96-1364 Business Tax Advisory Committee Report to the 83rd Texas ...

The Business Tax Advisory CommitteeReport to the 83rd Texas LegislatureFor several reasons, the report includes total tax for 2011 that is different from any previously reported. The reportanalyzes return data that totals $3.99 billion in tax reported. This total represents the net tax liability of returnsthat were processed through mid-year 2012 for the 2011 report year and shouldn’t be confused with fiscal-yearnumbers in other Comptroller reports. Return data for the 2012 report year will be nearly fully processed by early2013. Updated versions of Tables 1-5 will be made available to the governor and Legislature during the earlymonths of the 83rd Legislature. It is important to note that for the 2012 report year, the no-tax-due threshold remainedat $1 million.The total tax revenue of $3.99 billion included in this report should not be confused with totals reported at theclose of fiscal 2011 or any estimate of revenue produced by the Comptroller, whether it was the Comptroller’sBiennial Revenue Estimate (BRE) for the 2010-11 biennium, the follow-up certification estimate for the 2010-11biennium or the BRE for the 2012-13 biennium released in January 2011.A particular challenge presents itself with the switch from separate-entity reporting to combined reporting. In thisanalysis, a taxpayer’s industry assignment is based on the NAICS code of the combined group as a whole; a groupthat in many instances will include a variety of separate entities that may be engaged in a number of different linesof business stretching across a number of industries.Consequently, tax data assigned to a particular industry may include a substantial amount of tax generated froma combined company’s activities in other industries. For example, an integrated oil and gas company may file asa combined group under “refining,” an industry within the manufacturing sector, though it may also include asubstantial amount of revenue from oil and gas extraction (mining) and service stations (retail). This may generatecertain unavoidable inconsistencies as the tax data are shown relative to the state’s economic output by industry.Combined reporting also creates challenges in offering comparisons to previous years’ analyses of the old franchisetax. In previous years, each separate entity was assigned to a particular economic sector, as opposed to now beingclassified in the industry of their combined group. For example, the taxpayers from the previous paragraph wouldall be categorized as manufacturing for the pre-margin analysis in Tables 6-10.To adjust for these inconsistencies, the 2007 data have been recalculated, assigning the separate entities to the appropriateindustry of the combined group they filed with in 2009. While this provides a more accurate presentationof the changes from 2007 to 2009, it must be noted that the industry classifications presented here will notbe consistent with any previous analyses of franchise tax by industry such as provided in the Comptroller’s biennialtax incidence study.Taxpayers will also have a higher level of receipts under combined reporting. For example, three affiliated businesses,each with $400,000, would appear as three separate $400,000 businesses under previous analyses, but wouldappear as a single entity with $1.2 million in receipts in this report. Texas businesses in this analysis will appear tobe, on average, larger than some previous studies have suggested; again, not because of any structural change in theeconomy, but because of the method of combined reporting.Finally, throughout this report the former tax base of earned surplus and taxable capital will be referred to as “premargin.”The current tax is referred to as “the revised franchise tax on margin.” The term “margin tax” is avoidedbecause the tax is still referred to in statute as the “franchise tax.”2Susan Combs Texas Comptroller of Public Accounts January 2013