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HB3: A Broad-Based Business Tax for the Politically Unconnected?

by: Capitol P I

Mon Apr 24, 2006 at 01:22 PM CDT

(So do you really want HB 3 right now folks? - promoted by Karl-Thomas Musselman)

Texas needs a fair broad-based, low-rate business tax. But is our state so leaderless and bereft of principle that to pass HB3 we have to laden it with special tax goodies for the powerful and well-connected?

These special interest tax loopholes are worth up to $1.5 billion, according to the SA Express News. If we closed these loopholes, we could provide a $5,000 pay raise for Texas’ middle class teachers, who are paid $6800 less than the national average. But who cares about our teachers and the middle-class taxpayers who will subsidize these tax breaks? What do they matter when there is a Roman feast to be had?

Here are some goodies obtained by the restaurants, oil and gas industry, banks, financial vehicles of the wealthy, and real estate firms (which I am sure are just the tip of the proverbial iceberg):

1. Restaurants and Retailers. Texas restaurants--a powerful lobby to put it mildly- got themselves a special deal to be included in the definition of retailer. As a result, they get a a .5% tax rate instead of 1%-- a 50% tax break. The bill defines retail trade using a 20 year definition from the 1987 Standard Industrial Classification Manual, which just so happens to include restaurants. (See CSHB3, p.3, lines 14-16). Bars and restaurants usually are not considered retailers because they make more than 50% of the products they sell. That’s why the bill contains a hidden, technical-sounding exemption from the 50% plus manufacturing rule for “Major Group 58 [restaurants and bars] of the Standard Industrial Classification manual.” (See CSHB3, p.14, lines17-20)

If any group shouldn’t get a tax break, it’s retailers and restaurants. They, unlike manufacturers, can’t pick up their businesses in Texas and go to China if they don’t like our policies and taxes. And while some retailers have low margins-- the often cited grocers- many have high margins, such as furniture sellers, jewelers etc. But they all get the 50% tax break. Yee Ha.

2. Oil and Gas. The computation of the deduction for cost of goods, which can be deducted from gross receipts for non-service industries, is 7 pages long. (CSHB3, p.28, line 25- p. 36, line l2). This alone is a very bad sign that there are lots of special goodies.

Buried in this definition are exemptions that allow oil and gas operators to deduct almost all their costs, according to Morris Burns, an executive with the Permian Basin Petroleum Association. (CSHB3, p.30, line 2- p. 32 line 17; p33, line 22- p.34 line 6). Mr Burns was apparently so gleeful that he couldn’t keep a secret, telling the Midland Telegram Reporter (April 11, 2006) that the “oil and gas industry ‘got more than we asked for’ in the proposal, which will allow operators to deduct virtually every cost incurred in producing oil and natural gas.”

Guess those in the oil and gas business aren’t making enough money these days with $3.00 a gallon gas at the pump and $75 a barrel for oil. I am sure they will tell us they need even more in incentives to drill. Chomp. Chomp.

3.Banks and All Other Lending Institutions. Despite reaping recently massive profits, financial institutions just weren’t satisfied and had to obtain their own special tax goody in HB 3. So even though interest isn’t normally considered a cost of goods, the bill allows lending institutions-- which includes everything from banks to credit unions to pawn brokers-- to deduct their interest expenses (CSHB3, p. 35, line16-20). Those that got keep getting in our Capitol.

4. Real Estate Firms. You would think that real estate would be sated with the large school property tax breaks that will be a boon to their industry. But no, they had to have more.  By inserting a special provision that defines real estate firm’s commissions to their agents– their major expense-- as not part of “total revenue,” real estate firms will greatly reduce their tax exposure. ( CSHB p. 23, lines 3-8). Many real estate firms likely will pay little in taxes because their “total revenue” without commissions will be under the $300,000 tax threshold. Sooey.

5. Passive Investment Entities. These are financial vehicles used predominately by the rich and famous. The bill exempts all passive financial vehicles, meaning their rich owners won’t have to pay any tax on their interest, dividends, capital gains and profits from their investments-- a huge boondoggle. (CSHB3, p. line 17-24). Since this benefit is especially helpful to the multi-billionaire Bass Brothers, let’s just call it the Bass Brothers’ special treat.

This exemption is the ultimate decadent indulgence by super-rich Texans. Passive investment entities aren’t exempt from federal or most states’ taxes, but the super-rich in other states somehow survive. And the money generated from their investment vehicles spends just the same as income from other businesses.

But Texas’ super-rich are used to being pampered. Texans in the top 1% of income already pay only 3% of their income in state and local taxes, while the middle class pay 8% and the poor 11%. When you combine a 50 cent school property tax reduction with this exemption, the Texas super-rich will pay even a smaller percentage in state and local taxes. I am sure the super-rich feel they are deserving of this tax break. They also probably conveniently forget the fact that the middle-class will pay for their tax break, either in increased taxes to make up the difference or under-funded schools for their kids.

Apparently, only Texas’ rich and powerful count at the Capitol Pig Trough. It seems that our legislators say sweet things about our kids’ education and their teachers when campaigning, but don’t deliver on the Capitol floor because they are too busy engorging the Big Piggies. 

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Winners and Losers (0.00 / 0)
Funny, as Bush would put it, they picked winners (the special interests) and losers (everyone else).

Jebus Dawg. (0.00 / 0)
The utter shamelessness of the Tx Lege is unbelievable, and I speak as one who survived the Az lege of Evan Mecham years.

Before you win, you have to fight. Come fight along with us at TexasKaos.

May I Disagree (2.00 / 1)
I've seen tax bills rammed through fairly cleanly (think Schlueter 1987) and I've seen things go totally to hell (think Hurry 1991).

I've been surprised (astounded, actually) at the discipline displayed this afternoon. I'd like to address the PI's points:

1) Retailers and restuarants generally have high volume but low spreads. They also generally pay taxes three times (producer, wholesaler and retail). I agree that jewelers are an anomoly, mainly because jewels don't have an intrinsic value and can get away with it (because the cusomer permits it and it gets you laid). High-end restuarants pay a ton in alcohol taxes. Low-end retailers generate a ton in sales taxes.

2)One of the main points of the Sadler Committee in (I think) 1997 was that oil and gas had paid a disproportionate amount of taxes relative to their scale of their overall economy (almost 65 percent prior to the enactment of the sales tax in 1961). It is more true today than ever (that's where the surplus and Rainy Day Fund gains have germinated).

3)The commercial lending industry tax structure is so complex that I can't comment. You may be correct.

4) The Realtors got the same employee compensation deal as everyone else got, assuming they are using the personnel cost and benefit basis as opposed to the cost of goods basis. The Realtors' good deal is in the newfound affordablity of homes, not in special tax breaks.

5) Most passive investments are handled by retirement vehicles, insurance, REITs or similar outfits that attract small investors. The Bass Brothers have a great deal, but we shouldn't shut off mom and pop investment options because a few guys in Fort Worth have gamed the system.

Keeping a tax bill clean is damn near impossible. The House is actually doing a pretty good job today.

Business taxes are unjust and nonsensical (0.00 / 0)
A corporation is not a political entity, it cannot vote, it's is merely an abstract organizational unit to allow people to conduct business more efficiently.

The individuals that run corporations are taxed, and rightly so, to fund our government. However, there is no justification for taxing corporations or any business, any amount. In short, it leads to taxation without representation -- unless you want to start giving corporations votes, proportionate to say, their company size. Furthermore, it's also a form of double taxation.

Eliminating corporate taxes will lead to greater economic efficieny, thus lowering prices for consumers everywhere, and rasing wages. The increased economic productiviy will result in higher income tax revenue.

Even if the higher income tax revenue does not make up for the lost revenue from removing the corporate taxes, that is not a problem. I think it would be acceptable to slightly raise income taxes, especially in the top bracker, on individuals. This would be a just approach, because the highest earners would be the only one's affected. Plus, you'd no longer be taxing corporate earnings, which as I said above, are really just individual's earnings, taxed twice and without representation.

You point the the fact that Texas teachers make less than around $6000 of the average teacher salary. Did you know their standard of living is higher if you account for cost of living? Do you know why the cost of living is much cheaper in Texas? It's because our government pays more than lip service to the concept of liberty, and refrains from taxing and regulating excessively. This leads to a much more efficient business and economic enviroment.

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