Extras on Excise: Texas Lawmakers Pass Cut to Franchise Tax Rate, Eye Future Repeal

Texas state legislators have taken their most significant step yet toward repealing the franchise tax, having passed H.B. 32, known as the Franchise Tax Reduction Act of 2015, on June 1. The governor has not yet signed the bill but is expected to do so. This legislation reduces current franchise tax rates and stipulates that the intent of the legislature is to repeal the franchise tax in order to promote economic growth.

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 March interview with Bloomberg BNA. Fischer contends that property and sales taxes are bigger tax drivers in Texas in attracting and/or retaining businesses.

Nevertheless, the franchise tax has been on the chopping block for quite a while and was a focus of the Texas legislature in the 2015 session.  

H.B. 32 reduces the general franchise tax rate to 0.75 percent, down from 1 percent. The franchise tax rate for entities engaged in retail or wholesale trade is reduced to 0.375 percent, down from 0.5 percent. These reductions reflect a 25 percent decrease in the franchise tax and will take effect on January 1.

Under the new legislation, businesses are eligible for the E-Z computation provided that their total revenue is not more than $20 million and the applicable tax rate is 0.331 percent. The limitation is $10 million and the tax rate is 0.575 percent under the current franchise tax law.

Reports indicate that the tax cut will cost Texas $2.56 billion in revenue over the next two years. This would represent an even greater business tax cut than the $2 billion proposed by Texas Gov. Greg Abbott (R) in his budget for the 2016-17 biennium.

The passed legislation does fall short of many of the proposals contemplated earlier in the legislative session which included:

  • Clear phase-out of the franchise tax by incrementally reducing the tax rate over a period of years;
  • Immediate repeal of the franchise tax with a single transition year in 2016; and
  • Changing the tax base to equal federal taxable income.

Also, while H.B. 32 states the legislature’s intent to repeal the franchise tax, there are no provisions in the bill that set forth how this will occur.

by Jequetta Byrd

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will the franchise tax reduction be a permanent or temporary solution in Texas?

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