In 2007, after Texas lawmakers passed sweeping tax reform that reduced property taxes and created a business franchise tax, Dallas-based business owner Andy Ellard saw his company's franchise taxes shoot up from $335 to $7,602.
Ellard, who co-owns Manda Machine, a manufacturing company, with his three brothers, said his family had to pay more taxes even though the company didn't turn a profit that year.
"We ended up having to borrow money from our parents to pay the taxes," Ellard said.
Texas' business community has expressed discomfort with the state's tax system since the 2006 overhaul, arguing that it puts a heavier burden on them. A new study prepared by Ernst and Young LLP for the Council On State Taxation confirms what some business owners have been saying, finding that businesses paid 61.5 percent, or $649 billion, of total state and local taxes in fiscal year 2012.
That is a 3.9 percent increase from 2011. Business owners nationwide on average paid less: 45.2 percent in total state and local taxes in 2012, according to the report. However, Texas collects 11 percent less in taxes per employee statewide, the study found.
While many Texas business owners agree that the burden on them is too high, there is disagreement over how to fix the tax system. Some say the state should do away with the business franchise tax, while others argue the state should adopt a personal income tax.
Legislators during the regular session filed more than 90 bills that attempted to address the tax system, but almost none of them passed.
Dick Lavine, a senior fiscal analyst for the liberal Center for Public Policy Priorities, said the burden on the business community is largely a result of the state's lack of a personal income tax. Lavine said establishing an income tax would be an equitable way to ease the burden. But proposals to do so in the past have proven politically impossible.
"The trouble with the property tax from [the public and business] point of view is that their property taxes aren't related to their ability to pay; they're related to the value of the property," Lavine said.
James Quintero, a director at the conservative Texas Public Policy Foundation, said an income tax would hurt Texas, discouraging wage growth and decreasing investment in the state. The foundation supports simply abolishing the franchise tax.
"The state revenue growth is on such good trajectory that you could cover a good portion of any missing revenue from existing revenue growth," Quintero said, adding that Texas would be the only state without a personal income tax and franchise tax, which would attract new business.
Bill Hammond, president and CEO of the Texas Association of Business, said he's not arguing for a lower tax burden but wants people to know that businesses have a heavier burden than other sectors. Hammond said the report paves the way for a more equitable tax system in Texas by dispelling notions that businesses pay low taxes.
Ellard, the Dallas business owner, said that until that day comes, his frustration would continue.
"In our type of business, we have to take a lot of risk with our capital," Ellard said. "At some point, I don't know where that point is, your margins are not to where you're making enough of a profit that you think you ought to for the risk you're taking."
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