The Honorable Rick Perry
Governor of Texas
The Governor's Mansion of Texas
1010 Colorado
Austin, Texas 78701

Dear Governor Perry,

Greetings! As you are well aware, we have been faithful and loyal supporters for years because we had confidence in you and have agreed with your policies. We have contributed tens of thousands of dollars to your campaigns and have used our influence to encourage others to support you.

Every leader, including you, Governor, needs friends who are willing to risk their relationship in order to warn him about an action that may have unintended consequences.

We are urging you to veto House Bill 3.

You are well aware of our principled opposition to this business tax which, if signed into law by you, would become the largest tax increase in Texas history.

Unless you veto HB 3, Texas will be the only state to tax businesses on their gross margin. Due to the diversity of businesses, this tax is extremely inequitable. The only reason that this margin tax was recommended by the Texas Tax Reform Commission, rather than an income tax, is because the Texas Constitution strictly prohibits a state income tax. To even the most unbiased observer, HB 3 is an end run around the state constitution.

Governor, you and your advisors have been telling corporations which currently pay the Franchise Tax that your "tax reform plan" would lower their tax rate from 4.5% to 1%. This is inaccurate. In fact, your business tax eliminates the 4.5% Franchise Tax rate on net income, only to replace it with a 1% tax rate on up to 70% of gross margin. This is a much larger dollar amount. In most cases this will dramatically increase the amount of tax paid. The vast majority of businesses that we have evaluated, which currently pay the Franchise Tax, will pay significantly more on the Margin Tax, in some cases up to 10x as much.

Governor, your business tax would be an effective tax rate of 10%-15% of net income of businesses with a net profit margin of 5%, and an effective tax rate of 20%-30% of net income on businesses with a net profit margin of 2.5%. This is simple math. If your advisors have told you otherwise, then they have deceived you and have placed your reputation, as well as the welfare of Texans, in jeopardy.

Norman Adams, Dan Patrick and Paul Bettencourt met with Mike Morrissey, a member of your staff, on Friday, April 21, 2006, in Austin, at your request. They gave Morrissey numerous examples of real businesses with completed Schedule B tax forms. For bringing this to your attention, we have been called liars in writing by John Sharp. Please take time to review our rebuttal at www.texansfornonewtaxes.org, Press Room, April 29, 2006, TNT's Norman Adams Rebuts John Sharp's "The Big Lie." We gave the names of these businesses to your advisors, as requested, but neither Morrissey nor anyone from the Texas Tax Reform Commission ever called these businesses as they told us they would do. The only conclusion that can be drawn from this is that your advisors are not interested in you knowing the facts.

During our testimony before the Senate Finance Committee Hearing on April 28, 2006, we exhorted the members of the panel to send the Schedule B tax form to every Texas business affected by HB 3 in order to get feedback from individual business owners as to the effect that this tax would have on their businesses. We encouraged the senators not to act on HB 3 until they had visited with business owners who had filled out their Schedule B tax forms. This would have been a prudent course of action. You and your supporters have argued that the business tax would be offset by the property tax proposal, HB 1. In its current form, HB 1 offers property tax reductions that are so minimal that most businesses would invariably pay hefty new taxes. In order for any business to benefit, it would either have to have enormous property holdings or a 20%+ net profit margin. Accordingly, HB 3 may benefit a few companies but it will decimate the vast majority of businesses that fuel the economic engine of our Texas economy.

Governor, you discussed the adverse effects of business taxes in your speech at the Texas Association of Business Annual Conference on February 6, 2004.

"There are no phantom taxpayers. Even those who talk about taxing business would be wise to remember an observation once made by President Reagan: 'Businesses don't pay taxes, people do.' Higher taxes on employers get passed on in the form of higher prices to the customer. Or maybe the employer is forced to sustain a smaller profit margin, meaning someone often loses their job. Either way, when taxes get raised on employers, real men and real women pay the price, not some faceless entity."

Governor, what has caused you to change your mind?

Paul Bettencourt, the Harris County Tax-Assessor Collector, has stated that the average home owner in Harris County would receive only a $15 savings in property tax in the first year when the 7% increase in appraised property value is taken into account. This is so minimal that few homeowners would ever notice the difference. But many small businesses would be crushed by HB 3.

HB 1 would solve the immediate problem with the Texas Supreme Court. The property tax reduction under HB 1 would not change in the first year whether or not HB 3 is adopted. HB 3 would not kick in until 2008. So why not just pass HB1 and allow the 80th Texas Legislature to deliberate on your proposed business tax and its future ramifications?

Governor, you can be a hero. Reduce property taxes, solve school finance with the $8.2 billion surplus and avoid any new taxes.

HB 3 creates an enormous problem for the Texas economy in the future. If you sign HB 3 into law, then Texas business owners will be shocked when they find out what their business tax will be. This will invariably have future political repercussions.

Do you want your legacy to be that you signed into law the largest permanent tax increase in Texas history?

The property tax reduction which HB 1 offers is minimal and would be temporary. Without appraisal caps, the promise of meaningful property tax reduction is worthless.

Please take time to consider our recommendations and veto HB 3. Then encourage the Texas Legislature to pass HB 1 and avoid this business tax.

Governor, you have staked out your position and most Republican Legislators have followed your lead. To veto this bill would demonstrate that you are willing to reevaluate your decision in light of additional information and are willing to take appropriate action to prevent future unintended consequences. Nothing endears a leader more to his supporters than when he admits that he was initially mistaken in his position and then rectifies the problem.

It is our prayer that you will consider this letter.

With much appreciation for your friendship, we remain, as always,

Sincerely yours,