Texas House members take a swing at franchise tax

A week after a bill to phase out the state franchise tax won approval from the Texas Senate, some House members made clear Wednesday they also want to take a whack at the state’s main business tax.

“I believe that it is time we put this tax to bed,” said state Rep. Mike Schofield, R-Houston, testifying before the House Ways and Means Committee. A bill Schofield co-authored — House bill 599 — would cut the franchise tax rate by a third every two-year state budget cycle in which state revenue is projected to rise by at least 6 percent, until the tax rate hits zero and is eliminated.

The Committee took testimony Wednesday on Schofield’s bill and several other House bills that either would phase out the tax over several years, based upon various formulas, or that would eliminate it entirely beginning Jan. 1.

Last week, the Senate approved Senate bill 17, authored by state Sen. Jane Nelson, R-Flower Mound, on a 23-7 vote and sent it to the House, which has yet to consider it. Nelson’s bill, commented upon favorably by Gov. Greg Abbott and Lt. Gov. Dan Patrick, would dedicate half of any state revenue growth above 5 percent to cutting the franchise tax — also known as the margins tax.

Based on current revenue estimates, Nelson has said the tax could be phased out within about 10 years as a result.

Representatives of a number of business organizations turned out Wednesday to testify in favor of eliminating the tax, praising the overall legislative effort as much as the particulars of the individual bills. As in the past, they criticized the tax, accusing it of placing an unfair financial burden on businesses, causing administrative headaches and requiring some businesses to pay it even in years when they’re unprofitable.

“It’s critically important for small business owners to get rid of this onerous tax,” said Will Newton, Texas executive director for the National Federation of Independent Business.

But other speakers voiced skepticism that Texas is in a position to eliminate a major tax at a time when it’s having trouble bridging a multibillion-dollar gap in its budget for the upcoming 2018-19 biennium. Rep. Drew Darby, a GOP member of the Ways and Means Committee, was among them.

“The reality is, we have to provide for essential services,” said Darby, R-San Angelo. He called it “a wing and a prayer” to expect the Texas economy to grow uninterrupted indefinitely and always provide enough revenue from sales taxes tax to cover state needs.

The various franchise tax proposals would come at a cost to state coffers, although advocates for eliminating the tax stressed repeatedly their view that taking the action would spur economic development to offset the declines.

Nelson’s bill wouldn’t have an impact in the 2018-19 budget cycle but would reduce state revenue by a total of more than $1.6 billion from 2020 to 2022, according to the Legislative Budget Board.

Schofield’s bill would cost the state a total of about $3.3 billion from 2020 to 2022, although nothing in the 2018-19 biennium, the budget board has said.

Meanwhile, the proposal to eliminate the tax beginning Jan. 1 — HB 1052 — would cost the state more than $3.9 billion in the 2018-19 biennium, as well as a total of more than $12.3 billion from 2020 to 2022.

State Rep. Leighton Schubert, R-Brenham, who authored HB 1052, acknowledged the potential hit to the state’s budget but said he hoped it would help “start a larger conversation” about the tax.

“It might not be feasible to do a complete repeal of it right now,” Schubert told the committee.

State Rep. Dennis Bonnen, R-Angleton, who chairs the Ways and Means Committee, said he has proposed delaying the start date for his own bill to phase out the franchise tax — HB 28 — until Sept. 1, 2019, in light of the current state budget situation, but said he still thinks it should be done at a more rapid pace then would be accomplished under Nelson’s SB 17.

“Given our budget situation, our ability to eliminate the tax this session is not likely,” Bonnen said. He said his bill still is “a far more reasoned and aggressive approach” than SB 17.

Bonnen’s bill would allocate a portion of surplus state money, up to $3.5 billion, to franchise tax rate reduction at the end of each biennium. Without the implementation delay, his bill would cost the state more than $1.5 billion in the 2018-19 biennium and a total of more than $2.44 billion from 2020 to 2022, according to estimates from the Legislative Budget Board, which has yet to assess the bill with a later start date.

The Ways and Means Committee left all of the bills pending after taking testimony on them.

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