84(R) - 2015
Relating to decreasing the rates of the franchise tax.
A fiscal note dated March 2, 2015 estimates that as initially filed, Senate Bill 7 would have no impact on General Revenue Related Funds through the biennium ending on August 31, 2017. But it adds that it will impact the Property Tax Relief Fund by a $1,433,525,000 loss for the 2016-17 biennium, adding to the State's responsibility to make up for this loss to fund to the Foundation School Program.
Senate Bill 7 would reduce the franchise tax rates from 1 percent to 0.85 percent for businesses not involved in retail or wholesale, and from 0.5 percent to 0.425 percent for retailers and wholesalers.
Following the 83rd Legislature, the franchise tax rates were already reduced (respectively to 0.95 percent and 0.475 percent) but these decreases expire on December 31, 2015. Senate Bill 7 would make the decrease in rate it proposes permanent.
Senate Bill 7 also has provisions that would modify Sec. 171.1016 of the Tax code regarding the E-Z Computation method. It would increase the maximum total revenue under which a taxable entity can file the franchise tax using the E-Z computation method from $10 million to $20 million, and would reduce the rate used from 0.575 percent to 0.331 percent.
Companion Bill HB 1316 is similar but not identical.
Vote Recommendation Notes
The Franchise tax is a complex and unfair tax. It costs money and time to businesses to comply with and to file - whether they ultimately pay it or not, and since it is similar to a gross receipts tax, some businesses may end up having to pay taxes even without making a profit.
Additionally, the franchise tax has failed to raise the amount of revenues expected from its collection.
Senate Bill 7 would bring considerable relief to businesses by decreasing the rate and making the decrease permanent. It would also broaden the scope of businesses that would be able to use the E-Z computation method, reducing the cost of filing the tax for more businesses.
As a consequence, Senate Bill 7 would allow businesses to keep more of the wealth they create - which could translate into more investments and/or job creation. This would have a positive impact on property rights and the free market system, and it would reduce the impact of government on these businesses. Lower rates would also encourage businesses that want to expand or relocate to move to Texas.
We support Senate Bill 7 but because a complete repeal of the franchise tax would better help all businesses and unleash more prosperity for the Texas economy and Texans as a result, we suggest that Senate Bill 7 be amended to plan for the repeal of the tax, by phasing it out over two to three years.