With less than two months remaining in the 83rd legislative session, Gov. Rick Perry on Monday called on state lawmakers to find $1.6 billion to give Texas businesses relief from the state’s franchise tax.
Perry’s proposal consists of four parts: reducing the overall franchise tax rates by 5 percent, making permanent a $1 million deduction for businesses with up to $20 million in gross receipts, lowering the rate for businesses that file their taxes using the state’s simplified “EZ form” and allowing out-of-state companies that relocate to Texas to deduct their moving expenses.
Perry said Texas needs to invest in more tax relief because other states are considering cutting their taxes to match Texas.
“The idea that we can just sit here and think we can stay at the top of the heap is just not correct,” Perry said Monday at a news conference at the Austin Chamber of Commerce.
The plan has the support of groups like the Texas Association of Business and the National Federation of Independent Business, though both groups have previously called on lawmakers to eliminate the franchise tax entirely.
Since Texas lawmakers created it in 2006, business leaders have described the franchise tax, also known as the margins tax, as inequitable and burdensome. State leaders wrote it with the goal of capturing a large swatch of businesses that had avoided paying an earlier version of the business-franchise tax while also being careful to avoid it being viewed as an income tax. Some businesses have complained that they have to pay the tax even in years when they don’t make a profit. Also, businesses in certain industries such as auto repair shops have said the rules of the tax arbitrarily charge different rates to similar businesses.
Since 2008, Texas has exempted the first $1 million in gross revenue from the tax for businesses with up to $20 million in gross receipts. The exemption is scheduled to expire in 2014 and revert back to a $600,000 threshold. State Rep. Harvey Hilderbran, R-Kerrville, the chairman of the House Ways and Means Committee, which oversees tax issues, has said making the $1 million exemption permanent is a priority for him this session. Hilderbran tried in 2011 to make the exemption permanent but faced trouble finding a way to pay for it amid a session in which lawmakers were struggling to resolve a multibillion-dollar budget shortfall.
The Legislative Budget Board has said making the exemption permanent would cost $164 million. At the $1 million level, about 45,000 businesses are exempted from paying the franchise tax, NFIB spokeswoman Laura Stromberg said. About 28,000 businesses would still be covered if the exemption reverted back to the $600,000 level, she said.
Perry’s plan left some aspects of his four-point proposal for lawmakers to hash out. Most notably, how the state would pay for the tax relief remains unclear.
In January, Perry called for $1.8 billion in tax relief this session and alluded to tapping the Rainy Day Fund for the revenue. That prompted some confusion around the Capitol as Perry has long said he only supports tapping the fund for one-time expenses. The fund is projected to grow to $11.8 billion by the end of the next biennium. At Monday’s news conference, Perry’s deputy chief of staff Mike Morrissey said the tax relief could be paid for from either the Rainy Day Fund or general revenue, the pot of money that makes up roughly half the budget.
“We’d look at the general revenue fund first,” Morrissey said.
The news conference began as details were beginning to emerge about the explosions at the Boston Marathon. A somber Perry called for Texans to keep those in Boston in their prayers. Asked later about whether Texas authorities were doing anything in response to the incident, Perry referred to Department of Public Safety Director Steve McCraw.
“We are monitoring what’s going on there very closely," Perry said. "Any decisions about heightened alert is in Steve’s capable hands.”