Will Texas lawmakers eliminate state franchise tax?

Two tax bills watched closely by businesses were heard in the Texas House Ways & Means Committee on Monday — one that would eliminate the franchise tax, and another to exempt tangible personal property from ad valorem taxation.

House Bill (HB) 391 by Rep. Craig Goldman (R-Fort Worth) would eliminate the state’s franchise tax in perpetuity, the tax paid by businesses operating in Texas. Last year, franchise tax collections brought $5.7 billion into the state, and it’s totaled $19 billion since 2019; this year has already reached $315 million.

Texas has a varied franchise tax system: most businesses pay a 0.75 percent franchise tax on their margins, though retailers and wholesalers pay 0.375 percent and any company that brings in less than $1.23 million in a year is exempt. For entities that bring in $20 million or more, the rate drops to 0.331 percent.

“When you eliminate a burdensome, unfair tax on businesses, the economy actually benefits,” Goldman told the committee Wednesday. “Businesses hate this tax.”

If passed, the form filing requirements would still apply to “audits, deficiencies, redeterminations, and refunds of any tax due or collected” under current law.

Goldman pitched to the committee that the elimination of the franchise tax would lead to more business investment in the state, becoming that much more attractive of a destination for commercial entities looking to build new or expand current operations in Texas.

In 2015, the Legislature approved a 25 percent cut in the state’s franchise tax.

The bill carries an estimated $7.8 million fiscal note for the state’s general revenue fund over the 2024-2025 biennium — tax dollars that would have been collected with an intact franchise tax. It’d also come with an estimated $3.8 billion less in remittances to the Property Tax Relief Fund, the state’s extra-constitutional fund that exists outside the general fund.

Seeing those sums as tax collections lost by the state is one way to view it; another is the tax savings businesses would experience.

Goldman acknowledged the large fiscal note in the hearing and countered that it would lead to economic gains down the road.

Just before his bill was considered, Rep. Will Metcalf’s (R-Conroe) HB 2987 and House Joint Resolution (HJR) 129 were heard — the enabling legislation and constitutional amendment that would exempt tangible personal property from property taxation.

In addition to taxes paid on real property — the value of the land and facility which a business owns — businesses currently pay taxes on all income-producing property. A forklift in a warehouse, a fast food joint’s grill, and inventory, the very products sold by a business, all count as income-producing property.

All of that is taxed by political subdivisions.

The fiscal note for HJR 129 is $2.9 billion through the next biennium — $9.3 billion through the next two biennia.

According to a report by the Texas Taxpayers and Research Association, business personal property tax collections by school districts, which collect the largest portion of property taxes, totaled $3.4 billion in 2018.

Despite being overshadowed by property tax relief for homeowners this session, business tax reform is very much on the minds of both chambers.

In addition to its $17.1 billion in rate compression — $12 billion in new rate reductions, and $5.1 billion in continuing previous reductions — the Texas House has prioritized lowering the current homestead appraisal cap to 5 percent and expanding it to all real property, including businesses.

Meanwhile, the Senate has preferred a strategy of raising homestead exemptions coupled with an inventory tax credit and a $22,500 increase in the business personal property tax exemption. Abbott previously called for increasing that exemption to $100,000, but the Senate has settled on one-quarter of that coupled with the inventory credit.

The two chambers are deadlocked over the appraisal reform strategy despite largely agreeing on compression, which will be the feature of whatever property tax relief plan the Legislature passes. Neither Lt. Gov. Dan Patrick nor Speaker Dade Phelan (R-Beaumont) yet appear willing to give in on the issue; Patrick has said the lower chamber’s plan is “dead on arrival,” while Phelan said “nothing is dead in the Texas House.”

But with Goldman’s and Metcalf’s bills moving — both from members of House leadership — the lower chamber has set in motion a plan B for business tax reform should its appraisal plan sputter out, or a supplement to plan A if their blueprint survives the Senate.

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