Oppose the Texas Senate Partnership Tax

Background: The House Ways and Means Committee crafted a number of bill drafts in an effort to close what is mistakenly described as the “Delaware Sub loophole.” However, it is in truth a result of the longtime policy decision of the Legislature to tax corporations and not partnerships. The House was unable to draft a bill that did not have far reaching consequences to businesses of all sizes, many fo which are not engaged in Delaware Sub structures. Last minute provisions added to HB 2425 by the Senate Finance Committee without public testimony or thoroigh analysis attempt to eliminate the “Delaware Sub.” While the provisions are narrower in scope that the House bills, they still have a number of undesirable consequences – some inteded, some not.

1.) This is a new tax on entities that have never been subject to franchise tax before.

2.) The tax bill has unintended consequences – affecting numerous companies beyond those engaged in the “Delaware Sub.” The bill would tax any out-of-state investors in order to raise capital. This bill makes it harder to attract investment capital because the reward for investing in Texas is taxation.

4.) The provisions double tax capital. The capital portion of th efranchise tax already requires a parent company to pay tax on the capital they have invested in subsidiaries. Subjecting subsidiaries to the franchise tax means the same capital will be taxed twice.

5.) The provisions are discriminatory, exempting certain types of businesses that compete against others which will be taxed. For example. interests in Real Estate Investment Trusts are exempted, but interests in simple real estate partnerships are not; Master Limited Partnerships created before 1/1/2003 are exempt, but those created after that date are not.

6.) Reporting requirements extend to all partnerships. The bill requires all Texas partnerships (including joint ventures, general partnerships, limited partnerships, trusts and business trusts, with certain exceptions) to file reports with the Comptroller. This will be a costly bureaucratic and administrative burden on businesses.

7.) The provisions deny deductions for legitimate business expenses in provisions totally unrelated to the “Delaware Sub.” The bill denies companies doing business in Texas the ability to deduct certain management fees, charges for th euse of an intangible, and certain interest if hey are paid to an affiliated company not subject to Texas franchise tax. Further, the provision for interest is tied to the prime rate (plus one percent) – a rate many taxpayers, particularly smaller businesses, may not qualify for. The Comptroller is given “exclusive jurisdiction” to interpret this section.

8.) This tax bill is not needed. Th eLegislature has agreed to a balanced budget to be financed without taxing partnerships and their owners. Further, this tax bill does not even accomplish what it sets out to achieve. The Comptroller estimates the bill “recovers” less than half of the amount at risk in 2005.

Any effort to expand the franchise tax this late in the Session risks a number of unintended onsequences. Businesses face potentially huge tax increases without an opportunity for public comment or detailed analysis. The broader issue of how business should be taxed should be addressed as a part of the interim studies on school and state finance, in which public comment may be solicited and legislators may have access to a more thorough analysis, which shows which and how many Texas businesses will be affected by the proposals, and by how much.