Franchise tax looks to be on way out
Third-largest source of state revenue seems doomed by House vote.
The third-largest source of revenue for Texas state government — the franchise tax — appears poised for elimination after the Texas House gave final approval Friday morning to a bill that would phase it out.
The Senate previously approved an alternative proposal to wind down the franchise tax using a different formula and time frame, but both chambers now have signaled they want to get rid of it, as have Gov. Greg Abbott and Lt. Gov. Dan Patrick.
The franchise tax, also known as the margins tax, is Texas’ main business tax and brings in an estimated $8 billion to state coffers every two-year budget cycle. It’s a tax on gross receipts, and industry groups have said that it’s too complicated and that it’s unfair because some businesses have to pay it even in years when they make little or no profit.
But critics of scrapping the
franchise tax contend the state can’t afford to eliminate a major source of revenue without any plan to replace it, particularly at a time when lawmakers already are faced with making painful cuts to services in the upcoming 2018-19 budget. Past reductions to the franchise tax have contributed to the current financial difficulties.
“This seems absolutely asinine,” said state Rep. Eric Johnson, D-Dallas, during debate Thursday night over House Bill 28, the House plan to phase out the tax. “I cannot for the life of me understand why we are even contemplating blowing an $8 billion hole in our future budgets” without any strategy to make up for it.
State Rep. Dennis Bonnen, R-Angleton, who sponsored HB 28, acknowledged it calls for “no replacement whatsoever” directly, but said eliminating the tax will generate economic growth, and thus new tax receipts, “that will go a long way toward replacing the revenue” in the future.
After giving preliminary approval to HB 28 shortly after 7 p.m. Thursday, the House gave it final approval on a 96-39 vote Friday morning, sending it to the Senate. No Republicans voted against the bill.
HB 28 would allocate up to $3.5 billion of the ending balances in state general-revenue funds each two-year budget cycle to reduce the state franchise tax. Under the bill, franchise tax rates would be lowered each cycle to account for the ending balances, until the rates approached zero and the tax was eliminated.
Senate Bill 17, approved by the Senate last month, would dedicate half of any state revenue growth above 5 percent to cutting franchise tax rates, until they reached zero. SB 17, sponsored by state Sen. Jane Nelson, R-Flower Mound, already has been commented upon favorably by Abbott and Patrick.
The House has not yet acted on SB 17. With HB 28 now sent to the Senate, either chamber has the option of taking up the other’s bill and approving it as written or amending it, in which case a conference committee could be appointed to reconcile the differences.
Based on current revenue estimates, Nelson has said the franchise tax would be phased out within about 10 years under her proposal. Bonnen hasn’t provided a precise time frame, although he has called his bill “a far more reasoned and aggressive approach” to eliminating the tax than would be accomplished under Nelson’s bill.
State Rep. Donna Howard, D-Austin, said it was irresponsible to phase out the franchise tax. She said during Thursday’s HB 28 debate that it will spur more deep cuts to essential services, such as public education and health care.
“Here we are talking about taking money we don’t have and giving another tax cut,” Howard said.
She said Bonnen’s bill would “punch a $3.5 billion hole in public education.” She also contended that Bonnen is counting on “a fake surplus” to reduce the tax, because the state’s ending fund balances that his bill would use to calculate the tax-rate reductions actually are earmarked for other purposes.
But Bonnen defended the bill. “If the money is there, it allows us to buy down the franchise tax over time,” he said.
HB 28 wouldn’t have any impact on the alreadystrapped 2018-19 state budget, because Bonnen altered it in committee two weeks ago to delay implementation by two years.
Still, the Legislative Budget Board has said that the bill will strike a significant blow to state revenue going forward. Based on an average ending balance in state general-revenue funds of about $4 billion over the last 10 budget cycles, “the maximum biennial franchise tax reduction of $3.5 billion would be triggered during an average biennium,” the organization said in its fiscal note on HB 28.
SB 17 wouldn’t have a financial impact on the state budget in the 2018-19 cycle, according to the Legislative Budget Board, but it would reduce state revenue by a total of more than $1.6 billion from 2020 to 2022.