The Issue… Tax Relief
The franchise tax was implemented in 2007 in the hopes that it would create an additional revenue stream that serves to reduce school district related property taxes.
Originally, of the state’s nearly $51 billion in revenue, the franchise tax was intended to produce $6 billion of that, but the tax has consistently fallen short of projected income by almost $2 billion. While the franchise tax contributes to nine percent of the state’s revenue, the state has a predetermined spending cap adopted by the Legislative Budget Board and even reaching that point will leave $7 billion untouched in taxes already collected.
While adjustments have been made to the broad base of the franchise tax, also known as the margins tax, ultimately it has continued to impact small and medium size businesses disproportionately from that of large businesses. Because this business tax is based on gross receipts, not profits of a business, the tax is on the volume of business being done without taking into account whether a business profits, breaks even or loses money. In a 2013 survey of National Federation of Independent Business (NFIB)/Texas members, 57 percent of respondents said they paid the franchise tax even when they did not make a profit.
The phase out of the franchise tax would impact Texas-owned business, a homeowner property tax reduction impacts Texas homeowners, whereas a sales tax reduction will impact Texans but also provides a reduction to the average 235 million state visitors that spend $67.5 billion. The elimination of the franchise tax will create a cascading effect where the funds show up in the form of job creation estimated to be around 41,500, capital improvements, employee pay raises, and debt payoff.
Small business is the economic backbone of Texas’ economy accounting for 96 percent of all businesses and creating two out of three new jobs annually. The franchise tax is one of many taxes a small business is faced with, in effect creating a pyramid of taxation that includes inventory, property, income, and sales taxes. Additionally, it is costly for these independent businesses to ensure that they are in compliance and because of the complexity in the computation of this tax most have to seek external accounting assistance that can cost more than the actual tax owed.
- Economic Effects of Eliminating Margin Tax by TPPF 2015
- NFIB/Texas Member Survey Results for Franchise and Property Tax Relief 2015
- Understanding the Texas Franchise or “Margin” Tax by TTARA 2011
- Phasing out the Texas Business Franchise Tax by NFIB Research Foundation 2013
- A Principled Case for Substantial Tax Reform by TCCRI 2013
- Fort Worth Star-Telegram
- Austin Business Journal
- Austin American-Statesman
- San Antonio Express-News
- Dallas Morning-News
- Houston Chronicle
- Texas Monthly
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