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Showdown brews in Legislature over business tax cut

The Texas Senate and House have both made clear they want to eliminate the state’s main business tax, but a showdown appears to be brewing over how to accomplish it.

One potential plan to end the franchise tax — outlined in House Bill 28 and approved by the full House three weeks ago — was taken up Friday morning by the powerful Senate Finance Committee. But committee members quickly swapped it out for their own version, Senate Bill 17, that the full Senate approved in March.

The outcome could be that the bill ends up in a conference committee, where lawmakers from both chambers would attempt to reconcile their differences with little more than a week left in the legislative session.

Both bills would phase out the franchise tax over a period of years, but they use different formulas to do so and SB 17 is widely viewed as less abrupt. The franchise tax, also known as the margins tax, is Texas’ main business tax and brings in an estimated $8 billion to state coffers every two-year budget cycle — making it the third-largest source of state revenue.

State Sen. Jane Nelson, R-Flower Mound, who chairs the Senate Finance Committee, introduced HB 28 in the committee on Friday but immediately presented a substitute for it, describing the substitute as “the exact same” as SB 17, which she originally sponsored. The finance committee previously approved SB 17 on a 12-2 vote, and the full Senate approved it 23-7.

Dick Lavine, senior fiscal analyst with the liberal-leaning Center for Public Policy Priorities and the only member of the public to testify in person on the issue Friday, said either plan is a bad idea.

The franchise tax is “a very important source of revenue, and I think we should hang onto it,” Lavine said. “Tax cuts do not pay for themselves” through increased economic growth.

Lavine and other critics of scrapping the franchise tax say the state can’t afford to eliminate a major source of revenue without a plan to replace it, particularly at a time when lawmakers already are faced with making cuts to services in the upcoming 2018-19 budget. Past reductions to the franchise tax have contributed to the current financial difficulties.

But many industry groups have advocated getting rid of the tax, saying it’s too complicated and that it’s unfair because, as a tax on gross receipts, some businesses have to pay it even in years when they make little or no profit.

SB 17 would dedicate half of any state revenue growth above 5 percent to cutting franchise tax rates, until they reached zero. According to the Legislative Budget Board, which advises lawmakers on the potential fiscal impact of proposed legislation, SB 17 wouldn’t reduce state revenue in the upcoming 2018-19 cycle, but would cost the state about $1.1 billion in the 2020-21 cycle.

HB 28, sponsored by state Rep. Dennis Bonnen, R-Angleton, would allocate up to $3.5 billion of the ending balances in state general-revenue funds each two-year budget cycle to reduce the state franchise tax. The tax rate would be lowered each cycle to account for the ending balances, until the rates approached zero and the tax was eliminated.

The Legislative Budget Board has said in a fiscal note on HB 28 that “the maximum biennial franchise tax reduction of $3.5 billion would be triggered” during a typical two-year budget cycle — meaning that’s how much it would reduce state revenue — based on an average ending balance in state general-revenue funds of about $4 billion over the last 10 cycles.

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