With money in the bank, legislators update and extend tax breaks

Posted by Jon Weist, on Thu June 13 2013 at 08:51 PM

Depending on your perspective, the 83rd Texas Legislature might have improved business profitability or crippled the state’s ability to deliver services, or something in between.

With bold new revenue forecasts that gave legislators room to pay for the services they are still obligated – some of them very reluctantly – to deliver, state officials set about finding ways to shower favored businesses and industry sectors with tax breaks.

Some of the tax exemptions, tax reductions and changes in business definitions clearly benefitted only a few businesses, albeit large and influential ones. Others were represented as improving tax efficiency, of maintaining global competitiveness, or spurring various specific types of business activity. None were called deals for special interests – at least not by proponents – and the Chamber has supported some but not all of them.

It’s a virtual guarantee that when governments experience a good year in revenue, elected officials who are looking for a bumper-sticker accomplishment for their next campaign immediately argue that it’s more money than they need – need being an extremely loose term, subject to constant revision – and start trying to cut that revenue stream in the future.

The problem with that sort of reflex-driven approach is that the demand on government services continues to ramp up, while the reduction in revenue to support those services – even those they call temporary – tends to be permanent. Texas already exempts from taxation almost as much economic activity as it taxes, and that’s in a state that doesn’t have an income tax. State spending is never going to compete with larger, less thrifty states, and no one is arguing that participating in such competition should be a goal.

But the reflexive desire to always be seen cutting tax rates and spending, before what basic services require to properly function is considered, is a sign that political perception will always trump thoughtful public policy.

With that, here are the major adjustments to taxes as approved by the Legislature. Governor Rick Perry had until Sunday to veto bills he didn’t like – it’s a certainty he won’t veto tax cuts – so anything he didn’t veto becomes law today even without his signature.

Freeport Exemption

Manufacturing enterprises have long complained that the tax Texas levies on inventory used in production is unfair, since many complex assembly projects require parts on hand for longer than the 175 days they can stay in the state without being taxed. Some businesses have even gone to the extreme of shipping inventories out of state and then returning them a week later, re-starting the 175-day clock.

House Bill 3121 extends the temporary period for aircraft parts to remain untaxed – useful locally for Bell Helicopter and perhaps Lockheed Martin – from 175 days to 730 days (two years). A constitutional change required to enact the law is on the ballot in November.

Margins Tax

Perhaps the most disliked but difficult-to-change taxing mechanism in the state, legislators started the session by attempting to clean up business definitions, inconsistencies in how some industries were treated and generally make the system less complicated.

That didn’t work out.

Part of the reason why it didn’t is because of what the state attempts to accomplish with the tax, a redesign of the old franchise tax that many, many businesses didn’t pay. The idea was to capture partnerships and service industries, thereby increasing revenue dedicated to paying for public schools.

The technical problem comes in designing a tax system without basing it on net revenue, which would be an income tax, which the state constitution prohibits. So, the now-not-so-new franchise tax is based on gross revenue, which means some companies pay the tax even when they don’t turn a profit. Not a good system, but regulators have relatively few options that don’t bump up against the income-tax constraint.

This time around, legislators made permanent an expiring provision that exempts the first $1 million of revenue from taxation. For the 2014 tax year, the rate has been reduced by 2.5 percent; for 2015 it’s 5 percent if the state Comptroller’s office certifies that the second reduction won’t put the state budget in jeopardy.

Some new retail categories were created, such as rental shops and auto-repair businesses. Higher revenue exclusions were added for a host of specific industries – pharmacy networks, aggregate haulers, barite transporters, landmen subcontracts, vaccines, waterway transporters and taxes paid by motor carriers.

State budget officials estimate the cost to the state is about $1 million in the general fund – an admittedly insignificant amount – but up to three quarters of a billion in the property tax relief fund, which is dedicated to public school finance.

The bill also creates new tax credits for business relocation and rehabilitation of historic structures; creates new provisions for non-admitted insurance companies, retailer affiliates engaged in minimal electric generation and apportions the revenue from internet hosting companies to clients within the state.

The text of House Bill 500 and the analysis of its costs to the state are posted here and here respectively.

As originally passed, HB 500 carried a huge fiscal note, and it’s passage provoked a feeding frenzy in the House, with legislators offering exemptions, breaks, extensions or all three for their local industries, favorite lobbyists or both.

The Senate made it simpler, though not less costly, and we will be talking about this in some form again 18 months from now.

Research and Development Tax Credit

Much sought after by manufacturers and research companies alike, it has taken them four legislative sessions to restore a tax exemption that was eliminated in 2007, in the aftermath of the last school-finance restructuring.

The re-established credit allows a taxpayer to choose between a franchise tax credit or a sales tax exemption. It applies to depreciable personal property used as qualified research as defined by the Internal Revenue Service. The property must have a life of more than one year and be subject to depreciation under generally accepted accounting rules. The law expires in 2026.

The Texas Economic Development Act: Chapter 313

A much-maligned, occasionally abused but nevertheless vital program, Chapter 313 is set to expire in August 2014 unless renewed by legislators. This provision of the tax code is designed to lure large, billion-dollar plus investments to the state by allowing school districts to participate in tax relief – something they have largely not been able to do in most instances.

The law allows districts to offer temporary property tax relief for large projects – such as the construction of the Toyota manufacturing facility in San Antonio – with their revenue losses backfilled by the state. In many cases, companies that get the tax relief make side deals to fund school programs – some in very large amounts – and the ability to do that remains in the law despite efforts to remove it.

The law does require a benefits test that essentially requires companies to prove that when the tax break expires, the net gain to the state will be less than the revenue given up in the incentive package.

Reporting and audit requirements have been increased, as have penalty provisions for non-compliance or failure to meet targets. A key item, a change in the way jobs were counted, was opposed by many Democrats because, they argued, it effectively reduces the salary requirements that go with the incentives and created a minimum number of qualifying jobs rather than a percentage of total jobs at a certain income level. How those jobs are counted has also been changed to the company’s advantage.

The extension expires in 2022.

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