In spite of the Open Letter to Texans from the Senate Republican Caucus, people on Twitter (follow the subject tag #TxSen), Facebook and even RedState.com are still making the accusation that Lieutenant Governor Dewhurst “proposed” or “supported” a personal income tax and/or a “wage” or “payroll” tax for Texas, back in 2006. I’ve touched on the subject before, but thought I’d post a more detailed explanation.
There’s a quote all over the Internet, used to prove that the LG made a statement in favor of the income tax when in fact, the comment is taken out of context. Dewhurst was objecting to adding another burden to small businesses and start ups. Unfortunately, the original Associated Press March 30, 2006 article, “Businesses studying proposed tax structure,” by April Castro, is not available online. (A Screen shot of the first page of one newspaper that carried the article is here in pdf, but there’s no quote from Dewhurst in this part. I haven’t been able to find any online version carrying the supposed quote.) However, here’s a summary from Politifacts debunking of the claim;
A March 30, 2006, AP news article, headlined “Businesses studying proposed tax structure,” indeed quotes Dewhurst as saying: “I think I’d rather see a tax that’s based on income — you earn money, you pay something, you don’t earn money, you don’t pay anything.”
We can see why a critic would single out that comment, though the full AP story indicates that Dewhurst was speaking to the particulars of revamping the business franchise tax rather than advancing his desire to create a personal or business income tax.
The story initially points out that lawmakers had previously stumbled over how to restructure the business tax, which most corporations did not owe. “They worried that proposals would not apply equally to different business structures,” the article says. “And business-friendly Republicans have been hesitant to levy a new tax that could be harmful to job creation and economic growth.”
According to the story, the consensus proposed fix — which was a plan devised by a panel headed by John Sharp, a former Texas state comptroller — would tax businesses on a percentage of their gross receipts, meaning the money a company brought in before expenses, with each company choosing between deductions for cost of goods sold or employee benefits like salary and health care. The story says sole proprietors and general partnerships would be exempt, along with companies that have annual gross receipts of $300,000 or less.
For more than 80 years, the story says, the state’s main business tax had been based on a company’s net assets, though lawmakers changed it in 1991 to make it more like a corporate income tax. Texas companies subsequently had the choice of paying either 0.25 percent of the value of their net assets or 4.5 percent of their net corporate income, whichever was greater, according to a 2003 report on Texas taxes by the nonpartisan House Research Organization.
The LG’s comment was in fact made in opposition of one idea floated during the 2005/2006 update of Texas’ 100 yr old tax business franchise tax, so that all businesses, whether they made a profit or not, had to pay on gross receipts.
In order to lower property taxes and comply with a Federal Court ruling that allowing local school districts to max out the property tax was a de facto State income tax, Governor Perry named an independent Commission in 2005, under the leadership of John Sharp, a fairly conservative Democrat. (Texas has a lot of those as well as left radicals.)
Before, there had been a lot of loopholes and exempted businesses, so that only 6% of businesses paid at all.. When the franchise tax was broadened to include nearly all businesses in Texas, lots of ideas floated around. It took a couple of years, but the final tax ended up with an exemption of the first $150K and then the next session amended that to the first $300K.
Another claim – currently seen in Cruz’ TV ads – is that Dewhurst “actively supported” a “payroll tax” during this process. Cruz cherry picks two words from a Press Release issued by the Dewhurst staff in 2006. One Senate version of the franchise tax rework praised the Senate for passing a bill that included School finance and the business tax changes. The term is only used once, in paragraph 4 and is not actually in the Bill. There are quotes around the statements by Dewhurst, but no quotes are found in the part that uses the words “payroll tax.” The Press Release notes that businesses had the option to choose between the two ways to calculate that tax, one based on income alone and one adjusted by employees payroll with exemptions, but doesn’t advocate one way over the other. (That version never passed into law.)
Attorney General Abbott successfully defended the tax against a lawsuit claiming that the franchise tax was an income tax on sole proprietorships and small partnerships in August, 2011, and the ruling from the Texas Supreme Court was reported in November, 2011.