The Senate’s Plan for Texas Franchise Tax Relief

The Texas Senate just passed its plan for fixing the Texas Franchise Tax.  It’s quite different from the Texas Franchise Tax reform bill the House passed two weeks ago, which I detailed in an earlier post.  Of course, this means that the House and Senate must reconcile the differences over the weekend if the Legislature is going to make any changes to the Texas Franchise Tax for 2014.

So, how does the Senate’s Texas Franchise Tax reform plan differ from the House’s? In short, while the Senate’s approach is simpler than the House’s, it fails to address many of the inequities in the Texas franchise tax that so many taxpayers have complained about. I’ll compare the two.

The House’s very complicated plan “fixes” the Texas Franchise Tax by adding over thirty provisions to the tax code. Many of these provisions assist certain industries hit hard by the margin calculation.

On the other hand, the Senate’s plan – a simplified version of HB 500 – slightly reduces the franchise tax burden across the board. These are the Senate’s changes to the Texas Franchise Tax:

–  The bill would set the small business exemption permanently at $1 million in revenue (adjusted for inflation). Under current law, it drops to $600,000 in 2014. The House version also contained this provision, and it will almost certainly pass.

– The bill effectively reduces the Texas franchise tax rate for all taxpayers.  Of course, the Senate’s proposed way of accomplishing this is a bit convoluted.  The bill allows taxpayers to elect to pay the Texas franchise tax at the new lower rates, which it calls “temporary permissive alternate rates.” Taxpayers that would pay at 1% may elect to pay only .95%. Wholesalers and retailers qualifying for the .5% rate may elect to pay only .475%. And taxpayers with less than $10 million in revenue may still elect the “EZ method,” but its rate would drop from .575% to .546%.This equals s a 5% reduction in the tax rate for each category. It’s unclear why the Senate chose to make these lower rates “elective” instead of automatic—based on statements made by members of the Senate Finance Committee, it was the Comptroller’s Office that suggested to make the lower rates elective.  I can think of no reason why any entity would not make the election.  The “election” is only valid for reports due in 2014 and 2015. Unless the 2015 Legislature votes to extend the election, rates will jump back to their pre-2014 levels beginning in 2016.

– The bill would allow a “ticket reseller, promoter, or primary ticket distributor” an “exemption” to deduct as cost of goods sold the “amount paid to procure” a ticket. Effectively, it gives ticket resellers a cost of goods sold deduction equal to their ticket costs.  It’s unclear why the provision uses the term “exemption.” This is probably a drafting error.

– The bill would automatically “kick out” a utility provider from a combined group to allow the rest of the group to pay the Texas franchise tax at the half-percent rate. Under current law, if a combined group contains a member engaged in retailing or wholesaling utilities, the entire group doesn’t qualify for the .5% rate. This is the only industry-specific provision that both the House and Senate included in their Texas Franchise Tax reform plans. The Senate version would also add a statement clarifying the legislative intent of the provision.

– The bill would add allow “political subdivision corporations” to entirely avoid paying the Texas franchise tax. Political subdivision corporations are corporations that act as agents for counties, towns, school districts, and other local governments to negotiate and purchase electricity for the local governments’ use.

– The bill would create a system where the Comptroller’s Office and the Legislative Budget Board would together review all “tax preferences” at least once every 12 years. The provision defines a “tax preference” as a “credit, discount, exclusion, exemption, refund, special valuation, special accounting treatment, special rate, or special method of reporting.” The provision applies to all “tax preferences,” not just those pertaining to the franchise tax. The  Legislative Budget Board is required to deliver the first report to the Legislature on September 1, 2014. The Tax Code includes many, many tax preferences. If enacted, this will be quite a project for the Comptroller and the Legislative Budget Board.

That’s everything in the Senate’s version of the bill. We’ll learn by Monday how many (if any) of the House provisions the Senate will add back into its Texas franchise tax reform bill. Some of the House’s Texas Franchise Tax reform proposals have made passed both Houses as separate bills.  I’ll cover those once we learn the fate of HB 500.

Which version of the bill is “better?” The House version makes an already complicated tax even more complicated. But the Senate’s 5% rate reduction will not provide much assistance to those industries facing relocation or bankruptcy because of the Texas Franchise Tax. The House version assists some—but not all—of these industries. Neither version is very good. Perhaps the conference committee will come up with something better.


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