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By a vote of 10-1, the Texas Senate Finance Committee advanced legislation that would lead to the demise of the much-maligned, inefficient “gross margins” franchise tax on business.

Senate Bill 17, authored by State Sen. Jane Nelson (R-Flower Mound), would phase out the tax that has been called an “income tax” on business. The tax was imposed a decade ago  by lawmakers looking to shore up the state’s school finance system following a Texas Supreme Court decision. The court found that the finance system for public education was unconstitutional. By imposing the tax, lawmakers were able to “buy down” the property tax rate.

When she introduced SB 17, Nelson said it was necessary for economic development.

“SB 17 keeps Texas on the path to responsibly eliminating the franchise tax while maintaining the ability to meet our needs. If we are to remain the friendliest state for businesses, we need to remove this obstacle to job creation and economic growth,” Senator Nelson said.

Even at its inception, the tax was criticized by Empower Texans, Texas Public Policy Foundation, and the National Federation of Independent Business as being confusing, unfair, and inefficient. As Cary Cheshire recently noted, “The problem with a ‘business tax’ is no matter how government tries to disguise it, businesses do not pay taxes; people always left footing the bill.”

That’s because while few people see the tax itself – usually just business owners and accountants – the burden of the tax, both the amount-due and the cost of compliance, is hidden inside the costs of goods and services, or in reduced opportunities and lower wages.

SB17 will now go to the full Senate.

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