Op-Ed: Repealing Texas franchise tax would spur economic growth

 By John Colyandro and Tom Aldred

Published by the Houston Chronicle, March 19, 2015

Over the past decade or more, Texas’ Republican-led Legislature has enacted a succession of balanced budgets without a tax increase. The state has maintained a favorable regulatory climate and substantially reformed the civil justice system.

Texas is home to the second highest number of Fortune 500 companies in the nation (52), one behind California and three ahead of New York. The state has recovered strongly from the economic downturn, regaining all of the payroll job losses that occurred since 2008.

But Texas’ sustained economic power is not a certainty: continued strong fiscal policy matters. Other states like Wisconsin, Ohio, Kansas, Indiana, and Michigan have made significant economic strides in recent years.

As economist Brian Domitrovic argued two years ago, “Texas stands in jeopardy of repeating California’s grave mistake. If Texas does not cut taxes soon, it will guarantee an increased level of governmental displacement of the real economy and choke off the sources of what’s emerging as one of the proudest moments in all of Lone Star history: the state’s great prospering in the context of national economic stagnation.”

This is even truer today: In fiscal 2014, state tax revenues grew by 6.7 percent while the state’s economy grew by just 3.7 percent. In fact, you have to go back to fiscal 2010 for the last time the growth of the state’s economy outpaced the growth of state tax revenues. Put simply, tax revenues are growing faster than the state’s economy as a whole.

The displacement of the private sector economy is underway, and it is a path to economic calamity. The only way to change course is to eliminate a source of tax revenue: the Texas franchise tax. The franchise tax is a privilege tax on corporations that are chartered in or doing business in Texas.

There are a multitude of flaws with the tax, which is why more than a dozen bills have been filed to phase out or eliminate it immediately.

In a recent legislative committee hearing, Sen. Kevin Eltife, R-Tyler, said, in reference to the franchise tax, “It was a failure, and I’m all for repealing it.” Sen. Craig Estes, R-Wichita Falls, arguing for his bill that would immediately repeal the tax, described the state’s current budget cycle as “the ideal moment to do this,” and Sen. John Whitmire, D-Houston, contended that “repealing the margins tax would be up near the top” of the state’s tax relief options.

Echoing the senators’ sentiments, the Tax Foundation has underscored the urgent need to phase-out and eliminate the tax, arguing that “the margin tax experiment has failed, and it should be retired.”

There are ample revenues to accomplish the goal. The state has unspent revenue of more than $7 billion in the current budget cycle, and both the House and Senate budgets contain substantial room for tax relief in the upcoming budget biennium.

The House’s proposed budget currently has $7 billion available below the state’s spending limit, while the Senate proposal provides for $4 billion in tax relief and still has $4.5 billion left below the limit. There is also projected to be $4.9 billion in revenue collected in excess of the spending limit by the end of the next budget cycle.

Economic analyses confirm the benefits of repealing the franchise tax. The Beacon Hill Institute at Suffolk University estimates that in the fourth year of repeal, the economic gains would be significant: 42,000 new jobs created, net new investment of $3.4 billion, and new personal disposable income of $9.8 billion.

The time has come for Texas to be bold and visionary, setting itself aside from the rest of the nation. During his campaign, Gov. Greg Abbott argued that: “Tax reform and reduction is the best economic development program.” Being the only major state without a direct, state business tax would guarantee that the state will remain a magnet for job creation and business investment. The time to repeal the franchise tax is now.

John Colyandro is executive director and Tom Aldred is director of policy and research at the Texas Conservative Coalition Research Institute, based in Austin.