Savvy Consumer: Franchise tax takes bite out of small businesses

Consumers may see more price increases from Texas businesses this summer — but this time it’s not because of rising fuel or grain prices.

This summer a revised franchise tax went into effect that increases state taxes for 180,000 businesses based in Texas, according to an estimate by the Texas office of the National Federation of Independent Businesses.

Nearly half of those affected will be passing those costs on to their customers, according to a survey released last week by the NFIB, which represents 25,000 businesses including restaurants, grocers, home-repair companies, medical professionals, attorneys and other small businesses.

The state has collected $4.3 billion this year from more than 132,000 companies, according to a report given by the state comptroller at a meeting Monday of the Business Tax Advisory Committee in Austin. The committee was formed by the Legislature to study the effects of the new business tax and to issue a report to the Legislature and the governor at the beginning of the regular session.

An estimated 50,000 companies have yet to pay the tax, which was due June 15, and have filed for extensions. The comptroller’s initial projection for collection on the new franchise tax is $5.9 billion.

The revised tax has caused major increases for many businesses, often causing their franchise tax bills from last year to double or more.

Local businesses affected

A survey by the NFIB of its members in May showed that 84 percent of companies affected by the revision saw their state taxes double, and nearly half of that group saw an increase of 500 percent or more.

"It’s awful," said Kirk Godby, president and co-owner of Corporate Couriers, a courier service in downtown Fort Worth. "This tax that was $2,500 for us is now over $18,000."

Andy Ellard, owner of Manda Machines Co. in Dallas, said his franchise tax increased from $900 to $8,000.

"The frustrating part is the Legislature passed the tax bill not knowing the effects of it," Ellard said. "Instead they said, 'Let’s see what it does in two years.’ "

How it happened

The franchise-tax increase is a result of legislation passed in 2006 to cap property taxes, both commercial and residential, and create an equal playing field among small and large businesses for each to pay their fair share of costs toward public education.

Under the new franchise tax, most partnerships, associations, limited liability companies and corporations must pay a tax. The tax is now the primary source of funds used to buy down property-tax rates, and already $1.42 billion of the franchise tax has been transferred to the property-tax relief fund, according to R.J. DeSilva, spokesman for the comptroller. The remaining amount collected has been sent to the state’s general revenue fund.

"The new tax is expected to hit about 12 percent of Texas firms, compared with the previous tax’s 6 percent," according to a report on the tax by Jason Savings, senior economist at the Federal Reserve Bank of Dallas. "Among the firms will be roughly half the state’s nonsole proprietorships."

Consumers feel the bite

Passing such costs onto consumers is a natural course for businesses, Savings said.

"It’s safe to say any time businesses’ taxes increase, the prices paid by consumers are also going to rise," he said. "To some degree, consumers are going to pay for this change to the franchise tax."

Members of the Independent Electrical Contractors of Texas are raising prices to offset the franchise-tax increase, said Renea Beasley, spokesperson for the IEC of Texas.

"When our contractors’ costs go up, they have to pass it on to the consumer," she said. "These are huge increases. The tax ate up all their profits and anything they planned they have had to put on hold."

Will Newton, executive director of the NFIB said he is receiving dozens of calls a week from members about the revised tax.

"People are screaming about it," he said. "It’s a devastating and very harmful increase in tax on small business."

What’s ahead

When this tax was passed, state legislators believed that property-tax decreases would offset business-tax increases, Newton said.

But with property appraisals rising, most have not seen a decrease in property taxes — instead property taxes simply have not increased as quickly as they would have under the old formula, he said.

The NFIB has partnered with the IEC of Texas, the Air Conditioning Contractors of America Texas Chapter, the Associated Plumbing-Heating-Cooling Contractors of Texas and the Texas Courier & Logistics Association to form the Texas Business Tax Coalition. The groups have joined to advance a legislative agenda of changing the tax when the Legislature meets in January.

Savings said revisions in the tax are anticipated.

"Business groups and policymakers all seem to agree that it will be looked at in the next legislative session," he said.

State Rep. Myra Crownover, R-Denton, who sits on the Business Tax Advisory Committee, said that it’s too soon to judge the merits of the revised franchise tax.

"The first year of a tax is a work in progress," she said. "We need a full year under us. We’re trying to be open to criticism, but we need to keep our eye on the ball and that is funding education."