Most of the bills businesses should be watching during the Texas Legislature’s 85th session involve modifying or repealing the dreaded Texas Franchise Tax. Another proposed bill state you keep an eye out for during the 2017 legislative session involves electronic verification of state agency contractors. For small businesses, the most anticipated legislative action moving through the Texas legislature involves either the removal of, or further modification of the Texas Franchise Tax.
Take a peek below and learn what could potentially happen to the Texas Franchise Tax and find other bills businesses should monitor during the Texas legislature’s 85th session.
Texas Franchise Tax or “Texas Margin Tax”
The beginnings of the Texas Franchise tax are rooted back to the 1800’s, but the major modifications made to it in 2008 led to its other common reference as the Texas Margin Tax. Before its current form, the Texas School Finance System gained funding from a statewide property tax, which the Texas Supreme Court deemed unconstitutional in 2005 and state lawmakers had to generate another idea that would bring funding to Texas schools.
The effort to increase school funding from a source other than property taxes led to the idea of altering the Texas Franchise Tax to its current form without taking from a statewide property tax. A special Texas legislative session transformed the current version of the Texas Franchise Tax into a complex hybrid of the Texas gross receipts tax and a business profits tax.
Since its introduction, the current version of the Texas Franchise Tax has been a magnet for criticism and lawsuits. A repeal has been advocated for years, but lawmakers have yet to figure out how to make up the loss in revenue the elimination of the tax would cause. Several attempts have been made to modify or repeal the Franchise Tax in the last few years, but this legislative session may hold the key to changing the tax, and ultimately Texas’s tax climate, for good.
Senate Bill 575
- This proposed bill regarding the Texas Franchise Tax would raise the total revenue exemption from $1 million to $4 million, providing relief for tens of thousands of Texas businesses, especially small businesses. The Texas Comptroller’s office estimates that raising the current revenue exemption to $4 million would provide $238 million in tax relief and completely exempt approximately 62,000 small businesses, of which represent 49.3% of all entities required to remit payment to the franchise tax. This rollback could open the budgets of these small businesses and further increase jobs and new investment in Texas’s economy.
Senate Bill 17
- Senate Bill 17 aims to reduce the franchise tax each year the comptroller of public accounts certifies the state will experience at least five percent revenue growth. Based on current estimates, the franchise tax could completely vanish in ten years’ time. Many believe this proposal would be more widely accepted by lawmakers because it includes a phase-out plan instead of a cold-turkey immediate repeal.
Senate Bill 131
- Senate Bill 131 explores the idea of offering a rebate for businesses that pay the Texas Franchise Tax. The rebate is determined by the Texas Comptroller, who will decide if the unencumbered positive balance of general revenues from the preceding state fiscal biennium. Lawmakers may view this bill more favorably because there is a condition precedent before granting the rebate. In other words, businesses would pay the tax today, and in the next biennium receive a rebate to be applied to the tax that would be owed in future years.
Although it seems that the disappearance of the Texas Franchise Tax is far off, the positive outlook it could have on Texas’s economy is encouraging. Many experts claim that eliminating the Texas Franchise Tax would give Texas one of the most competitive corporate tax climates in the country. Texas businesses should take note of other bills making their way through the House or the Senate during the legislative session, some of which pertain to employment authorization and verification, like Senate Bill 85.
Senate Bill 85
- Senate Bill 85 would require state agencies awarding employment contracts to verify employment authorization, including using the E-verify program, and authorizing suspension of licenses held by private employers for knowing that a person they employed was not lawfully present in this state. A state agency will not be able to award contracts for goods and services or award grants within the state of Texas unless the contractor or recipient registers with the E-verify program, which electronically verifies the work authorization and legal presence of employees.
- The contractor or grant recipient will have to provide one of the acceptable documents listed within the bill to verify work authorization, some of which include a birth certificate, passport, unexpired driver’s license, certificate of U.S. citizenship, military identification, etc. Any state agency who knowingly employs someone who is not lawfully or legally present to be here within the United States or does not have authorization to work in the United States will be subject to fines, and the suspension of the license held by the employer thereby depriving them of the ability to do business with the state for a set period of time.
While it is easy to forget that the Texas legislature has a greater impact upon businesses at the state level, it is important for business owners to stay abreast of potential changes in the law through legislation and its impact on their operations. While tinkering with the Franchise Tax, or adding requirements to doing business with state agencies seems minor, its potential impact on both the short and long-term results of one’s business can be profound. As such, it is important that Texas business owners keep a wary eye upon the activities of the Texas legislature and understand the impact that the legislative session can have. If you have questions or concerns regarding legislative session changes and how they can impact your business, please contact me.
