Tax break extension a Compromise for Perry

Gov. Rick Perry, who often boasts that Texas is a great state for business, made seven business-oriented promises before his re-election in November. Two of them are now ready for fresh ratings on the PolitiFact Texas Perry-O-Meter.

In July 2010, Perry proposed giving businesses a $1,500 sales tax credit for each full-time employee who goes back to school and receives a diploma or earns a GED certificate. This idea to help reduce the number of high school dropouts did not pass into law, making it a Promise Broken.

Months earlier, Perry pushed for changes hat he said would help Texas maintain its positive economic momentum, including "making permanent the recent tax cut extended to 40,000 small businesses in the last legislative session," according to a September 2009 campaign blog post.

Based on legislative action this summer, we rate that promise as a Compromise. This month, Perry signed into law a proposal extending the tax break for two years, falling short of fulfilling his call for the break to be made permanent.

Some background: In 2006, legislators revamped the state’s corporate franchise tax to help pay for a statewide reduction in local school property taxes. Before the changes, the business levy was essentially a 4.5 percent tax on a company's profit. For the new tax, often called the margins tax, lawmakers reduced the rate to 1 percent and broadened its application. The tax is now applied to the annual revenue of qualifying companies minus one of three options: the cost of goods sold, the cost of employee compensation or 30 percent of total revenue.

As the law was passed in 2006, companies with revenues of $300,000 or less were exempt from the tax. In 2009, after small businesses complained that they were unfairly burdened by the tax, lawmakers raised the exemption threshold to $1 million for 2010 and 2011. That change left more than 130,000 businesses exempt, including almost 40,000 that had to pay the tax in 2008 and 2009, according to the August 2009 issue of Fiscal Notes, a publication of the state comptroller’s office.

Without this year's action, the $1 million exemption threshold would have fallen to $600,000 at the end of 2011. According to an April 11 Texas Tribune article, the head of the Texas chapter of the National Federation of Independent Business, which lobbies on behalf of small businesses, told a House committee that if that happened, nearly 28,000 businesses would lose their exemptions and be added to the tax roll.

During the 2011 regular legislative session, lawmakers filed multiple bills to maintain the $1 million exemption threshold. As of April, though, lawmakers were still trying to figure out how to replace the revenue that would be lost if that happened, House Ways and Means Committee Chairman Harvey Hilderbran, R-Kerrville, told the Austin American-Statesman for an April 11 story.

On May 21, nine days before the end of the regular session, Hilderbran proposed — and the House agreed to — adding a two-year extension of the $1 million exemption into Senate Bill 1811, a budget-related bill. But a Democratic filibuster in the Senate kept that legislation from surviving.

In the special session, backers of the extension proposal revived it by tucking it into SB 1, which was must-pass budget-related legislation.

According to a Legislative Budget Board analysis, the extension of the exemption will cost the state about $150 million in revenue during the 2012-13 biennium. Hilderbran told us in an interview that other provisions in SB 1 offset the loss of revenue.

Perry’s July 2010 proposal to create tax credits for businesses whose employees achieve GED certificates or diplomas specified that to be eligible, a business would be required to provide the employees with at least two hours of paid time off each week to study or attend class.

Outlining his idea, Perry said his goal was to get 5,000 dropouts to participate in the program each year at an annual cost to the state of $7.5 million.

After the 2011 session began, Perry again pushed for the credit in his February State of the State address. "Let's offer employers a $1,500 tax incentive for every employee who earns their diploma or GED after receiving two hours off per week with pay to study or go to class," Perry said.

We asked the governor's office what became of the initiative. Spokeswoman Catherine Frazier told us in an email that state Rep. Jerry Madden, R-Richardson, had filed legislation to create the program but that it had "failed to make its way through the legislative process."

Madden's House Bill 2355, filed March 7, was similar to Perry's proposal, although it would have allowed businesses to receive their incentives as either a sales-tax credit or refund.

Madden's bill never made it out of the House Ways and Means Committee.