Texas Governor Greg Abbott said in his State of the State speech, “We must continue to cut the business franchise tax until it fits in a coffin.” He is correct, and legislators from both sides of the aisle are making that case.

After cutting the franchise tax rates by 25 percent last session for savings of $2.6 billion, the Texas Senate and House have legislation moving through the process that would put the franchise tax, also known as the margins tax, on a path to elimination. This is essential because businesses do not pay taxes; people do in the form of higher prices, lower wages, and fewer jobs available. The Foundation recently testified for Senate Bill 17 and House Bill 28 that would accomplish this goal.

The Senate passed SB 17 and it is waiting to be heard in the House. SB 17 is a tax cut “trigger” bill whereby half of the estimated general revenue for the upcoming biennium that exceeds a 5 percent increase from the prior biennium would trigger a cut in the margins tax rates each budget period until elimination.

Table 1 presents what could have happened if this legislation would have been in effect since the 2013 legislative session. To simplify the analysis, I’ve considered only a static analysis that doesn’t account for potential increases in economic growth and additional tax collections from cutting the margins tax. The expected growth rate in the 2014-15 biennium by the Comptroller in the 2013 Biennial Revenue Estimate was 12.4 percent. This rate times the initial general revenue (GR) funds balance of $90.2 billion gives a tax cut of $3.3 billion, or a 36 percent cut in the franchise tax revenue of $9.4 billion. The cut leads to a reduction in the 1 percent rate on businesses that are not wholesalers or retailers to 0.64 percent. After reducing the GR funds balance by the amount of the franchise tax cut in the next two sessions, again not assuming any actual dynamic economic growth and resulting increases in other tax collections, the tax is reduced to a rate of 0.4 percent, with $3.8 billion collected in the 2018-19 biennium. 

The House Ways & Means Committee recently passed HB 28, and there is a good likelihood it will be passed by the full House. HB 28 would use the lesser of either surplus dollars at the end of a fiscal period or $3.5 billion to buy down the margins tax rates, and would abolish the tax when the rate reached 15 percent or less. Table 2 shows a similar scenario with a static analysis as in Table 1. The 2013 Certification Revenue Estimate notes that the GR ending fund balance (surplus) was $5.5 billion, which provides a $3.5 billion franchise tax cut. This cut reduces the 1 percent tax rate to 0.63 percent. In the subsequent two sessions, the franchise tax is cut another $3 billion to give a tax rate of 0.31 percent and collections of $2.9 billion.

While these two bills would each make substantial cuts in the franchise tax, what if these two bills were combined so high revenue growth and surplus dollars could be used to eliminate the margins tax as quickly as possible?

Table 3 presents the scenario where both of these bills are in place in a static analysis. The combined tax cut in the 2013 session could have been $6.8 billion, reducing the 1 percent tax rate to 0.27 percent. After reducing the ending fund balance and the initial GR funds balance by this tax cut, there is sufficient revenue to cut the tax by $3.6 billion in 2015, which more than eliminates the margins tax.

While this leaves less revenue in the ending fund balance in 2017, we must consider that this simple analysis forgoes the consideration of dynamic economic growth and resulting increases in other tax collections. Table 4 highlights research showing that there is a dynamic effect as elimination of the margins tax could contribute to as much as $16 billion in new personal income and about 130,000 new private sector jobs over five years above the status quo when considering the reduction in tax payments and compliance costs. If you just consider the reduction in tax payments, even the most conservative estimates indicate $5 billion in new personal income and almost 42,000 new private sector jobs five years after elimination.

We applaud the efforts made so far by state leaders to eliminate this onerous tax.