I agree with the Chron's Austin-based business columnist in one area: Taxation in the State of Texas is one of the most poorly designed systems I've come across.
Where we disagree is on the fix.
Mr. Tomlinson (From the linked article above):
Texas' tax system is as broken as the federal system and desperately needs an overhaul. We need the Legislature to stop punishing business and investment, and instead tax conspicuous consumption, bad behavior and extreme income.
OK then, what is "bad behavior"? And who defines that? What is "conspicuous consumption" and who defines that? And what is "extreme income" and who gets the power of defining that?
My guess is that Tomlinson believes that he is the ideal candidate to become the "Texas Tax Czar" placing punitive taxes on Wal-Mart purchases, the energy industry and anyone making more than he. Because, that is what he's calling for, selectively taxing things that he doesn't like while giving those things he does a pass.
That's not a fair and effective tax system, that's a means of punishing those with differing political views than you.
Ironically, he admits, directly above his prescription for Texas, that his system wouldn't work.
A smaller tax on more people and businesses is also better than a high tax on only a few.
Yet his prescription for Texas is more of the same of what it is currently doing, only at higher rates and more tightly targeted against those whom he feels are bad actors. This is demagoguery at its highest, not a serious attempt to reform Texas taxes.
The best, most equitable tax code is one that is broad, flat, easy to adhere to and free of special interest exemptions. As Mr. Tomlinson points out the current Texas tax code is anything but that. The problem is, his "fix" for the situation is even worse.
He focuses on the so-called Margins Tax, which is awful, but let me give you an under-the-radar way Texas handles tax policy poorly....oil and gas severance taxes.
On it's surface the tax is fairly straight-forward. Unlike some other commodity taxes it's a value based tax on the "Net Taxable Value" derived from the severance of oil and gas from the soil. In short, it's the gross proceeds less allowed expenses times 7.5%, for oil and produced condensate the rate is 4.6%. Easy enough.
But then, you have exemptions. There's the high cost gas exemption (Type 05) which allows for a reduced rate of taxation for up to 10 years or until 50% of the drilling costs are recaptured, whichever comes first. In order to qualify for this there is a lengthy, an unwieldy, application process which involves first dealing with the RRC, and then turning around and repeating the process with the Texas Comptroller. Then you assigned a reduced rate, and can take that new rate until you meet the deadline or threshold whichever comes first.
Of course, by the time the State gets around to approving the rate reduction over a year can go by before approval. This means that you have to go back and retrospectively adjust your accounting, pay royalty owners late for their share of the increased rates they pay, and ask the Texas Comptroller's office for a refund, which is a time-consuming and expensive process, not to mention the time and expense wasted on the re-work.
Think that's bad? There's also the low-producing well exemption (Type 11) which is triggered by both price and volume. Not only that, but the State index price that has to be rolled back to 2005 equivalents, that's right, the Lege forgot to allow for inflation. To add to that, a producer has to calculate a 3-month rolling average of production to ensure the tax criteria is met. If a producer makes an error, or uses a different production factor than the State, then the State will revoke your lower rate and charge interest on the unpaid tax.
For oil there's the Enhanced Oil Recover exemption (Type 05, for oil) which provides a rate decrease of 50% (from 4.6% to 2.3%) on all incremental barrels of production realized from secondary or tertiary recovery. In order to qualify for this then you have to initiate a project, file the appropriate paperwork (with fee) to the RRC, and then wait a year to determine if the project was successful or no. Once it is you have to re-apply with the results to the RRC, and then take their approval over to the Comptroller's office to have them approve the credit, and tell you how long you have to retrospectively fix you accounting on the back periods before you lose the credit. All of the time you are waiting for this money has come into the State on which the are earning interest. Meanwhile, the private royalty owners (who share in the tax expense) are losing out on revenue because a company is charging them full-rate tax (by law) which reduces their income.
All of that for reporting and paying taxes in Texas and I haven't even discussed the Cost to Market deduction yet. A better way to administrate this would be to eliminate all of the exemptions, and lower the tax rates. A flat oil tax of 2% of Net Taxable Value and a gas tax of 4% of Net Taxable value (calculated as they are currently) would be much easier (and cheaper) for companies to administer and would benefit the State as well.
You could extrapolate that to the Federal Income Tax, most business taxes and a host of other taxes as well. Any tax really where special-interest driven loopholes exist.
Unfortunately, this will never happen because both political parties and their courtiers LIKE the system we have. Not only does it wet the beaks of their patrons, but it proffers them the levers of power to punish their political opposites as well. It's always been this way, it's just rare when one of the courtiers is dense enough to put the fact in print.
On that note: Thank you Mr. Tomlinson. Thank you.
