Babcock Business Advisor
March 18, 2004 - Vol. 1 No. 008

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2004 Special Session Review

The sales tax on business utilities passed the Legislature and will renew for five years a 2.8 percent state sales tax that businesses pay on their utility bills. The bill also renews state sales taxes on a variety of other items, such as video rentals, Mardi Gras items, racehorses and antique airplanes. The "temporary" taxes, which have been on the books since 1986, generate about $160 million annually and will attract an additional $42 million federal dollars.

In final form, House Bill 2 will roll back the state sales tax on manufacturing machinery and equipment by fiscal year 2010. Amendments put farming and forestry machinery into the mix as well. The phase-out begins July 1, 2005. Though the bill only phases out the state sales tax on manufacturing equipment, it gives local municipalities the right to phase the tax out as well.

The Legislature also passed House Bill 3, which will phase out the corporate franchise tax on debt beginning Jan. 1, 2006, until it is eliminated in 2012.

The Legislature voted for a seven-year phase-out of the state tax on corporate debt and the sales taxes paid on machinery and equipment used in manufacturing and agriculture. The impact of the taxes was, in effect, double taxation, as companies pay the sales taxes when they purchase machinery and equipment, then get taxed on the borrowed money used to make the purchases. a seven-year period and a trigger that will begin the reduction in the state fiscal year beginning July 1 if state revenue projections are, as expected, higher than they were predicted to be last December. The phase-out will be 2 percent in the first year if projected state revenues are $20 million higher and 5 percent if the projections are $75 million higher.

The sales tax on machinery and the franchise tax on debt together represent about $275 million per year. The phase-outs reportedly will cut business taxes by more than $1 billion during the next eight years.

Another major piece of legislation raised the cap on the amount of mineral revenue that can be used in the state budget. The current cap of $750 million was raised to $850 million, and $801 million is expected from that source in fiscal 2004-05. It is reported that Blanco plans to use that extra $51 million to obtain an additional $115 million in federal matching funds for the state’s Medicaid program.

The Quality Jobs Act was approved by both chambers and is headed to the Governors desk for signature as well. The Act extended tax breaks businesses receive for creating jobs that pay at least one and a half times the minimum wage and provides health insurance benefits to employees. This program will be extended through January 1, 2008.

Lawmakers also approved a bill raising the pay of department heads. The secretaries of the state Departments of Economic Development and Health and Hospitals could receive up to $250,000 a year, and the secretary of the state Department of Environmental Quality would receive $115,000 a year.

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