Critics Call for End to Franchise Tax
With the 83rd Texas Legislative Session convening today in Austin, there is a move afoot by business leaders and some lawmakers to eliminate Texas's business margins tax, commonly known as the Franchise Tax. The tax was implemented back in 2006 with the support of Governor Rick Perry as a way to offset a cut in property taxes, but it has proven very unpopular and confusing among most in the business community. Among the groups pushing for eliminating the tax, is the National Federation of Independent Business (NFIB). Texas NFIB chapter director Will Newton tells KTRH that doing away with the franchise tax would be a net positive for Texas by making the state more business-friendly. "We're looking at incredible growth in the business activity in the state if we eliminate this tax, and therefore all other revenues to the state will increase."
Critics of the franchise tax call it unfair because it taxes the gross receipts of a business, rather than actual profits. That means successful businesses are hit equally as struggling businesses. Governor Perry and legislators have sought to rectify that by creating a small business exemption to the tax for the first $1 million in income. But Newton argues that exemption isn't nearly enough. "A $2 million business isn't really that big of a business," he says. "So we believe we should be encouraging those who invest in those businesses to grow them, so they can create new and better jobs."
Getting rid of the tax seems like a good idea, until you consider the hole it would leave in the state's revenue. KTRH Money Man Pat Shinn says the state would have to find something to replace the franchise tax if it's eliminated. "It does generate approximately 10% of the total tax revenue for the state of Texas, so in no way do I think this is gonna go away." Indeed, the franchise tax raised $4.5 billion last year, according to the comptroller's office. Critics of the franchise tax have suggested replacing it with a business income tax, or gradually phasing it out over a ten-year period to avoid a sudden drop in state revenues. "If they just did away with (the tax), they would have a 10% cut in the state's revenue," says Shinn. "Clearly something we can't afford to do at this particular time."