Tax Panel Considers Making $1M Exemption Permanent

The House Ways & Means Committee is considering several bills that have the same mission: to make permanent the franchise tax exemption for businesses that report $1 million or less in gross revenue.

The exemption has been in place since 2008. It is scheduled to expire in September and go down to $600,000; businesses that have gross receipts totaling less than that amount would be exempt, while those reporting more would pay the tax. If that happens, the head of the Texas chapter of the National Federation of Independent Business told the committee that nearly 28,000 businesses would be added to the tax roll.

Keeping the exemption at $1 million would cost the state about $148 million in the next biennium. The committee's chairman, Harvey Hilderbran, R-Kerrville, is sponsoring the main bill, HB 262. He held the legislation in committee until he could find a way to make the exemption “revenue neutral.”

What does that mean? The current funding source for the exemption is no longer available, so Hilderbran is looking for the $148 million in other places. That won’t be easy with lawmakers in a desperate search for money to fund other areas of the budget, such as health services and public education.

Hilderbran hinted that some ideas include repealing the back-to-school sales tax holiday (worth about $111 million), selling unclaimed property, spending cigarette tax money, or raising taxes on the tobacco companies that are not currently included in the state’s settlement fund. He's waiting for estimates on how much those taxes would produce.

“We’re going to wait to get them back and pick the one we like best,” Hilderbran said, adding it may take two or three bills to make HB 262 pay for itself.

One small business owner, Tim Piggott of Longview, told the committee he wants to see the exemption become permanent because his auto parts business currently reports about $617,000 in gross revenue. Under the current rules, he is exempt from having to pay franchise taxes. If the ceiling is dropped, he would have to pay the state $3,000 in taxes.

“I can’t afford that. I certainly couldn’t hire more workers,” Piggott said. “Bottom line is, it comes right out of my pocket.”

Will Newton, NFIB’s executive director in Texas, told the committee the franchise tax, sometimes referred to as a “margins” tax, should be abolished in favor of the tax it replaced in 2006. Recognizing that’s not likely to happen during the session, Newton said small companies would at least want the $1 million exemption as a “short term fix to help businesses get through” the recession.

“It’s a bad tax, and it needs to go away. Most people I’ve talked to agree it was a failed experiment,” he said. “A lot of small businesses don’t have savings accounts. Big businesses can hire attorneys and figure out loopholes.”

The Center for Public Policy Priorities weighed in Monday with a policy report that criticizes a series of bills moving the through Legislature, including these exemption bills. The organization contends that such legislation "would further cut the amount of revenue available to fund the 2012-2013 state budget" and "should be rejected" in favor of raising new revenue and using the Rainy Day Fund.