Senator Eliot Shapleigh - El Paso, Texas

AMARILLO -- An Austin lobbyist thinks that as soon as business owners begin writing checks for the new margin tax passed by the Texas Legislature last spring, things will change.

The lobbyist, Ed Small, noted that under the new margin tax, a company could lose money and still owe taxes.

Dale Craymer, an economist with the Texas Taxpayers and Research Association, reviewed the new margin tax at the joint Texas Cattle Feeders and Texas and Southwest Cattle Raisers Associations here this month, explaining that the new tax was passed by the Texas Legislature in special session last spring as part of a school finance package that included property tax relief. Craymer said the Legislature will revisit the margin tax when they meet in regular session beginning in January.

Craymer's assessment of the new tax is that it is complex and complicated.

“It is a taxpayer's nightmare,” he said.

It will also raise about $6.5 billion a year as opposed to $2.5 billion for the old franchise tax it replaces.

“This is a major change in tax policy,” Craymer said. “This is a major tax and will have major impact on business.”

“This is worse than a state income tax,” said Jay O'Brien, an Amarillo rancher and businessman.

O'Brien said former Lt. Gov. Bob Bullock had proposed a state income tax a decade ago, but O'Brien said the time wasn't right then.

“It's time for a state income tax,” O'Brien said.

When the Legislature meets in their regular biennial session beginning in January, they will consider the Technical Corrections Bill, proposed legislation to clean up some of the problems already connected to the margin tax.

The first margin tax payment isn't due until May 2008. The margin tax takes effect Jan. 1, 2008, but it's calculated on business in 2007.

Beginning Jan. 1, 2007, business is going to be subject to the margin tax, Craymer said, even though business won't have to pay for it until the following year.

“It's going to come due all at once,” Craymer said. “It's not like the corporate income tax where you make quarterly payments. You'll notice it when you write the check.”

The margins tax, he said, is part of a greater issue. That issue is school finance. The Legislature was under court order to come up with a school finance plan last spring.

“I've been working around the State Capitol since the early 1980s,” Craymer said. “Probably for as long as I've been involved in the process, it seems like we've been under some court order dealing with public school finance.”

In Texas, he explains, financing public schools is the shared responsibility of the state and local school districts.

“The way the system works,” Craymer said, “is the school district levies a local property tax for maintenance and operation. They can levy up to $1.50 per $100 of value.”

Beyond that, school districts can levy a separate tax for debt service to build facilities.

“That's the local part of the program,” Craymer said. “The state distributes state aid to the districts. The way it does that is it looks at property values relative to the number of students.”

Texas has more than 1,000 school districts. Some of them have a significant amount of property and few students, such as the Miami school district with a small population and large oil and gas reserves. At the other extreme is the property poor school district.

Craymer said there is a tremendous amount of disparity between very wealthy districts and very poor districts. The state tries to level out those disparities.

There are about 100 wealthy school districts that generate so much property wealth that there's no way the state can bring everyone up to that level, Craymer said.

“Those districts,” he said, “end up having to pay back to the state a portion of the taxes they collect.”

The system, developed by the Texas Legislature about a decade ago, is known as recapture or “Robin Hood.”

In 1996, more than 500 of the 1,000 school districts in Texas had school tax rates below $1.25. Craymer said the $1.50 cap wasn't a particular problem except for about 75 districts that were at the $1.50 maximum.

By 2005, almost 600 of the 1,000 school districts in the state were at the $1.50 maximum. The Texas Supreme Court said that essentially made for a statewide school property tax, which is unconstitutional.

The school finance package caps school property taxes for maintenance and operations at one dollar.

Small said educational pressures are going to continue to push property taxes. He said he doesn't understand why a $1.50 cap is unconstitutional and a one-dollar cap isn't.

Initially, the Legislature used a budget surplus to buy down the tax rate, but they also created the margin tax to help fund schools in the future. The margin tax will replace the franchise tax.

“The other key part of the package is an increase in the cigarette tax,” Craymer said.

The price of a pack of cigarettes has increased dramatically over the past couple of months. The old tax on a pack of cigarettes was 41 cents a pack. Now, it is $1.41.

Craymer said the new margin tax is a taxpayer's nightmare. It's complex and will include a number of new areas that have not been taxed before.

Overall, Craymer said that wholesalers and retailer probably won't notice much difference in tax liability, nor will farmers and ranchers.

There will be a bit of a cut for mining and utilities, he said, because they pay so much in property taxes.

“A little bit of property tax relief goes a long way for them,” Craymer said.

Construction companies will probably pay a little more.

There will be an increase in taxes for telephone and cable companies, but a reduction for most financial companies and real estate companies.

There will be an increase for most service businesses like doctors and lawyers.

“The state is placing a lot of its eggs in this one basket with a margin tax,” Craymer said.