Texas House to debate franchise tax cut that would hit public schools

Businesses dislike the franchise tax because they say it’s overly complicated and can punish them in less-prosperous years. But critics warn the tax cut would harm public schools and other government programs.

State Rep. Dennis Bonnen, R-Angleton, on the House floor on May 13, 2015.

The Texas House will debate a tax phase-out on Thursday that would likely thrill business owners while cutting funds for public schools.

House Bill 28, authored by state Rep. Dennis Bonnen, R-Angleton, would cut the unpopular “franchise tax” paid by businesses. The proposal would not reduce the tax during the current penny-pinching legislative session, but it would do so in future years.

Ultimately, Bonnen’s proposal seeks to eliminate the franchise tax, which brings in nearly $8 billion every two-year budget cycle, altogether. According to the Texas Comptroller’s office, about $1.8 billion of that money goes to the Property Tax Relief Fund, which pays for public schools.

While in later years the tax cut would affect the entire state budget, in the first few years under Bonnen’s proposal, that funding would come directly from the Property Tax Relief Fund. “At first, it’s coming exclusively out of schools,” said Dick Lavine, a fiscal analyst with the liberal-leaning Center for Public Policy Priorities.

Politically speaking, “it may be more palatable [to phase the tax out over time] because it’s not an $8 billion hit all at once,” he said. “But the downside is, we keep using the analogy that you’re lighting a fuse, but you don’t know when the bomb is going to go off.”

Reached on the House floor Wednesday, Bonnen declined to be interviewed. A spokesman for House Speaker Joe Straus did not respond to a request for comment.

Businesses dislike the franchise tax, often called a “margin tax,” because they say it’s overly complicated and can punish them in less-prosperous years. It is a tax on a business’s gross receipts, which means a business can still be required to pay the tax even in years it takes a loss.

Texas’ business community has long called the franchise tax an unnecessary burden, and high-profile Republicans including Gov. Greg Abbott have sought its demise. Lawmakers in 2015 cut the tax rate by 25 percent, which gave them $2.6 billion less revenue to help craft a budget this year.

Proponents of a further tax cut argue it would stimulate the state’s economy and create jobs. In time, that would cause the state to collect more revenue from sales taxes and other sources, said Vance Ginn, an economist at the conservative Texas Public Policy Foundation.

“It will have an influence on education spending, but we have to consider there’s economic growth that comes from it, that brings in revenue,” he said. “And there’s the question of, do we need to spend more on education or do we need to make reforms?”

In the short term, it’s difficult to say just how much revenue is at stake by cutting the business tax because it’s highly dependent on economic conditions. Still, a fiscal note written by the state's Legislative Budget Board estimated it could cut public school funds by up to $3.5 billion in the 2020-2021 biennium.

State Rep. Donna Howard, D-Austin, said she opposed the bill because it would limit lawmakers' ability in later years to pay for priorities beyond just public schools. The other $6 billion in state funds that the tax generates every two years helps pay for other public programs including Medicaid, Child Protective Services and higher education.

“I am disappointed because I do believe this is going to have widespread ramifications for most everything we’re working on here at the Legislature,” she said.

Bonnen’s franchise tax proposal is similar to one passed last month by the Texas Senate. House lawmakers are expected to vote on the tax cut Wednesday afternoon.

Disclosure: The Center for Public Policy Priorities and Texas Public Policy Foundation have been financial supporters of The Texas Tribune. A complete list of Tribune donors and sponsors is available here.