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The franchise tax dates to 1907 and was premised on the idea that companies should pay something for the privilege of doing business in Texas. Over the years, it evolved into a payment made by some companies in return for state laws that limited their legal liabilities. These fees and costs were generally low and spread out across the business community.
That changed in 2006 when the Texas Supreme Court declared that because the Legislature limited what local authorities could charge in property tax rates - forcing almost all of them to charge the maximum rate - the Legislature had created a de facto state property tax. Since the Texas Constitution forbids such a thing, the court ordered the Legislature to find new ways to pay for things like schools.
The solution was a franchise tax based on margins of revenues, not on income. There are four methods of calculating the taxable margins on gross receipts in Texas, and companies are allowed to pick the one that is best for them. Unfortunately, that requires many companies to make all four calculations using an accountant with specialized training.
Compliance is therefore expensive, but the good news is that with a $1 million exemption, 94 percent of Texas companies will not have to pay any tax.
That doesn't make Texas a low-tax state for businesses, though. Businesses pay 64 percent of the taxes collected in Texas, compared with the 45 percent national average. Texas' effective tax rate on business is 5 percent, higher than the national average of 4.7 percent.
The business community let out a cheer last year when the Legislature came close to eliminating the franchise tax, but Republican Lt. Gov. Dan Patrick insisted on raising the homestead exemption on personal property taxes. Instead, lawmakers only cut the franchise tax rate by 25 percent with a promise to ultimately phase out the tax.
That was 2015, though, when 1,600 oil and gas rigs were drilling in Texas, sales tax collections were jumping and appraisal districts were raising property values at a breakneck pace. Lawmakers know 2017 will be different.
