A plan to phase out the state’s main business tax has advanced in the Texas House, potentially providing lawmakers who want to eliminate the tax with a choice between it and a Senate proposal that would accomplish the same goal under a different time frame and formula.
The House plan to end the franchise tax — House Bill 28, authored by state Rep. Dennis Bonnen, R-Angleton — was approved by the House Ways and Means Committee this week but still must be taken up by the full House for a vote. Bonnen chairs the powerful committee.
Bonnen’s bill would allocate a portion of surplus state money, up to $3.5 billion each two-year budget cycle, to reduce the state franchise tax, which also is called the margins tax. Under the bill, franchise tax rates would be lowered each cycle to account for the surplus, until the rates approached zero and the tax was eliminated.
A similar effort — Senate Bill 17 by state Sen. Jane Nelson, R-Flower Mound —already has gone to the full Senate for a vote and won approval, but it has yet to be taken up by the House.
SB 17 would dedicate half of any state revenue growth above 5 percent to cutting franchise tax rates, until they reached zero. It has been commented upon favorably by Gov. Greg Abbott and Lt. Gov. Dan Patrick.
Business groups, which have said the franchise tax is unfair and a source of significant administrative headaches, have been content for the most part to praise the overall legislative effort and watch it play out rather than take sides on the various proposals to eliminate the tax.
Chris Wallace, president of the Texas Association of Business, took that tact Thursday, saying his organization supports either HB 28 or SB 17. The precise time frame for ending the tax will be “dependent on circumstances of what is affordable,” Wallace said.
But critics of the effort to phase out the tax contend neither is affordable, with the state struggling to bridge a multibillion-dollar gap in its budget for the upcoming 2018-19 biennium that was exacerbated partly by previous cuts to the franchise tax.
Dick Lavine, senior fiscal analyst with the liberal-leaning Center for Public Policy Priorities, called it “astonishing” that lawmakers would consider the proposals given the state’s current financial straits. The franchise tax is the third-largest source of state revenue, Lavine said, and is projected to bring in $7.8 billion to state coffers during the 2018-19 budget cycle.
The two bills “differ in what would trigger reductions in the franchise tax, but the results would be the same - elimination of franchise tax revenue that currently helps fund our public schools, then squeezing the amount of general revenue available to fund the rest of the budget,” he said.
Lavine called the bills “time bombs” that will hurt the state’s ability to provide essential services well into the future. Advocates for eliminating the franchise tax dispute the contention, saying it will foster broad economic growth that will help the state.
Based on current revenue estimates, Nelson, who chairs the Senate Finance Committee, has said the tax could be phased out within about 10 years under her proposal. Bonnen hasn’t provided a precise time frame, although he has called his bill “a far more reasoned and aggressive approach” to eliminating the tax than would be accomplished under Nelson’s bill.
Bonnen already has opted to delay implementation of his proposal, however, because of its projected negative impact on the state budget. The version of HB 28 approved by his committee this week pushed its effective date back by two years, until Sept. 1, 2019.
The bill was approved 10-0 by the House Ways and Means Committee on Wednesday, with state Rep. Eric Johnson, D-Dallas, absent for the vote. Earlier, Johnson had cast a lone vote against approval during initial consideration of the bill, but he was absent about an hour later when Bonnen called for reconsideration to make a minor change to it.
Without the implementation delay, the Legislative Budget Board has estimated that HB 28 would cost state coffers more than $1.5 billion in the upcoming 2018-19 biennium and a total of more than $2.44 billion from 2020 to 2022. The group has yet to assess the bill with a later start date.
SB 17 wouldn’t have a financial impact on the state budget in the 2018-19 cycle, according to the Legislative Budget Board, but it would reduce state revenue by a total of more than $1.6 billion from 2020 to 2022.