On September 26, 2016 TCCRI submitted written testimony before the House Committee on Ways and Means regarding the impact of the repeal of the franchise tax on the state’s economy and on revenue stability for state government.
Since the current iteration of the Texas franchise tax was first collected in 2008 (and even before it was enacted), the tax has been controversial and a source of much criticism. Many of these criticisms stem from the fact that the franchise tax is a form of (gross) margins taxation, which is generally acknowledged to be an inefficient form of taxation with high compliance costs for businesses that are subjected to it.
Understanding these issues and the negative impact that the franchise tax is having on the state’s business climate,iv the Texas legislature has already set itself on the path toward elimination of the franchise tax. In the 2015 legislative session, House Bill 32 reduced the rates of the tax by one-quarter, increased the annual maximum revenue threshold for filing an “EZ” franchise tax return from $10 million to $20 million, and lowered the EZ filing rate by 42 percent. HB 32 also directed the Comptroller of Public Accounts to study the future fiscal and economic effects of repealing the franchise tax. Per the Legislative Budget Board (LBB), the cuts to the franchise tax enacted in HB 32 amount to a $2.6 billion tax reduction over the course of the current (2016-17) biennium.