpayer risk than opportunity.

During TSCPA's testimony Chairman Oliveira (D-Brownsville) confirmed everyone’s speculation: he said he presumed that any changes suggested to improve efficiency or fairness at the expense of state revenue would have to be accompanied by means to offset that revenue. Oliveira asked me directly if TSCPA might have ideas about how to raise revenues to offset such improvements; he was not happy when I declined that opportunity.

The committee hearing seemed to confirm what many participants already thought; budget deficit time is not the time to try to make franchise tax revisions.

But there was some interesting information that came out during the hearing. Associate Deputy Comptroller Mike Reissig presented a Franchise Tax Analysis and Update which included some explanations of why the revenue from the tax fell short of estimates, the most significant of which were more businesses claiming the cost of goods sold deduction than anticipated and the amounts of the COGS deduction being much greater than expected. Click here to read Mr. Reissing’s presentation (PDF).

Here are a few additional tidbits from the hearing:

  • There is a substantial discrepancy among franchise taxpayers in the amount of revenue that is taxed and the amount of tax paid consequently:
    • Taxpayers permitted to deduct cost of goods sold paid taxes on 18% of their revenue.  
    • Taxpayers permitted to deduct compensation but not COGS paid taxes on 45% of their revenue.  
    • Taxpayers not permitted to deduct either COGS or compensation paid taxes on 70% of their income.  
  • The State Comptroller hopes to have e-file capability similar to the IRS for franchise tax returns filed in 2011.
  • $335 million in franchise taxes have been collected by the Comptroller’s enforcement division.
  • Over 1,000 taxable entities filed paying the .5% rate for retailers and wholesalers that should have paid the 1% rate for all other taxpayers.
  • 2,000 taxpayers pay 60% of the total franchise tax and they will all be audited over a four year period.
  • $3.84 billion will be the revenue collected from the franchise tax for 2010. When economic times return to normal the maximum revenue production from the tax will likely be $5 billion.
  • John Hellman, revenue estimator for the Comptroller made the following points:
    • Texas suffered 14 months of declining sales tax receipts. The last four months' receipts have been increasing but at very slow pace.
    • Texas lost 430,000 jobs (4.1% of all people employed in Texas); it will likely be the end of 2011 before Texas employment recovers to pre-recession levels.
    • Job loss was not equal across industries. Construction, oil and gas, and manufacturing jobs declined 10% while the average job loss across other industries was 2%.
    • Oil and gas production taxes have held up well during the recession and should come in over estimate this year by $100 million.
    • The price of natural gas is not likely to rise much in the near or intermediate term.
    • $8.2 billion will be the balance in the rainy day fund as of Aug. 31, 2011.

There was also some discussion at the hearing about the likelihood of a state budget deficit for the current fiscal year. Rather than try to recount that discussion, the Texas Tribune has a good article Documents Reveal Deficit in Texas State Budget if you are interested.

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