Texas legislature acts to eliminate franchise tax

This week brought the Trump administration’s one-page opening salvo in what is likely to be contentious debate over reform of federal tax system.

A key part of the proposal is to reduce business taxes from 35 percent to 15 percent – even for small, unincorporated business whose owners pay taxes at the individual, not the corporate rate.

It isn’t only at the federal level, however, where changes to business taxes are in play.
In this post, we will a Q & A format to update you on the possible elimination of a state tax on Texas businesses called the franchise tax.

What is the franchise tax?

The Texas legislature created the franchise tax, also known as the margins tax, in its current form in 2006, as part of a change in the funding of the public school system. The idea behind the revised tax was to rely less on property taxes for school finance.

Over the past decade, numerous amendments have taken the burden of the franchise tax off of most small businesses. Larger businesses have expressed concerns, however, that they are being double taxes by having to pay both the franchise tax and property taxes.

The franchise tax currently brings in about $8 billion every two years, with a little over a third going to schools. The remainder goes to the general fund.

What action has the legislature taken?

On April 27, the Texas House approved a bill (House Bill 28) to eliminate the franchise tax. The vote was 98-45.

The House bill must now be reconciled with a similar bill (Senate Bill 17) that had already been approved by the Texas Senate. Though the two bills are substantially similar, the franchise tax will not go away all at once.

Pending reconciliation of the two bills, the tax is to be phased out, as state revenue grows. Under the House bill, it will not be fully eliminated until 2020.

What is the likely impact of eliminating the tax?

Some lawmakers are concerned that getting rid of the franchise tax will cause a big hit to the funding of public education. There is also concern about increases in property taxes. For now, however, businesses are in line for relief from the franchise tax, even as the prospect of federal tax cuts also heats up.