Senate takes aim at state’s franchise tax,
Dems decry the move, saying it jeopardizes state’s revenue stream.
A measure that could eliminate Texas’ franchise tax — the state’s primary tax on business — within a decade won swift approval from the Texas Senate on Tuesday.
Senate Bill 17, filed by state Sen. Jane Nelson, R-Flower Mound, and backed by the Texas Association of Business and other industry groups, mandates a cut to the franchise tax every two-year state budget cycle if state revenue grows by at least 5 percent.
Under the bill, half of any revenue growth above 5 percent would be used to cut the franchise tax, which also is known as the margins tax. Based on current revenue estimates, Nelson has said the tax could be phased out within about 10 years as a result.
The proposal now will go to the Texas House for consideration.
“Under this legislation we put (the franchise tax) on a glide path to elimination,” Nelson, chairwoman of the powerful Senate Finance Committee, said on the Senate floor. Just minutes later and with no debate, the Senate approved her bill on a 23-7 vote.
“The businesses of this state thank you,” Nelson told her colleagues afterward.
But the lack of debate and the quick approval was viewed by some as simply acknowledgement that Senate passage had become a foregone conclusion.
State Sen. Kirk Watson, D-Austin, who voted against it Tuesday as well as earlier this month during committee, criticized the move to cut the tax as short-sighted. He said the state has yet to find a way to provide relief from spiraling school property taxes for Texas residents, which was among the original purposes of the franchise tax, and he noted the irony of proposing to cut it at a time when the state is struggling to bridge a multibillion-dollar gap in its current budget in the wake of previous tax cuts.
“Part of the hole we’re in now is a result,” Watson said after approval. “We need these revenue sources.”
Other opponents noted that the bill would “automatically lock in future revenue cuts” regardless of the state’s financial needs.
It will “guarantee tight state budgets into the future, starting with a $1.1 billion reduction in franchise tax receipts for the 2020-2021 budget,” said Dick Lavine, senior fiscal analyst with the left-leaning Center for Public Policy Priorities, in a prepared statement. “The franchise tax is the state’s third largest source of state tax revenue.”
But Nelson said on the Senate floor Tuesday that the proposal strikes a good balance between cutting the tax and ensuring the state retains enough of its future revenue growth to pay for its needs.
Gov. Greg Abbott and Lt. Gov. Dan Patrick both have cited cutting the franchise tax as among their priorities, and both previously have spoken approvingly of Nelson’s bill.
The franchise tax generated $9.39 billion in fiscal year 2014-15, according to Nelson’s office. That money provides a source of revenue to reduce property taxes and to pay for school finance reforms.
But fiscal conservatives and some business organizations say the tax places an undue financial burden on businesses. The tax has been criticized for causing an administrative headache for small businesses, as well as for unfairly burdening certain types of businesses over others and for forcing some to pay it even in years when they’re unprofitable.
“There is widespread support to eliminate the franchise tax, which hinders the ability of Texas businesses to grow and prosper,” Nelson said in a prepared statement after her bill was approved. “Our economy is healthier when businesses have fewer burdens and are free to grow.”
‘The franchise tax is the state’s third largest source of state tax revenue.’ Dick Lavine, CPPP analyst
Sen. Jane Nelson, R-Flower Mound (center, with Sens. Brian Birdwell, R-Granbury, and Judith Zaffirini, D-Laredo), filed Senate Bill 17, which would phase out the business margins tax within 10 years should state growth continue on its current path.