Texas Legislature Passes $2.56 Billion Tax Cut Package

June 1, 2015

Last week, Texas took a step in the right direction when lawmakers passed a bill cutting the state’s controversial Margin Tax. HB 32, the “Franchise Tax Reduction Act of 2015,” reduces the burden of the Margin Tax by lowering rates and administration costs. From 2016-2017, HB 32 will result in an estimated $2.56 billion tax cut for businesses.

The bill reduces the business franchise tax from 1 percent to 0.75 for most businesses. Retailers and wholesalers will also see their rate cut from 0.5 percent to 0.375 percent.

Under current law, businesses in Texas that are subject to the Margin Tax have three options for filing: No Tax Due, E-Z Computation, or Long Form. E-Z Computation is a simplified form currently offered to businesses with annual revenues of up to $10 million, but companies cannot deduct all costs, compensation, or take credits. Using E-Z Computation, companies pay a tax rate of .575 percent.

HB 32 delivers changes to E-Z Computation, allowing businesses with revenues up to $20 million to file through the program and decreases the associated tax rate by 42 percent, cutting rates from 0.575 percent to 0.331 percent.

The Texas Legislature also passed SB1 which, most notably, increases the homestead exemption from $15,000 to $25,000. This expansion generates an estimated $1.24 billion tax cut in the 2016-2017 biennium.

Both bills have been passed by the legislature and are waiting on Governor Abbott’s likely approval. HB 32 also clarifies that it is “the intent of the legislature to promote economic growth by repealing the franchise tax.” Senator Don Huffines (R-Dallas) did propose an amendment to begin permanently phasing out the Margin Tax, but it was not adopted.

We have written extensively on the damage the Margin Tax does to Texas’ economy. An elimination of the Margin Tax would increase Texas’ Business Tax Climate ranking from 10th in the country to an impressive 3rd. A reduction in the Margin Tax is more economically advantageous than no changes to the tax, but it would be in the state’s best interest to eliminate the tax entirely in order to reduce the complexity and costliness of the state’s tax code.

More on Texas here.

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