Since the beginning of session, the Senate’s leaders have been calling for billions of dollars in tax relief via a package deal focused on property taxes and the franchise tax. Considered together, the package has been met with opposition from Democrats and even from some Republicans, on the basis that the state revenue is already amply constrained and that for a number of reasons this isn’t the right time for Texans to be cavalier about the state’s economic outlook or ongoing spending commitments. Considered separately, the property tax relief proposal has been the most controversial. As I’ve written, it would effectively create a recurring obligation for the state to subsidize local school districts. As others have noted, it wouldn’t mean that much to the average homeowner; it would work out to about $200 a year, a figure that homeowners might not even notice, as property values, and therefore property taxes, continue to rise. Plus, the property tax proposal is what’s spurred the absurd claim, from the Senate Finance Chair, that state spending isn’t necessarily state spending.
But I wanted to take a moment to look at the franchise tax proposals, SB 7 and SB 8. Both are controversial because of the aforementioned context: if passed, they would cut biennial revenue collections by about $2.2 billion. That’s a significant figure in an austere state, especially at a time when revenue collections are already vulnerable to low oil prices and a slowing rate of economic growth. However, the bills are worth considering separately, and seriously. One strikes me as a reasonable idea that would have a lot of appeal if not for Texas’s overall tax structure. The other has a lot of appeal regardless.
The former is SB 7, from Jane Nelson. It would ratchet down the franchise tax rate (which varies depending on the nature of the business), meaning a tax cut for all businesses currently paying the tax, big or small, rich or poor. Ultimately, business interests would like to see the franchise tax repealed, because they consider it burdensome, complex, and even punitive. And although Big Business isn’t necessarily a sympathetic character, their perspective has defenders; earlier this week the Houston Chronicle’s Chris Tomlinson summarized the case for reform, and endorsed it. I see the reasoning, but in light of Texas’s overall tax structure, I can’t endorse the idea of repealing the franchise tax. Texas is one of only a few states that taxes gross margins, but we’re also one of the only states that doesn’t have a personal income tax; the former is, in practice, a substitute for the latter. It may not be a good substitute, but as things stand, it’s the only one available. if we repealed the franchise tax we would be creating a gaping hole in the budget.
If we lowered the tax, as Nelson’s proposal suggests, it would be a smaller hole, and in some years it might seem like a manageable one. But 2015 isn’t one of those years. Paul Bettencourt, one of the freshmen Republicans in the Senate, said as much in January: in light of the economic outlook, it would be an unrealistic moment for major tax cuts. And intervening events have only strengthened the case for caution. I’m still not panicking about oil prices. But I am thinking that if whatever Barack Obama’s doing with Iran results in sanctions being lifted, that’s an extra 500,000 barrels of oil hitting an already oversupplied global market every day. And I’m noticing that as a result of America’s crude oil export ban, storage capacity is quickly being exhausted; that’s putting US producers in a tough position, and creating pressure for them to produce less oil—and Texas’s overall economy is a lot more vulnerable to production levels than prices.
SB 8, however, from Charles Schwertner, is worth considering even in the current context. This would exempt businesses with less than $4m a year in gross receipts from paying the francise tax at all. Currently, the exemption applies to businesses with receipts less than $1m. It would help thousands of businesses across the state, and unlike blanket changes to the franchise tax rate, it differentiates between small businesses, which could probably use the help, and big ones, which don’t like the franchise tax but manage to survive it. And because these businesses are small, the aggregate cost to the state—the taxes that the businesses would no longer be paying—would be modest; the fiscal note puts it at about $380m a year. Put differently, of the $2.2bn biennial price tag for the franchise tax proposals, only about a third of that would come from this bill. And since small businesses usually aren’t wildly profitable, the tax cut would probably spur some extra activity on their end—the money would reappear on the payroll, as business spending, or even just as consumer spending from the business owners themselves. Some of the foregone revenue would thus be recaptured via the sales tax and so on. I doubt it would add up to $380m a year, but the damage to overall state receipts, under this proposal, would be more of a ding than a disaster.
On balance, SB 8 is easily the best of the tax proposals on offer this session. If it was the only one, it would still face reasonable resistance because of the context, but Senate Republicans could make a great case for it. Since it’s been dragooned into this tax relief reform package, though, the case for the bill has been subsumed by the case for the package—and that’s a weaker case, on the merits and in context.