Senate Ties Franchise Tax Relief to Budget Measures

The Senate raised the bar Tuesday night in its standoff with the lower chamber by tying the provisions in a major franchise tax relief bill to key legislation being held up in the House.

Before unanimously approving House Bill 500, the Senate adopted a handful of amendments, including one by Senate Finance Chairman Tommy Williams, R-The Woodlands, tying the legislation to the overall budget deal for the upcoming biennium by making the bill’s provisions contingent on the passage of Senate Joint Resolution 1 and House Bill 7.

Although conferees from the upper and lower chambers concluded formal negotiations on the 2014-15 budget Friday, the Senate and House have been in a standoff to pass key legislation necessary to seal the deal and avoid a special session. The House suspended legislative rules on Tuesday to delay a vote on SJR 1. House Appropriations Chairman Jim Pitts, R-Waxahachie, said the House is waiting to see the final version of House Bill 1025, a supplemental bill for the 2012-13 budget that is also essential to the 2014-15 budget deal.

The Senate on Tuesday also approved House Bills 6 and 7, which seek to reduce the amount of dedicated general revenue the Legislature relies on to certify the budget. The chambers must confer on the final language of both bills before they can be sent to the governor.

“While the Legislature does not spend dedicated funds for unintended purposes, they have been used for certification purposes for over two decades,” Williams said.

Businesses with less than $1 million annual revenue are currently exempt from the Texas franchise tax, but unless HB 500 passes, that exemption would be lowered to $600,000 in annual revenue on Jan. 1, 2014. Both chambers’ versions of the bill have a provision to sustain the $1 million threshold — but differ in the other details.

Sen. Glenn Hegar, R-Katy, the Senate sponsor of HB 500, essentially threw out all of the other provisions in the bill approved by the House — most of which provided tax relief for a handful of specific industries — and replaced it with an across-the-board 5 percent cut to the franchise tax.

“I do think that meaningful relief, whether it’s large or small, should be applied to all,” he said.

Sen. Dan Patrick, R-Houston, also offered an amendment, which was tabled, to raise the threshold for the franchise tax to $2 million, rather than implement a broad rate cut.

“I believe in tax cuts across the board, all I’m saying is the biggest bang for our buck is for that small entrepreneur,” said Patrick, explaining that 80 percent of the franchise tax is paid by businesses that gross $10 million or more.

Williams discouraged senators from approving Patrick’s amendment. He said it would “throw a wrench in the work” on the bill, because it had not been vetted by the finance committee. Williams called Hegar’s version of HB 500 “carefully crafted” and said, “We’re also giving the rate cut to everybody who’s still a part of this; we think this is a fair way to treat everybody.”

“Whether business tax relief comes in the form of the $667 million targeted approach in the House, or via the Senate’s $630 million general rate cut, relief is needed,” Chuck DeVore, vice president for public policy for the conservative Texas Public Policy Foundation, said in a statement.

“Texas businesses, which shoulder two-thirds of the state and local tax burden, need to see meaningful relief from the state’s onerous margin tax to remain competitive nationally and internationally.”

The state comptroller estimates that in 2014-15, the Senate version of HB 500 would provide a $627 million cut in the franchise tax, while the House version would provide a $648 million tax cut.

Since its conception in 2006 to pay for property taxes and address inequities in public school financing, the franchise tax has been the bane of many industries’ existence. Franchise tax assessments depend on the structure of a business, leading many businesses to complain that they are taxed unfairly compared with others in the same industry. More than 90 bills have been filed this session related to the tax.