Impacts of Reducing the Franchise Tax

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

4 Responses to “Impacts of Reducing the Franchise Tax”
  1. If business can’t reducie responsibility to schools, who can?

  2. mba student says:

    Legislatures are always looking for ways to get someone else (e.g., businesses) to collect taxes for them, so people won’t blame them for raising taxes. In reality businesses don’t pay tax — one way or another, their customers (the taxpayers) end up paying the taxes through higher prices.

Check out what others are saying...
  1. […] Better Texas Blog calculates the cost of cutting the business margins tax. […]

  2. […] Better Texas Blog calculates the cost of cutting the business margins tax. […]

Leave A Comment