Almost to the end of the first special legislative session of 2005 and the leadership's property tax relief has been whittled down to very little compared to the original promises.

Truth is, it never was a "tax relief" plan as much as it was a tax shift. Property taxes were to have been replaced by increases in sales tax and tobacco taxes, plus a newly designed business tax to replace the current franchise tax that more than 90% of Texas businesses have learned to avoid. (Those avoiding the Texas franchise tax include Dell, SBC and just about any other major company operating in Texas.)

While consumers are still targeted to pay for much of the remaining shift through higher sales and tobacco taxes, the long-awaited reform of the franchise tax has fizzled, leaving the leadership without the revenue needed to make a serious dent on property tax rates.

Why?

The 90% of the businesses in the state who are not paying the franchise tax are not eager to start doing so. Lobbyists for each industry are hard at work explaining why whatever type of business tax is proposed is not fair to their particular industry.

For example, one proposal called for a tax based on the total amount of dollars that a business takes in (known as a "gross receipts" tax). But businesses like groceries (that have a low profit margin but high volume) argued they would pay far more tax per dollar of profit than companies that sell higher-profit items.

Another proposal based its tax on a company's payroll. But that type of tax overloads the share paid by labor-heavy businesses, like restaurants and service firms, and it's really hard on temp agencies whose entire product is labor.

The current franchise tax, to the extent businesses pay it, is partially based on the value of a company's physical plant and equipment. That type of tax is tough on refineries, chemical plants, etc., which are also hard hit by property taxes.

Regardless of the type of tax proposed, new industries such as biotechnology argue that to tax them at all would cut into the funds they need to grow at a crucial time in their development. Of course, once an industry is deemed "new", it seems to keep that label for a long time. The semiconductor industry is certainly not a new industry in this state, yet businesses in that industry continue to argue that they are "at a critical point in their growth" and should not be burdened with new taxes.

It might make sense to provide a break to certain new businesses or industries. But each time you give a particular industry a special break, no matter how worthwhile the reason, you force the rate up for every other business and soon the tax becomes unsupportable by those that are left to pay it.

Of all the business taxes on the table, only a business income tax is viewed as "fair" to all businesses. But collecting a business income tax in Texas is difficult because of Texas' prohibition against a personal income tax.

Why? Because it is easy (and legal) for a business to shift company profits into personal income to avoid the tax. Here's how.

Let's say you and I own a business that's set up as a corporation. The corporation's profits are what's leftover after all expenses are paid. Our salaries are part of those expenses.

So, if we want to reduce the profits that the corporation pays taxes on, we can simply pay ourselves more in salary. In fact, we could pay all the profits out as salary if we wanted to.

The same is true for federal taxes on corporations, except that there is a federal personal income tax, so anything the corporation pays to us to lower its corporate taxes becomes taxable at the personal level for you and me. In other words, at the federal level, the tax man always wins.

The legislature could just decide that you can't deduct salaries paid to officers or major owners of the corporation. But then there would be yet another problem.

Let's say you run your own yard work business. Your take-home pay is what you collect from your customers, minus your expenses. That's also your business income. So, by taxing your business income, we're taxing your take-home pay. That means its a personal income tax, prohibited in Texas.

So what should happen?

First, the leadership should make absolutely clear that there will be a new business tax. And they, and the legislature, should decide and agree on how much the tax needs to raise, along with any other taxes and revenue sources, to fund the schools and reduce property taxes. That has not happened.

Second, all forms of business tax should be on the table, and the business community should participate in determining what will work. The process so far has been hampered by the governor shooting down tax proposals before full debate, without offering a plan for solving the problem. (The current plan that he is advertising is a stop-gap measure, not a long-term solution.)

Third, every proposal that is seriously considered should be evaluated for fairness, impact on the business climate, impact on Texas consumers, and potential for growth as the economy grows. One of the flaws of the proposed sales-tax-for-property-tax swap is that it grows no faster than the current system, which means local property tax increases, not state funds, will still have to pay for teacher pay raises and inflation costs.

Fourth, we should be honest enough to take this whole effort off the table if the leadership is not fully committed to change. Tax changes are always difficult. President Bush, as governor, learned that when he tried to reform the business tax in 1997. Even with the cooperation of the Speaker and Lt. Governor, and the cooperation of Democrats in the House, he was unable to persuade the Republican-controlled Senate to pass his plan. The continued rumors that Speaker Craddick would rather wait for a court decision on school finance encourages any business group that wants to kill any plan.

Fifth, and finally, we must factor the schools into this equation. The tax bills being considered provide no new money for the schools - rather they swap existing property taxes for other taxes. In any such swap, some people will pay more so that others can pay less, not exactly an easy sell to those paying more. Many Texans are unwilling to pay more taxes under any circumstances, but most will pay more if it truly means more for teachers and more money to the classroom. The plans being considered do not do that.

The current special session of the legislature ends Wednesday.

Scott Hochberg
State Representative
District 137 – Southwest Houston