The committee took up and considered bills related to franchise and sales tax relief and heard testimony from the office of the Comptroller and the Legislative Budget board (LBB).
Kerry Barton, Office of the Comptroller
- The franchise tax was changed in 2006 to include many new types of entities that had not been subject to the tax previously
- The tax can be calculated multiple ways
- 58% of the tax is paid by entities taking the cost of goods sold deduction
- There are approximately 1.1 million franchise tax filers; those with no taxes due are around 984,000
- Percentage of tax paid by industry is getting closer to GSP as changes are made to the tax
- Sen. Kel Seliger asked what was the projected levy when the tax was implemented
- Last year collections were about $3 billion; the first year collections were roughly $6 billion
- Seliger asked what the total value of all exemptions subsequent to 2005 have been
- Don’t have that available
- The sales tax in Texas affects all sales of tangible property and goods unless exempt; certain services are taxed which have to be enumerated
- Most taxed services have been in place for a while; Texas tends to tax more services than most other states
- The largest exemption is for resale of goods
- There are approximately 637,000 sales tax filers who file either monthly, quarterly or annually
Ursula Parks, LBB
- Property tax relief fund is one method of finance for the foundation school program; if the fund comes in low, GR makes up the difference
- Any action taken by the committee that changes how much franchise tax comes in will result in a change to GR needed to supplement the foundation school program
- SB 2, as introduced, has included a $1 billion adjustment to the PTRF
- Sen. Kirk Watson noted that he remembers in 2006 the legislature came in and reduced property taxes by roughly 1/3; the plan was to partly fill that gap through the margins tax; at the time it was projected the margins tax and other items would create $8.3 billion in revenue; that amount has never been reached; about to add to that hole and will have to fill it with GR
- Sen. Kelly Hancock asked what the $0.50 property tax reduction resulted in for property owners
- That was a 1/3 compression; actions by local school districts to increase tax efforts and increase appraisals lessened the tax reduction felt by owners
- Hancock noted as property taxes are decreased the local share for public schools is decreased and the state share is increased; an idea people discuss constantly
- Hancock asked if the comptroller has tried to increase similarities from industry to industry as far as definitions of cost of goods sold go; need to simplify it to make it easier to pay taxes
- COGS is defined specifically in statute and affects certain types of businesses differently based on how they operate
- Hancock noted he would like a little more consistency; understands the inconsistency is unintended
- Sen. John Whitmire noted he hasn’t heard from many constituents about the franchise tax and as he looks at the exemptions and other provisions of the tax he realizes why that is; he would have to go looking for someone who pays the tax; this will not impact a huge number of Texas businesses; what would have an effect is property tax; Landry’s brings in $3 billion a year and pays $1 million in franchise tax but pays a lot more in property taxes; only 100,000 people are paying the franchise tax out of 27 million
- Sen. Paul Bettencourt noted yesterday seven property tax bills were laid out specifically for businesses
- Watson noted it is not right to say schools are made whole through GR because 30% of schools have lower revenue than in 2006; there is a structural problem that needs to be addressed which is being added to with these relief bills
- Sen. Charles Schwertner noted removing the franchise tax is a good solution; could increase the sales tax by one penny and raise nearly $4.5 billion
- Sen. Robert Nichols noted the first change he saw to the tax was in 1991; he was in the manufacturing business; the 1991 proposal was worse than a corporate income tax; at that time he was thinking that the $50,000 the proposal cost him would have alternately been used to create jobs, etc.
- Sen. Lois Kolkhorst noted she hears companies complaining all the time about the franchise tax; one of the best things to do would be to eliminate the tax and brag that Texas has no business tax; it would do wonders for bringing businesses to Texas
- Sen. Juan Hinojosa noted it is not the American way to tax a business who has not made a profit
- Sen. Kevin Eltife noted he was adamantly against the tax when it was passed; created a structural deficit in the state revenue; it never delivered any of the property tax relief it claimed it would; forced the school districts to cap their tax rates and took away local control; all for repealing the franchise tax
- Sen. Royce West noted the state still has a structural deficit; what are the options to do away with the franchise tax
- Could either implement a new tax, raise a current tax, or change the tax base for a current tax
- Chair Jane Nelson noted the legislature should stop looking in the rearview mirror and look forward to fix the problem; she would personally love to get rid of the franchise tax; how much would that cost the state
- About $4.7 billion/year
SB 7 – Nelson, Relating to decreasing the rates of the franchise tax.
- Provides approximately $1.5 billion in franchise tax relief
- Would increase the rate reduction to 15% permanently
- Very straightforward bill
SB 687 – Hinojosa, Relating to the exclusion from total revenue of certain payments received by health care providers for purposes of computing the franchise tax.
- Currently the franchise tax treats health care providers differently; doctors, clinics and others are allowed to exclude 100% of their revenue from Medicaid, Medicare, CHIP and indigent health care
- Not all providers receive this same exemption
- Bill would pass the Medicaid, Medicare, CHIP and indigent care exemption to all providers
SB 8 – Schwertner, Relating to the total revenue exemption for the franchise tax.
- Would raise the franchise tax exemption from$1 million to $4 million
- Would exempt 61,0000 business or 52% of the current tax base
- Would only result in an 8% decrease in franchise tax revenue
- Watson asked how $4 million was decided on
- Created the amount of relief desired
- Watson asked the average benefit a business would get under that threshold
- Not sure
- Hancock noted the compliance cost is also being decreased for businesses who no longer have to file
SB 105 – Estes, Relating to the repeal of the franchise tax.
- Have never heard so much interest from a committee in voting yes on a bill until today
- Last session this same bill didn’t even receive a hearing
- A lot of states are repealing their business taxes
- The population of Texas is in favor of passing this bill
- Sen. Don Huffines noted he filed SB 175, almost identical to SB 105; studies have shown that repealing the franchise tax would lead to a significant increase in economic investment including jobs; the tax is notoriously complicated which hurts small businesses
SB 186 – Creighton, Relating to the franchise tax and alternative revenue sources and spending priorities for this state; repealing the franchise tax.
- The franchise tax is an issue in many districts across the state
- The bill asks the Comptroller to look for alternatives to how the tax is assessed
- Watson noted in 2006 a margins tax advisory committee was created; he believes it was never intended to do anything; the committee met and did not provide any advice on how the tax could be improved; no systematic analysis of what the future might look like has been prepared
- Bettencourt asked if the intention of the study is to look at ways to eliminate the tax
- It does seek to repeal the tax as we know it by 2020; if the Comptroller does not provide palatable alternatives the status quo will be kept, however
CSSB 330 – Creighton, Relating to the computation of the franchise tax.
- Would alter the formula used to determine the taxable margin under the franchise tax
- Currently the tax requires business to account the total revenue then deduct a certain amount
- Taxable amount would be total revenue minus $1 million, minus COGS, minus cost of compensation
SB 331 – Creighton, Relating to the use of certain surplus state revenue to provide for a rebate of state franchise taxes.
- Allows for the creation of a rebate system based on a potential state surplus
- If there is an unexpended balance, half would go to the rainy day fund and half of the remaining money would go to rebates
- Enabling legislation for SJR 23 – Creighton, Proposing a constitutional amendment concerning the use of unencumbered surplus state revenues to provide for a rebate of state franchise taxes.
SB 138 – Perry, Relating to the phaseout and repeal of the franchise tax; lowering the rates of the tax.
- Provides a responsible phaseout of the franchise tax by reducing it 25% each of four consecutive years
CSSB 756 – Taylor, Van , Relating to the determination of cost of goods sold for purposes of computing the franchise tax.
- Currently businesses have to use one book to pay federal taxes and one book to pay state taxes
- This bill would allow businesses to choose which version of the form to use
- Businesses would likely pay the higher rate because it would be easier to use and have less compliance cost
SB 31- Zaffirini, Relating to the authority of certain volunteer firefighter and emergency services organizations to hold tax-free sales or auctions.
Volunteer firefighter and emergency services organizations to hold tax-free sales or auctions
Nichols said he looked at the fiscal note and it said no significant impact
Money is available but had not been appropriated
SB 140 – Perry, Relating to a sales and use tax exemption for telecommunications services used for the navigation of certain farm and ranch machinery and equipment.
- Exempt GPS data plans used by farm and ranch machinery
- Large fiscal note on the bill – it included something that did not belong so number will be revised down
- Bettencourt confirmed details on the fee being charged – data plans
- Hancock was shocked at number as well – expects the note to be fixed
SB 755 – Taylor, Van, Relating to the application of the sales and use tax to certain computer program transactions.
- Design to fix a problem in sales and use tax exemption
- Rackspace was listed as example – getting taxed twice
- Large Fiscal note being addressed
- Bettencourt – clarifies the bill is looking into double taxation
SB 765 – Eltife, Relating to the repeal of certain occupational license fees and taxes.
- Right a wrong of occupations that are double taxed
- As filed will eliminate fees on 12 occupations – they are now getting a fee and franchise tax
SB 759 – Kolkhorst, Relating to the repeal of certain state taxes.
- Repeals tax on certain bingo halls, repeals tax on liquefied gas that is used to power a motorized vehicle
- Nelson – good to look for efficiencies
SB 752- Bettencourt, Relating to the repeal of the inheritance tax and the tax on combative sports events.
- Repeal the state estate tax which has not been collected for some time
- Eliminates tax on combative sporting events and cost to collect is higher than amount collected
SB 761 – Creighton, Relating to the taxation of fireworks.
- Repeals a 2% tax on fireworks – above and beyond sales tax charge
SB 757 – Perry, Relating to the repeal of the production taxes on crude petroleum and sulphur.
- Crude oil and sulphur tax would be removed – collections are higher than amount being brought in
- School funding would not be affected – it would be made whole
All bills left pending.