Burnt Orange Report

Republican Back Door Income Tax

By Andrew Dobbs

This legislative session is headed toward a dramatic meltdown in just about a week as HB 2- the bill that was supposed to make Texas schools more equitable and put more money into them, but actually makes them less equitable and looks like it will force major budget cuts in various districts- heads for a floor debate on either March 7 or 8 according to sources at the Capitol. I'll write another post on all of that jazz shortly, but as for right now I have another peeve to discuss.

At the beginning of the session school finance reform and property tax relief were seen as two sides of the same coin and two separate bills were filed- HB 2 to redefine funding formulae for Texas schools and HB 3 to shake up the tax system in order to get the money for the schools. Now the two have drifted apart and have very little to do with each other (more on that later) and some of the things coming out of HB 3 are likely to raise some eyebrows. First on that list would be the push for a new "Uniform Business Tax" to make up for lost revenue with the major property tax cuts proposed.

Quorum Report has the talking points being passed around to explain and defend the new tax. I'll quote some of them here:

With the stated goals of reducing M&O school property taxes by a third along with reaching the 83% of businesses currently ducking the franchise tax, the House proposal has dubbed the tax on payrolls a Uniform Business Tax.

The rate would be 1.25% of wages already reached by the state's Unemployment Insurance. In other words, employees exempt from unemployment insurance would not subject to the UBT. The tax would be based on gross payroll and paid to the state quarterly. (...)

1. It would more accurately reflect business activity in Texas. "Companies in Texas could not reorganize to avoid a UBT." (...)

3. The UBT is not a personal income tax. Employers are prohibited from deducting the UBT from a paycheck although it is based on the gross wages paid to an employee.

5. Unlike property taxes, businesses can adjust their tax liabilities by adjusting payroll. "Businesses can and do adjust controllable costs, and a primary controllable cost in business is payroll. If a business wants to hire an employee at$8.50 per hour, the business will know in advance thtat the UBT will cost an additional $0.11 per hour. (...)

13. A UBT would be deductible as a business expense on an employers federal income tax return.

14. "A UBT would grow with the economy and with enrollment in public schools." (Ed. Note: It would also presumably shrink when the economy is in recession or other distress.)

The bolds are mine, the editor's notes are Harvey's. So let me get this straight... there will be a new 1.25% tax on payroll and employers will conceivably shift this cost onto employees, making it a 1.25% tax on income. Sure it can't be witheld from your paycheck, but at the point when a tax is being paid on one's income and the tax is in effect coming out of one's pocket how is that not an income tax? In fact, it has all of the negatives of an income tax without some of the biggest benefits- the people who are paying it in the end can't write if off their federal income taxes, though their employers can. Big employers get the best of this deal- they get lower property taxes and they can write off a new tax that they just make their employees pay. A big state and federal subsidy to business in the end.

I don't necessarily oppose this tax- it is better than the status quo, though if you really want property tax relief at the expense of an income tax why not pass Eddie Rodriguez's bill (which would eliminate the bulk of property taxes and dramatically increase state revenue)? My big problem is with hypocrisy. Every election cycle Republicans try and beat us over the head with the income tax- in 2002 they used it to great effect against John Sharp, who didn't even support an income tax- they claim that it will never happen, it's the third rail of Texas politics. But now the GOP is the one introducing it. It is just another sign of their shamelessness and their complete lack of principle.

Finally, like any good income tax, the lobbying for loopholes has already begun. Wal-Mart and HEB are seeking a cap on the amount they have to pay in payroll taxes, though they are far less likely to pack up and leave than many other labor intensive businesses- call centers are the example Harvey Kronberg gives. So not only will be tax provide them with big opportunities to make the people of Texas and the United States at large fork over large sums of money, they will have strict limits on how much they have to pay. Great public policy, Craddick.

Keep your eye on Burnt Orange Report for new developments, and be sure to call all the Republican legislators you can to ask if they'll be supporting the new Back Door Income Tax.