Franchise Tax Hurts Businesses, Texans - Texas Scorecard

There’s no question about it—small businesses are hurting.

Government-mandated shutdowns in response to the Chinese coronavirus have forced many “nonessential” businesses to close their doors entirely. Many of those lucky enough to be deemed “essential,” such as restaurants, were forced to adhere to strict guidelines that severely strangled revenue.

Even now, as Texas enters Phase III of Gov. Greg Abbott’s phased reopening plan, it’s far from business as usual. Most businesses are still limited on occupancy, and many have seen a significant decline in customers due either to fear of the virus or the fact that their personal financial situations have worsened.

Evidence of the stark economic consequences of the shutdowns can be easily seen in two numbers: the unemployment rate and the drastic drop in sales tax revenue.

According to data from the Texas Workforce Commission, between 2.5 and 3 million Texans have lost their jobs since the shutdowns began in March.

And just last week, Comptroller Glenn Hegar announced that sales tax collections in May were down 13 percent from the previous year.

“The business closures and restrictions and stay-at-home orders due to the COVID-19 pandemic spurred deep drops in collections from restaurants, amusement and recreation services, and physical retail stores,” Hegar said.

But while it’s clear that Texas businesses need more help than ever, state lawmakers have failed for years to repeal the onerous franchise tax placed on businesses.

The modern franchise tax, also known as the gross margins tax, originated nearly 15 years ago.

While the tax was sold as a way to lower property taxes, it actually brings in a small fraction of Texas’ revenue, and property taxes have continued to climb—becoming one of the most cumbersome burdens Texans face.

Though the tax is placed on businesses, the ultimate cost is passed onto consumers who are forced to pay higher prices to make up for the cost.

The Republican Party of Texas platform is clear on its position towards taxation at all levels:

“We in the Republican Party of Texas believe in the principles of constitutionally limited government based on federalist principles. To this end we encourage our elected officials at all levels of government to work to reverse the current trend of expanding government and the growing tax and debt burdens this places on ‘We the People.’ We believe the most equitable system of taxation is one based on consumption and wish to see reforms toward that end at all levels of government.”

But while the platform is clear, results from the Texas Legislature have lagged.

In 2015, when the Texas Senate considered legislation to reduce the tax, former State Sen. Don Huffines (R–Dallas) attempted to add an amendment to phase the tax out completely. Ultimately, he was only joined by a handful of Republican colleagues, and the motion was defeated.

While legislation was filed in both chambers last session to phase out the tax, it did not reach the floor for a vote.

This year, in light of the coronavirus, the deadline for payment of the tax has been moved to July 15, in line with the postponed IRS tax deadline. That may have bought businesses some time, but the deadline is inching ever closer on the calendar.

Now, with businesses and Texans struggling more than ever, it is time for the legislature to listen to the demands of Texas taxpayers and end the franchise tax.