Extras On Excise: Will Opponents of the Texas Franchise Tax Finally Be Granted Their Repeal?

Texas state legislators are pushing to revamp the business franchise tax in the current legislative session, and Gov. Greg Abbott (R) followed suit in his State of the State address, proposing $2 billion of franchise tax relief for the 2016-2017 biennium. Approaches include options ranging from slight modifications to outright repeal of the tax. While the political debate centers on the idea that taxation of businesses stymies the economy, some believe that the complexity of the tax and resultant compliance costs are major issues.

Legislators have introduced bills proposing remedies including:

  • Phasing-out the franchise tax over a period during which the tax rate is reduced incrementally;
  • Changing the tax base to equal federal taxable income;
  • Increasing the existing revenue exemptions in order to exempt more taxpayers; and
  • Immediately repealing the franchise tax, allowing a single transition year in 2016.

The governor also embraced the anti-franchise tax movement in his first budget presented to the legislature, proposing that the franchise tax be permanently decreased beginning with $2 billion in reductions during the 2016-17 biennium. Abbott did not, however, provide much detail on how to effectuate these reductions, perhaps willing to allow the legislature to drive that issue.

As do many opponents of the franchise tax, the governor expects that a significant reduction of the tax will result in new jobs and capital investment in the state. In his budget, Abbott touted a study by the Beacon Hill Institute that he said projected 41,500 new jobs, $3.4 billion in new net investment, $9.8 billion in new personal disposal income and $209 in real disposable income per capita in 2017 if the franchise tax were repealed.

However, Texas is already very attractive to business and the state economy is healthy, said Scott Fischer, partner in PricewaterhouseCoopers LLP State and Local Tax Practice in Dallas, Texas, in a recent interview with Bloomberg BNA. Fischer contends that property and sales taxes are bigger tax drivers in Texas in attracting and/or retaining businesses.

Similarly, the Tax Foundation published a special report deeming the franchise tax a failed experiment but Texas still made the top 10 of the organization’s business tax climate index, coming in at number 10. Based on the index ratings, Texas’ individual income tax and unemployment insurance tax ranks are primarily responsible for its high overall business tax climate rating.

Regardless of where one lines up on the issue of franchise tax, that Texas has a robust economy is not in dispute. However, some would argue that the franchise tax statutes are about as clear as mud.

The complexity of the tax alone has been driving up compliance costs for small business owners, said Will Newton, executive director of the National Federation of Independent Business in Texas, in a recent interview with BBNA. “In many cases, we have heard from people in the small business community that pay more in compliance costs than in the actual tax itself.”

These concerns are not isolated to small businesses either, as large taxpayers have also found franchise tax compliance efforts to be complex and challenging, said Fischer.

by Jequetta Byrd

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will the Texas Legislature repeal the state’s franchise tax this session?

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