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Texas Senate Passes Margin Tax and Property Tax Bills

By: Scott Drenkard

Texas policymakers have a lot to be proud of, but the state’s poorly structured gross receipts-style “Margin” TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. is not one of those things. The business tax (which is called the Franchise Tax in statutes) is unique in that it has four base calculations, two rates depending on business industry, and a host of credits for certain firms, but not others. In January, we released a report delving into the merits of repealing the tax, finding that the state could improve from 11th to 3rd on our State Business Tax Climate Index, while growing jobs and investment in the private sector.

While tax elimination was widely talked about leading up to the beginning of the legislative session, it looks as though the Senate has settled on tax reduction for now. In addition to changes in the Margin Tax, the Senate also passed a joint resolution on property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. reductions.

Here’s a rundown of the bills (from State Tax Notes):

“SB 7, introduced by Senate Finance Committee Chair Jane Nelson (R), was passed on a 24-7 vote. It would permanently reduce the state's business franchise tax rate across the board by 15 percent — from 1 percent of gross receipts to 0.85 percent for most businesses and from 0.5 percent to 0.425 percent for retail or wholesale businesses.

“SB 7 would stipulate that the Legislature finds that the franchise tax has not provided "sufficient reliability for property tax relief." It adds that "it is the intent of the Legislature to promote economic growth by repealing the franchise tax," a proposition supported by many critics of the tax, including the Tax Foundation, which in January called the tax a failed experiment. […]

“The Senate also passed SB 8, introduced by Sen. Charles Schwertner (R), on a 24-7 vote. The bill would increase from $1 million to $4 million the minimum revenue threshold at which businesses are subject to the franchise tax.

“Finally, SB 1, also introduced by Nelson, was passed on a 26-5 vote. It is enabling legislation for SJR 1, passed on a 31-0 vote, which would ask for voter approval of a constitutional amendment that would increase Texas's mandatory property tax homestead exemption from a flat $15,000 to 25 percent of the median home price in Texas each year. Nelson said in a bill analysis of SB 1 that if the change is in place in 2016, the bill would create an estimated exemption of $33,625.”

A few things here. First, this is a good first step and a recognition that the Margin Tax is ripe for serious business tax reform. Second, as State Tax Notes’ blurb on SB 7 would indicate, I really think the state should consider putting the Margin Tax on an elimination schedule, though I suppose that some will be heartened that it “intends” to do so.

One of the chief burdens of this tax is its complexity, so while reducing its total collections is helpful, real economic boons would be had if businesses didn’t have to go through the arduous process of filing anymore.

Thirdly, if I have a concern with the package, it’s that while the increase in the Margin Tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax. to $4 million will protect many smaller businesses from having tax liabilities going forward, it might have the unintended consequence of dampening the support for future reform, as there will be less interested parties.

We’ll update here as the House makes decisions on these bills.

More on gross receipts taxes.

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