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Op-Ed: Franchise Tax Reform Still a Priority for Texas

Editor’s Note: This Op-Ed was submitted to Breitbart Texas by the R Street Institute and was written by Josiah Neeley.

Nobody likes paying taxes. But unlike the rest of us, once every two years, the Texas Legislature gets the chance to do something about it.

In 2015, with the state seemingly awash in cash, Texas enacted a possibly record breaking $3.8 billion in tax cuts. This year, a combination of less revenue from lower oil and gas prices and other factors has led to a tighter fiscal situation. Encouragingly, those tighter revenue estimates haven’t shut tax reform out of the conversation and the chances for further tax relief remain high.

A prime target for reform, then as now, should be Texas’ franchise tax. Enacted in 2006, the franchise tax was billed as a fair, easy-to-understand way to provide needed revenue without harming Texas’ competitiveness as a state. It has been a failure on all counts.

The Texas franchise tax is a complicated mess that raises little revenue compared to the pain it causes to the state. Texas currently ranks 14th on the State Business Tax Climate Index. A 2015 report by the Tax Foundation found that repealing the franchise tax would help vault the state to third place in the rankings.

Because the tax is imposed at various points along the production process, certain industries pay a far higher rate than others. For example, a company that buys lumber to build doll-houses could end up paying higher effective rates than a service-oriented business, like a law firm. As a result of this so-called “tax pyramiding,” the tax unfairly benefits some businesses at the expense of others.

The biggest problem with the franchise tax, however, is its effect on ordinary Texans. While officially paid by Texas businesses, the true costs of the tax are paid by Texans in the form of fewer jobs and higher prices. Analysis by University of Texas at San Antonio professors John Merrifield and Corey DeAngelis found the franchise tax has lowered Texans’ personal income by between $30.5 billion and $46.3 billion. Research by the Texas Public Policy Foundation suggests full repeal of the tax would create 129,200 additional jobs over a five-year period.

During the 2015 session, Texas cut franchise tax rates by 25 percent, and committed itself to eventual elimination of the tax altogether. Early indications are that Texas’ elected officials have not abandoned this commitment. In his proposed budget, for example, Gov. Greg Abbott calls for an additional $250 million in franchise tax relief. Already this session, at least a dozen bills have been filed that would further reduce or eliminate the franchise tax.

Some legislators have also developed inventive ways to ensure that franchise tax relief will continue beyond the current biennium. Legislation filed as S.B. 131 in the Senate by Sen. Brandon Creighton, R-Conroe, and as H.B. 538 in the House by Rep. Will Metcalf, R-Conroe, would set up an automatic mechanism whereby surplus revenue would be applied to franchise tax relief.

However the state decides to act, it must show it is still committed to eliminating this burdensome and nonsensical tax. By taking steps now to keep the franchise tax on the path to elimination, Texas can help to benefit the state economy for decades to come.

Josiah Neeley serves as executive director of the R Street Institute. Follow him on Twitter, @jneeley78.

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