The Texas Senate approved a bill to reduce and phase out the state’s margins tax, which is collected from business owners for the privilege of doing business in the state.
Lawmakers approved Senate Bill 17, sponsored by state Sen. Jane Nelson (R-Flower Mound), in March.
If approved by the House and signed into law by Gov. Greg Abbott (R), the bill would reduce the margins tax—a levy on businesses’ gross profits, also known as a franchise tax—every year state government revenue increases by 5 percent or more.
Texas’ margins tax has a complex history, says Vance Ginn, an economist with the Texas Public Policy Foundation.
“The business franchise tax [has] been around for a long time,” Ginn said. “Until 2006, it was primarily on large businesses. The Texas Supreme Court ruled in 2005 that our school finance system was unconstitutional. They ruled that we had a statewide property tax, while we have it explicitly written in our state constitution that we can’t have a statewide property tax.”
Lawmakers created a new tax to replace the old one, Ginn says.
“In order to alleviate that issue and bring down property taxes across the state, they put in place what was called the Property Tax Relief Fund, and the way that that was going to be funded was through a ‘reformed’ franchise tax,” Ginn said. “The reformed franchise tax was put in place in a special session in 2006. [It] basically broadened the base, so it wasn’t just large businesses anymore.”
‘Just a Bad Tax Overall’
“This ends up meaning employers are cutting workers or closing down, in some cases, so it’s just a bad tax overall,” Ginn said.
Salvador Ayala, a budget and policy analyst for Empower Texans, says the margins tax is costly for business owners and consumers alike.
“Texas businesses contend that the tax is burdensome and sometimes results in a cost of compliance that’s greater than their total franchise tax liability,” Ayala said. “As you may know, these costs and the tax itself are largely passed through to consumers.”
‘A Spending Problem’
Government overspending is the root cause of excessive taxation, Ayala says.
“Approximately $3 billion of franchise tax collections are deposited to the Property Tax Relief Fund, which is then directed to the Foundation School Program,” Ayala said. “What usually presents as a revenue problem is actually a spending problem. My belief, that phasing out the franchise tax does not necessarily imply less funding for education, isn’t affected by this.”