Impacts of Reducing the Franchise Tax

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Dick Lavine, Senior Fiscal Analyst at the Center for Public Policy Priorities

UPDATE: Senator Charles Schwertner (R – Georgetown) filed SB 7 , which calls for a reduction in the franchise tax rate, and SB 8, which increases the amount of revenue exempted from the franchise tax.

To ensure that all Texans have the chance to compete and succeed in life, we need world-class public schools, roads, hospitals, and universities supported by strong state investments.

This week we’re looking at some of the tax policies legislators are considering and their potential impact on Texans.

First up: The franchise (margins) tax

The franchise tax is Texas’ main business tax. A company’s tax responsibility is calculated based on the difference between its gross receipts and certain deductions, mainly the cost of goods sold or cost of compensation. Small businesses with less than $1 million in gross receipts are exempt.

After changes the Legislature made in 2006, the money generated by the franchise tax goes to both General Revenue and the Property Tax Relief Fund. The Property Tax Relief Fund supports the Foundation School Program. The Foundation School Program is the primary way state aid is distributed to schools and accounts for nearly half of all school funding; the other half comes from local property taxes.

Reducing the franchise tax means reducing business’ responsibility to schools

If the franchise tax is reduced, 100 percent of the reduction will come out of school funding, leaving all other taxpayers to make up the difference. Lawmakers would be choosing a tax cut of approximately $1-2 billion for businesses that pay the franchise tax over the schools that are educating the state’s future workforce.

The franchise tax is forecast to generate $9.6 billion in the next biennium. Reducing this revenue would create a hole on top of our existing structural deficit and would increase pressure to cut services in the future.

Lawmakers should keep this sustainable source of revenue to continue supporting schools.

Tomorrow: Diversions and the Motor Vehicle Sales Tax

Franchise tax and school funding v. 2

At the Center for Public Policy Priorities, we believe in a Texas that offers everyone the chance to compete and succeed in life. We envision a Texas where everyone is healthy, well-educated, and financially secure. We want the best Texas - a proud state that sets the bar nationally by expanding opportunity for all. CPPP is an independent public policy organization that uses data and analysis to advocate for solutions that enable Texans of all backgrounds to reach their full potential. We dare Texas to be the best state for hard-working people and their families.

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