Rick Perry’s Business Income Tax is Bad for Employment

This is a cross post. To comment go to the official version on the Chron here.

Ed Schipul

In 2006 Rick Perry passed an uneven business income tax in the state of Texas. This is in conflict with the Texas state constitution which states you can not have an income tax without a referendum. And for five years he has been able to get away with it. To the detriment of small business and preventing the creation of jobs in our state.

It is not tax that breaks a business man’s soul. It is inequities.

First things first:

“Render unto Caesar the things that are Caesar’s” – Matthew 22:21

One of the first rules of business is “Never ever EVER mess with the government.” Gangster Al Capone learned this the hard way going to jail for tax evasion instead of murder. I say this first to emphasize that I pay my taxes. All of them. Promptly. I collect sales tax and employee deductions and submit those promptly. And I pay them not out of fear of enforcement, but out of obligation as a proud American. Same reason I vote. It’s the right thing to do.

So why this blog post then? Why poke the ant-hill? Because I read about this tragedy in Austin a few weeks ago. For some reason it really hit me hard. From the article.

Restaurant owners dead in apparent murder-suicide: Yoli and Michael Amr ran Mama Roux and founded Gumbo’s
He offered his Louisiana cooking skills to the kitchens of places such as Gumbo’s and Mama Roux. She brought her personality to the hostess stand.

On Monday, they told workers they were going out of business.

By Wednesday morning, they were dead.
…
Police said they do not yet know a motive for the deaths.

A Texas corporation listing Yoli Amr as the owner — Dixie Roux Inc. — had its charter revoked Jan. 28 for violations of the franchise tax portion of the state tax code, according to documents on file on the Texas secretary of state’s website.

I do not know the motive for the tragedy in Austin. But I think all of us would speculate it was the failure of the business. I can’t imagine having to lay off my entire staff of 32 people. That would be horrible. The fact that they shut down on a Monday and were gone by Wednesday suggests that was the event that triggered it. And the reporter mentions the Franchise Tax based revocation of their license which suggests, but doesn’t convict, the new tax as part of the problem. (Note “Franchise” does not mean franchises like Subways. It applies to all businesses doing business in Texas)

At a high level it sounds like their business, like many in our fourth year of recession here in the states, was having money problems.

It is hard to run a small business. I say this from experience, or maybe I’m just a bit slower than the average bear. But it takes all of my energy. I don’t want sympathy, I chose this path. But y’all need us crazy business owners. From SBA small firms create jobs:

• Represent 99.7 percent of all employer firms.
• Employ just over half of all private sector employees.
• Pay 44 percent of total U.S. private payroll.
• Have generated 64 percent of net new jobs over the past 15 years.
• and the list goes on…

So what is the new revised “Franchise Tax” law and why do I call it a Texas Business Income Tax? Why didn’t Texas just pass an income tax? That isn’t politically prudent. And oh ya, Income Tax is against the Texas Constitution without a referendum. Specifically:

Sec. 24.  PERSONAL INCOME TAX; DEDICATION OF PROCEEDS. (a) A general law enacted by the legislature that imposes a tax on the net incomes of natural persons, including a person’s share of partnership and unincorporated association income, must provide that the portion of the law imposing the tax not take effect until approved by a majority of the registered voters voting in a statewide referendum held on the question of imposing the tax. The referendum must specify the rate of the tax that will apply to taxable income as defined by law.

In 2006 the Texas State Legislature wanted to reduce property taxes. I own a home and pay taxes on that as well and being somewhat fiscally conservative I liked the idea at the time. It is described on the Office of the Governor – Rick Perry site as:

The commission’s work culminated with a proposal to reform the franchise tax and for the state to buy down school property taxes. Working from the Texas Tax Reform Commission’s recommendations, Governor Perry called a Special Session in 2006 to address school property taxes. The commission’s plan was passed by the Legislature, and in May 2006, Governor Perry signed into law a package of bills that has provided tax relief of over $16.4 billion in school property taxes.

In other words, to reduce property taxes you must increase business taxes. Take $100 from Small-Business-Employer-Peter and give $10 each to Homeowner-Voter-Paul. OK, I get that. I’ll pay my share. But calling it a tax cut really galls me.

So what did they come up with? The euphemistically named “Margin Tax.” This Texas business tax increase of 2006 is described by Politifact as:

…in a 2006 special session, engineering a tax overhaul that reduced local school property taxes. To help districts offset the loss of revenue, the Legislature revamped the franchise tax, increased the cigarette tax and modified how the state taxes used-car purchases. Perry signed the overhaul legislation into law in May 2006.

A key goal of the new franchise tax, often called the margins tax, was to apply it to companies that had largely avoided the old corporate franchise tax. As expected at the time, businesses paid more in total after the overhaul of the franchise tax than before, although less than was forecast. Franchise tax revenue had totaled $5.8 billion in 2006 and 2007. In 2008 and 2009, the first two years of the revised tax, total revenue was $8.7 billion.

However, the 2006 changes didn’t affect all businesses the same way, said Dale Craymer, president of the Texas Taxpayers and Research Association… (more)

Yes, you read that right. Business Taxes in Texas went from 5.8 Billion to 8.7 Billion looking at a two year period. Which by the way is less than was projected.

So how do you explain the Franchise Tax law and why it is unfair? Well first because you can’t pass an income tax, they passed a “Margin Tax” where Government is going to classify each business and define how to calculate their margins. Um…. call me a skeptic but my experience has been government isn’t exactly an expert at defining the costs of running a business.

For a grocery store the following are NOT considered valid costs of running a business. I repeat, these grocery store expenses are the ones that are NOT allowed.

The following costs are not allowed as COGS:

• rent paid for the distribution center;
• rent paid for the grocery store space;
• refrigerated display cases;
• shelving for grocery display;
• compensation paid to cashiers and baggers;
• the cost of cash registers;
• credit card company fees; and
• grocery bags.

Cash Registers? What are we to do? Wander into an unheated warehouse with no employees with food stacked on the floor and leave money on the floor as we leave the building carrying half rotten food in our hands? So lets get one thing straight. The Texas Franchise Tax, called the Margin Tax, is in fact the Texas Business Income Tax with big government in charge of itemizing your Profit and Loss statement.

But wait, it gets worse. The tax rate is either 0.5% for a retail establishment or 1% for a service business. It can be double for the exact same type of service and generally favors larger corporations over small business. A recent editorial in the Chronicle explained the double taxation of small service stations:

Mom-and-pop auto repair shops across Texas are being forced into an unfair competition with big companies, dealerships and franchises that receive preferential tax treatment under state law.

Texas requires incorporated businesses with more than $1 million in sales (in 2012 this figure rolls back to $600,000) to pay a business tax called the franchise or margin tax. Even though $1 million sounds like a lot of money, many small businesses fall into this category. The state provides different methods to calculate the tax based on the classification of businesses. Service industries use one method, retail businesses use another and trades such as plumbers and roofers use a third method. Which method do you suppose the auto repair business is required to use? The worst possible one.

The independently owned auto repair shops in Texas are taxed at twice the rate applied to dealership-owned shops or franchise stores because of an outmoded classification system.

So if I have my Chevy fixed at the local family owned repair shop, that locally owned business pays twice as much tax as if I had paid to have it repaired at the Dealership (do we still own GM?) I don’t know about you, but that just seems wrong to me. It’s cheating plain and simple and should not be tolerated.

In business you have net profit, which is all of your sales minus all of your costs. This is what Corporations get taxed on by the Federal Government. It works pretty much like your personal taxes. Not everything is deductible so you always show more net profit on your corporate tax returns than you actually have at the end of the year (travel is only 50% deductible on the justification that you went to Odessa on business to party it up, but whatev…). So while someone may not like the Federal Income Tax, it is at least consistent. If it is bad, it is bad for everyone.

Want more jobs? Give us a level playing field and leave us alone. I realize Atlas Shrugged is puerile, but there are some truths in there. Get rid of the euphemisms. Speak clearly. Level the playing field. Then leave us alone. Regulate and tax us, but regulate and tax us fairly. You run the government and we’ll run the businesses and create jobs. OK?

The Texas Franchise Tax, what I shall pin to the Governor who passed it as Rick Perry’s Texas Business Income Tax, is a huge business tax increase and it just isn’t fair to small business. It needs to be scrapped and fixed from the ground up. Send me a tax bill. Raise my taxes. Pass a fair income tax. Fine. I’ll pay them like I always do. But Texas, please send me the same tax bill you send the other businesses. That is only fair.

Closing thoughts: In the course of writing this blog post I learned of the amazing work Yoli and Michael Amr did with animals. And read the heart felt comments on these posts. I am sorry I did not get a chance to meet them. In their honor I made a donation to Williamson County Animal Shelter. I also learned about some amazing resources to help entrepreneurs and anyone considering suicide. Don’t do it. We need you here. We really really need you here.

PS: And Governor, if you are reading this, you can block your fellow Aggie on twitter here.

stultifying effects of social proprieties

Less fairy tale than fable about the consequences of collective hypocrisy, Andersen’s story bears a message that has become a proverbial truth… Choosing to ignore what is in plain sight and blindly acting as if there were nothing wrong are the targets of Andersen’s satirical barbs. That it takes an “innocent” child to divine the truth that “His Majesty” is unable to discern is a reminder of the stultifying effects of social proprieties and the way in which culture and civilization produce duplicity and hypocrisy.

- The Annotated Classic Fairy Tales, Maria Tartar on The Emperor’s New Clothes

HBR: Authentic Leadership as Bad?

As someone who regularly recommends the book Absolute Honesty to people, I found this HBR post on Authentic Leadership to be very interesting:

Most people can agree that authenticity is of great value. We’d rather be — or follow — a leader who is for real than one who is faking it. Acting in a way that feels truthful, candid, and connected to who you really are is important, and is a leadership quality worth aspiring to.

On the other hand, being who you are and saying what you think can be highly problematic if the real you is a jerk. In practice, we’ve observed that placing value on being authentic has become an excuse for bad behavior among executives. (more)

via prsa.org

When to Apply Business Advice

I emailed out to the company today’s quote of the day, something we do internally, with the three quotes below. But given how popular advice from 37 Signals is among some of my employees, I wanted to add some commentary (after the jump). And BTW, I definitely agree with these three quotes from Rework.

“You need less than you think…Do you really need six months or can you make something in two?”  (pg. 53)

and

“No time is no excuse.  The most common excuse people give: “There’s not enough time.”  They claim they’d love to start a company, learn an instrument, market an invention, write a book, or whatever, but there just aren’t enough hours in the day.  Come on.  There’s always enough time if you spend it right.” (pg. 40)

and

“When you put off decisions, they pile up.  And piles end up ignored, dealt with in haste, or thrown out.  As a result, the individual problems in those piles stay unresolved.  Whenever you can, swap ‘Let’s think about it’ with ‘Let’s decide on it.’  Commit to making decisions.  Don’t wait for the perfect solution.  Decide and move forward.  You want to get into the rhythm of making choices.  When you get into that flow of making decision after decision, you build momentum and boost morale…You can’t build on top of ‘We’ll decide later,’ but you can build on top of ‘Done.’  The problem comes when you postpone decisions in the hope that a perfect answer will come to you later.  It won’t.” (pg. 77)

All from Jason Fried and David Hansson in the book Rework

COMMENTS: 37 Signals has been successful creating jobs for people and making a profit. They build tools for themselves and then share their applications with others. There is no question Basecamp is a success. The 37 Signals formula is to build products to the exact specifications of THEIR customers, it just so happens the customer is first and foremost THEM.

Our business model is different. We make products for OTHER people. This is a subtle but important distinction. Picture a male fashion designer who makes women’s clothes. He can appreciate them. He has a creative vision. But the clothes he designs will be worn by his female clientele. The male fashion designer’s success is when women purchase his designs built for the them. The male fashion designer is challenged to make a simple and beautiful product that works with the physical reality of his customers.

While I usually agree with the content of Rework, I find I do not always agree with the 37 Signals viewpoint. Yes, it works for them. Yes I agree with 90% of it. But just as critical is to know what advice is bad advice for a firm like ours. I think it is important that I plan for the company’s future. Thus I do not agree with statements such as this:

“Writing a plan makes you feel in control of things you can’t actually control…Why don’t we call plans what they really are: guesses.  Start referring to your business plans as business guesses, your financial plans as financial guesses and your strategic plans as strategic guesses.  Now you can stop worrying about them as much.”  (pg. 19)

It is catchy. It makes for a good anti-establishment Purple Cow type of quote. But I suspect the employees at Schipul appreciate me applying that advice carefully. Does that advice relate to our particular situation? No. And I think the team at 37 is plenty of smart enough to tell people to apply their advice…well, if it applies!

Sometimes advice is populist, but there is a logical flaw. A company who follows the infamous “work smarter not harder” quickly falls to a company that believes “work smarter AND harder.” Working smarter-not-harder would only work if hard workers were dumb. But we get smarter through experience! So unfortunately, hard workers are typically also smarter than you. Oooops. But we don’t like to admit that. What we want to hear is that the 4 hour work week is a winner.  I certainly wish the global economy worked that way!

I guess I am saying, use common sense and trust experience built upon DOING stuff.

Getting to Zero in Management

“And if you ask her for a new assignment, a promotion into a new role, you’re likely to hear the speech she first heard long ago from Mr. Hicks about “getting to zero” with a job.

To explain, she picks up a piece of paper and draws a line across it. She shades an area below the left end of the line.

“When you start the job, whatever it is, you have to find out who the secretary is, where the bathrooms are, who your teammates are,” she says. “Trust me, for a lot of time you are operating below zero.”

She then points to the middle stretch of the line.

“This is when most people want to leave a job,” she adds. “They say: ‘I’m done. I know everything. I’m done.’ But think about that. If you left there, basically all this area under the curve, which is negative, which is take-away, you owe the company all of that. Then you do this for six more months, and you can operate the place smoothly, but you haven’t really transformed it in the ways that you can help to transform it.”

She starts shading an area above the line to the right. That represents what a manager is expected to contribute — what to give back — after absorbing all of the training and experience that exists below the left side of the line. The balance amounts to “getting to zero.”

“You can only leave after you put in as much above the curve as under the curve. Unfortunately, that usually takes more than a day, and it takes a couple years,” Ms. Burns says. “People would come in to me and say: ‘You put me in this developmental assignment. I know how to run the place now. Thank you. Can I go to the next one?’ I say: ‘Well, how about all the stuff that you owe us? How about getting settled in for a little while longer and then start to transform it?’ ”

- Xerox’s New Chief Tries to Redefine Its Culture

you can’t get that shot, but that shot was not the problem

Thoughts on excuses and accusations in leadership.

Back in College I played a lot of racquetball tournaments and played on the Texas A&M racquetball team. I also coached a few hours a week, sometimes kids, sometimes other students, at the local gyms in College Station Texas. Every once in a while when coaching a newbie who threw me a floater in the middle of the court I’d crush it down the line or do a nice splat. The student would invariably look at me as if I had done something wrong exclaiming:

How am I supposed to GET THAT!?!?! You killed it! I can’t get that!

My answer was always the same.

You can’t get that shot. Nobody can. But THAT shot was not the problem. It was the shot before where you set me up that was the problem. The kill shot was just the part that hurt. Identify the real cause before you howl in indignation. Now lets work on not setting your opponent up, OK?

Running a business over the years I have found that two commonly used fallacies by employees (and by me!) are post hoc and non sequitur. Both of which are Latin phrases and sound all funny to me. How do they relate to business?

Example: an employee is late day after day after day. You work with them. Go through the usual discipline rigmarole. Think thoughts like “wow, they need a parent not a manager.” And eventually the day comes when you hold them accountable. The response:

I was on a church retreat this weekend and overslept today. And if you put work over God that is YOUR problem not mine. You are way out of line to put work over God and family!

It’s important to remember that the employee in this scenario ACTUALLY BELIEVES what they are saying. At a human level it is a mind-blowingly insensitive accusation against a fellow human being, but that is besides the point. The catch here is that “it does not follow.” This particular day it is the presenting problem; the floating ball in the middle of the court. The real issue is that they are late day after day. The accusation that the manager is a heretic bound for hell is simply the presenting problem. You, the manager, did nothing wrong.

Yet the employee believes what they said!

In my experience there is only one solution. Educate them on fallacies and communication BEFORE they use them on you. It doesn’t always work, but at least it might. Education is the first step.  Because common fallacies are, well, common. Read on my fellow leaders, and cut yourself some slack. It really isn’t you. It was the shot where they set you up that caused the problem.