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November 19, 2008

Opponents say margin tax puts burden on business, provides little funding for public schools

By Raymond Billy

Special to The Progress

A coalition representing the business and education communities have spent the previous six months trying to get state legislators’ attention. Now that the 81st Legislature is set to convene in about 60 days, those groups are anxious to see if their lobbying has paid off.

The issue that has united them is the new Texas Margins Tax. The tax — which replaced the franchise tax — was intended to replace the revenue lost by property tax reductions. Lawmakers created the margin tax in 2006 after a 2005 Texas Supreme Court ruling that said the state’s former method of funding public schools amounted to a statewide property tax, which is unconstitutional, justices said.

“Through [the tax] , businesses are taxed on the lesser of three values: total revenue minus the cost of goods sold, total revenue minus employee compensation and benefits or 70 percent of total revenue,” according to the San Antonio Business Journal. Most businesses pay a 1 percent rate, but retailers and wholesalers pay .5 percent.

But, school officials say the tax is inadequate to fund public schools and the reforms to school financing limit, too strictly, the amount of money districts can receive in state aid. State aid rises or falls based inversely on whether school property tax revenue rises or falls. Thus, even if districts experience cost increases for food, fuel and teacher pay raises during a school year, their dollar-per-child revenue will be the same as the previous year. The only way for districts to receive additional money is through enrollment increases.

Lawmakers need to “fix the funding mechanism which would take the cap off so we can see the benefit of more state revenue,” said Lindy Finley, JISD superintendent of Finance and Operations. “If they don’t do anything, just about every district in the state will be faced with the need to have a role-back election or make major cuts to their budgets.”

State Sen. Robert Nichols, R-Jacksonville, agrees that funding of public schools needs to be improved. He said it is wrong that local property taxes are the major source of school financing, not only because of the burden on taxpayers, but also because of the disparity between districts in property-tax revenue.

“I like the fact that [the margin tax] will lower property taxes for homeowners,” said Nichols, noting thatit is one of the few things he likes about the tax. “But, we have districts in this state that only get $3,600 per child and others that get $15,000 to $20,000 per child. That is an unequal system and does not allow all of our children a fair chance at a good education.”

Some fear the margin tax will even be able to fund schools to the extent that has been promised. So far, $4.5 billion has been collected under the tax. The initial revenue estimate was about $5.8 billion. Some lawmakers fear margin tax income will not reach the levels anticipated. R.J. DeSilva, a spokesman for the state comptroller’s office, said it is too soon to tell whether the margin tax revenue goal will be reached.

“We won’t know until all these final reports come in,” DeSilva said, noting that more than 50,000 businesses still have not paid the tax. “We’ll get a better idea about any difference in terms of the final collection aspects after the final reports are in.”

DeSilva said he expects final revenue numbers to be available by December or January. He said the Texas Business Advisory Committee — which Comptroller Susan Combs heads — will compile data on the impact of the tax and submit it to lawmakers in January.

But, while some are complaining the tax provides too little money for public schools, others are saying it is too much of a burden on businesses, especially small ones.

“This is an entrepreneurial killer,” The Texas Courier & Logistics Association’s Rod Steinbrook told the San Antonio Business Journal. “Don’t forget, every business is a small business in the beginning. The Texas Margin Tax is a tax against small businesses and not good for the Texas economy.”

Nichols is also concerned about the impact of the tax on businesses.

“This tax was intended to spread the tax burden so that some businesses wouldn’t have to shoulder the load more than others. But, it ended up reducing pressure on some and increasing it on others,” said Nichols, who was not a member of the legislature when the tax reforms were passed.

DeSilva said the comptroller’s office was aware of the business concerns.

“The associations representing small businesses have contacted us and the legislature as well about the impact the margin tax has been having on their revenues. There’s concerns that have been brought up and we forward that information on to the Business Tax Advisory Committee and the legislature as well.”

Nichols said it would take time to find the right balance of property taxes and business taxes to finance public schools.

“I don’t think it can be solved in one session. But, we can take incremental steps in the right direction,” he said.

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