The Texas Senate has passed a package of bills that include substantial reforms to the state’s franchise tax, a tax on a business’ gross margins. Conservatives are cheering the news, and turning a hopeful eye toward the House, where the fate of these reforms now rests.
The bill package was passed on Wednesday and includes significant cuts to the franchise and property tax, and reforms to both that are designed to make the taxes simpler and lower compliance costs.
SB 7 cuts the franchise tax rate by 15 percent and expands eligibility for the “EZ” reporting, doubling the amount of revenue allowed to be reported on the “EZ” form from $10 million to $20 million. SB 7 also cuts the rate for EZ filers by 42 percent. In addition to the direct savings from the reduced taxes, many Texas businesses would save money on reduced compliance costs from being able to use the simplified “EZ” form.
SB 7 also includes a key provision that directs the Comptroller to conduct a study to be ready for the next legislative session, advising the Legislature on how the franchise tax could be abolished by identifying alternative revenue sources that could replace the franchise tax.
SB 8 is another significant cut to the franchise tax, creating an across the board exemption for all businesses with less than $4 million in revenue. The previous exemption was $1 million. SB 8 would exempt 61,000 Texas businesses from the tax, over half of those that now have to pay it, saving small businesses $760 million over the next two years.
The bill package also included two measures that offered tax relief for home owners and home buyers, SB 1 and SJR 1. SB 1 doubles the homestead exemption and also tied the exemption to home prices, allowing it to automatically increase as prices rise. SB 1 is expected to save Texas homeowners $2.154 billion over the next two years. SJR 1 will place a question on the ballot where voters can amend the Texas Constitution to permanently ban taxing real estate transactions.
Lieutenant Governor Dan Patrick (R) touted the passage of the bills with a press release titled, “Today Marks the Beginning of the End of the Franchise Tax,” commending the Senate for “delivering true tax relief for homeowners and businesses.”
“Rather than spend excess revenue, the Senate has voted to return $4.6 billion to Texas homeowners and businesses over the next two years,” said Patrick.
Senator Charles Schwertner, M.D. (R-Georgetown), the sponsor of SB 8, had taken an active role in publicly promoting franchise tax reform. As Breitbart Texas reported, he wrote an open letter to several business groups that were opposing the reforms, criticizing them for neglecting the state’s small businesses in favor of protecting the interests of powerful big businesses.
After the bill package passed, Schwertner posted a note on his Facebook page. “Today’s vote in the Texas Senate represents a great step forward in providing meaningful tax relief for the small Texas businesses that need it most,” wrote Schwertner. “For many small and medium-sized businesses struggling to make it, the state franchise tax represents an unreasonable and unnecessary tax burden that only serves to limit job growth and stifle new investment. This landmark tax cut will go a long way in supporting the hard-working small business owners that create jobs and drive our Texas economy.”
“This fiscally responsible approach provides meaningful tax relief to the small businesses who need it most, while still maintaining a balanced budget,” said Schwertner. “It just makes sense.”
Senator Brandon Creighton (R-Conroe), the sponsor of several franchise tax reform measures and co-sponsor of SB 8 with Schwertner, was pleased with the final bill package that the Senate passed. Creighton told Breitbart Texas that it had been a “heavy day” of debate and the supporters of the reforms were “excited” to see the bills pass.
Creighton said that franchise tax reform was a high priority for people in his district, because of the harsh impact of the tax on many small businesses. “We are very pleased at this point in the session to have $4.6 billion [in total tax relief] and an effective repeal of the franchise tax for 52 percent of all Texas businesses that were paying it,” he said.
“I think we’re on a really good path to provide a strong strong base of support to the Texas economic engine,” said Creighton.
The Texas Public Policy Foundation (TPPF) was among the many conservative organizations that had urged the Legislature to pass franchise tax reform this session. Bill Peacock, TPPF’s Vice President of Research and Director of the Center for Economic Freedom, called the bills passed by the Senate “a first step in the process of giving Texans badly needed tax cuts.”
“The $4.6 billion in property and business tax cuts adopted by the Senate moves us in the right direction,” continued Peacock. “However, we continue to support the complete elimination of the state’s onerous margin tax.”
Americans for Prosperity-Texas (AFP) also supports the repeal of the franchise tax, but praised the Senate for taking a positive step with these significant cuts. Jerome Greener. AFP’s acting state director, called the franchise tax “complex and unfair,” telling Breitbart Texas that the Tax Foundation had determined that eliminating the tax “would help make Texas one of the best states to do business” in the country.
“While the Senate didn’t repeal it, they took an important and meaningful step by effectively cutting it by $2.5 billion,” added Greener. “All eyes are now on the House to see if they will offer significant business tax relief.”
There are still bills pending in the Senate that could offer additional reforms to the franchise tax, including one filed by Senator Charles Perry (R-Lubbock) that would phase the tax out entirely, the position favored by groups like TPPF and AFP. After Wednesday’s vote in the Senate, Perry posted on his Facebook page, “Today we passed both property and franchise tax relief out of the senate! It is my hope that we will continue this discussion and pass my bill to end the franchise tax for good!”
Governor Greg Abbott (R) has joined the call for reform, vowing in his State of the State address to veto any budget that did not include genuine tax relief for Texas employers and job creators. In a recent web video, Abbott included his wish to “permanently reduce the business franchise tax” as one of the reforms necessary for Texas’ future, although he did not offer specific details of what type of reforms he would like to see.
For now, all eyes turn to the House, where several bills proposing a number of different franchise tax reforms have been filed. It has not yet been determined when the House might take up the issue, and several advocates for reforming the franchise tax have expressed concerns to Breitbart Texas that the bills may be left to die in committees. A search of bills filed in the House shows numerous bills that have been referred to either the Ways and Means Committee or the Appropriations Committee, but as of the date of this article, none of them have been set for public hearing.
Breitbart Texas will continue to follow this issue as the Legislature continues to debate franchise tax reform this session.
[Disclosure: Sarah Rumpf was previously employed by the Texas Public Policy Foundation.]
Follow Sarah Rumpf on Twitter @rumpfshaker.