Beginning on June 15, state business owners are required to file the new controversial Texas Margins Tax. Not only are small business owners across the state up in arms, but Sen. Kay Bailey Hutchison has called the tax an "abject failure" and Lt. Gov. David Dewhurst is already advocating that it be repealed. This is all for good reason, as the tax has failed in its initial goal and puts undue strain on small-business owners.
The tax was originally passed in May 2006 to replace the previous franchise tax and to attempt to offset property tax burdens. It would do so by encompassing a greater number business that previously escaped the franchise tax by filing as limited liability corporations, among other distinctions. However, the tax has completely failed to lower property tax burdens. This is partially because the tax is not anticipated to generate enough revenue to match the corresponding cut in property taxes. Also, appraisals across the state are increasing by enormous rates, making the cut in property taxes negligible. For example, the Houston Chronicle reported that commercial property values in Harris county were up 34 percent this year.
Accountants are also baffled by the new tax code. The tax was originally due May 15, but the state gave taxpayers another month so that business owners and accountants alike could figure out what was going on. The reason for the confusion is the so called "margin" part of the tax. The new "taxable margin" is the lowest of three figures: total revenue minus the cost of goods sold, total revenue minus compensation and benefits, or 70 percent of total revenue. The taxable margin is then multiplied by 1 percent for most businesses and 0.5 percent for retailers and wholesalers (a seemingly arbitrary distinction), which requires accountants and business owners to calculate all three possible "taxable margins" and deal with the red tape involved with each. Oddly, since this tax is a tax on revenue, not profits (as the previous franchise tax was), ridiculous situations will arise in which companies that are unprofitable or barely profitable end up owing state taxes, but not federal ones.
Administrative complications aside, the National Foundation for Independent Businesses, a small- business advocacy group, has been the most vocal opponent to the new tax, claiming that it strangles small businesses. According to an NFIB survey, 84 percent of those who paid the former franchise tax will see their taxes increase over 100 percent, and more than 40 percent said they would pay in excess of 500 percent over their previous payment. At this point, the NFIB is not calling for an all-out repeal of the tax, but rather for reforms of the current margins tax to diminish tax burdens on smaller businesses.
The folly of this legislation should be clear. Granted, it may not be a bad thing to broaden the tax base to businesses that were previously exempt. But to increase the tax burden on small business to a degree such as the Texas Margins Tax is doing can only do harm to Texas' economy and eventually its future tax revenues. In 2007, prior to the new margin tax, the state comptroller reported that 520,000 out of 700,000 tax receipts were filed by taxpayers in businesses making less than half a million dollars. Though this category generates significantly less tax revenue than other brackets, small businesses still play a vital role in Texas' economy. Unlike larger businesses, many small-business owners do not have the ability to adjust easily to higher tax rates and are forced to either close or pass their costs onto consumers. Fortunately, potential gubernatorial candidates Hutchison and Dewhurst have already expressed that they are willing to make changes to nonsensical tax legislation like the new margins tax, and make the tax code more equitable for businesses of all sizes.
Antel is a philosophy senior.
