Is Texas going to Repeal the Franchise Tax?

So what does the 2013 Legislative session (beginning tomorrow) have in store for the Texas franchise tax? Laylan Copelin of the Austin American-Statesman wrote a great in-depth article about this topic over the weekend. See “Eliminating business tax on the agenda?” published January 5. At this time, it’s way too early to predict the tax’s fate, but my hunch is that we will see some fairly substantial changes to the Texas franchise tax, particularly after today’s announcement from the Comptroller about the amount of revenue the state has available for the next two years.

In the article, several of Texas’s larger business associations hint at their lobbying strategies for the next session. For instance, the National Federal of Independent Businesses (NFIB), which primarily represents small-business owners, along with the Texas Public Policy Foundation and the Texas Conservative Coalition, want the Legislature to repeal the tax without replacing it. However, these groups have apparently not yet discussed their desires with Rep. Harvey Hilderbran, the chair of the House Ways and Means committee. In a committee meeting earlier this year, it appeared that Rep. Hilderbran was more inclined to “fix” the franchise tax rather than repeal it. Rep. Hilderbran has stated that he has not yet filed the bill that will include his fixes, and he is still weighing the cost of various options. Since any bill to repeal the tax will have to make it through Rep. Hilderbran’s committee, the parties that wish for repeal may be competing with its chairman’s own ideas.

The article discusses other associations that wish to gradually phase out the tax by slowly increasing the small business exemption. Each year, fewer businesses will actually have to pay the tax. Our leaders in Austin, including Rep.  Hilderbran, may have an easier time accepting this approach to repeal. But this approach would burden larger businesses taxpayers more than smaller ones, and that may not sit well with those large, well-connected Texas businesses.

This morning, Comptroller Combs announced that the state will have $101.4 billion to spend over the next two-year budget cycle, an increase of 12.4 percent over the 2011 projection. The Senate’s proposed budget is expected to be $89 billion. Since the Texas franchise tax brings in about $4.5 billion each year, there is therefore more than enough room to entirely eliminate the tax. However, Comptroller Combs was also careful to mention that although the budget projection is rosy, it is rosy in part because of the highly volatile oil and gas activity the state is currently experiencing. There is no guarantee that her prediction will be accurate, and what goes up must come down, particularly in the oil and gas business.

We will have to see how the association for larger Texas businesses interprets the Comptroller’s statements. It is unlikely that any large-scale change to Texas taxes will occur without the support of the  the Texas Association of Business, the lobbying group for large Texas businesses. Leadership of the TAB appears dubious about a full repeal of the Texas franchise tax, but its president stated that “if there was revenue available, we’d surely take a look at it.” The TAB’s president made this statement before Ms. Combs announced her estimate. It appears as though the revenue will indeed be available, but the Comptroller’s comments about volatility may cause the larger businesses to take a prudent approach to the franchise tax, particularly since many of these businesses helped to create the tax back in 2006.

Another potential option on the table is to repeal the margin tax calculation, but revert back to a system similar to the one that existed before 2008. The Texas franchise tax would once again be a business tax clearly based on income–perhaps something similar to the old earned surplus calculation method. The tax would presumably extend to cover non-corporate entities, now that the Texas Supreme Court’s Allcat decision clears the way for an income tax on partnerships.  Rep. Otto, one of the legislators most knowledgeable about the franchise tax, has made statements during several Ways & Means Committee meetings suggesting that he may eventually support this approach. His support likely will depend on what the Comptroller estimates the income tax rate would need to be to bring in a comparable amount of revenue.

Alan Sherman over at the Texas State & Local Tax Law Blog has already published a brief and excellent overview of the tax bills that have already been filed so far this session.  As new bills are introduced, and as bills start working their way through the process, I’ll post the news here.

 [photo: http://www.flickr.com/photos/76657755@N04/7027595009/]