State Sen. Jane Nelson (R-Flower Mound), who is also the chairwoman of the Senate Finance Committee, authored several tax cut bills that Gov. Greg Abbott signed into law last week. In Sen. Nelson’s press release, she highlighted the state’s strong financial position that justified the cuts, stating that the “Texas economy produced more than enough revenue to meet our needs, so we have a responsibility to return some of those funds back to the taxpayers who earned it in the first place. This will provide much-needed relief to Texas homeowners and businesses, who should benefit from the success they created...this legislative package will make Texas an even more attractive place to live and do business.”
Here is a summary of the three key bills:
1. HB 32, Franchise Tax Relief: HB 32 decreases the franchise tax rate from 1 percent to 0.75 percent, and decreases the franchise tax on retailers or wholesalers from 0.5 percent to 0.375 percent.
The bill analysis notes that each taxable entity that does business or is organized in Texas is subject to the franchise tax, also referred to as a margin tax. In fiscal year 2014, the state collected $4.73 billion in franchise tax revenues, which was 4.5 percent of total state revenues. Taking effect Jan. 1, 2016, HB 32’s anticipated aggregate economic impact is to free up $1.3 billion in fiscal year 2015. Some estimate that HB 32 would generate $3.4 billion in annual investment and up to 129,000 new jobs within five years.
Another provision of HB 32 is that it makes nearly 14,000 more businesses eligible to use E-Z computation, reducing compliance costs and allowing those businesses to cut their overhead. Entities with under $20 million in total revenue, up from $10 million, are now eligible to pay their franchise tax, and the legislation decreases the rate under this calculation from 0.575 percent to 0.331 percent.
In January 2015, the Tax Foundation characterized Texas’ franchise tax as a “failed experiment” because it is complex, unfair, and generates litigation. At that time, the group theorized that repealing the franchise tax would improve Texas’ rank in the State Business Tax Climate Index from 10th to third best in the country. Its analysis suggests that repeal of the tax would create 41,500 new jobs, $3.4 billion in new investment, and $9.8 billion in real disposable income over a four-year period.
2. SB-1, Property Tax Relief: SB-1 increases the homestead exemption from $15,000 to $25,000, but it is subject to voter approval of a constitutional amendment in November. Currently, a school district must grant an additional $10,000 exemption from the appraised value of a residence homestead for adults who are disabled or more than 65 years old, and SB-1 reduces the taxable value of such homesteads by a corresponding value. SB-1 is expected to provide $1.2 billion in property tax relief over the biennium for Texas homeowners.
The bill analysis refers to supporters of the bill who say that a tax on property ownership, one of the most fundamental of rights, is “by far the most onerous and noticeable tax.” They anticipate that the tax cut could stimulate consumption by putting more money in consumers’ pockets, which drives job growth, which in turn stimulates consumption.
On the other hand, opponents point out that there is a sizeable portion of the low-income population that rent, so they would not benefit from a homestead tax reduction. They believe that a tax cut which benefits more Texans, like a sales tax cut, would be a better use of state resources. A Legislative Budget Board estimate predicts that over five years, a sales tax cut could return 40,000 more jobs and spark $5.7 billion more in GDP growth than an equivalent increase in the homestead exemption.
3. HB 7, Repeal of the Occupation Tax: Effective Sept. 1, 2015, HB 7 repeals a $200 annual licensing fee on 16 professions: chiropractors, physicians, dentists, optometrists, psychologists, certified public accountants, architects, landscape architects, engineers, real estate brokers, investment advisors, attorneys, veterinarians, property tax consultants, interior designers, and land surveyors.
Supporters believe that the occupation tax is a hidden double tax that selectively targets certain professions which already pay licensing fees, according to the bill analysis. Supporters say the repeal of this tax will save these citizens approximately $250 million over the next biennium, allowing them to reinvest in their businesses and spend in their local economies. Opponents object on the grounds that when these cuts are combined with others enacted in the current legislative session, certain priorities, like education, are left underfunded.
HB 7 addresses numerous other subjects, including the modification of provisions governing revenue dedicated funds and accounts, and modification of fees, eligible uses of funds, and procedures. For example, HB 7 lifts the requirement on public higher education institutions that they contribute 5 percent of their tuition into a student loan account that provides no interest loans to qualifying students.
In addition, 2 percent of medical students’ payments are no longer required to be deposited in the physician loan repayment program account. Finally, HB 7 requires the entire $150 application fee for an exception to any Railroad Commission oil and gas rule, rather than two-thirds of it, be deposited into the oil and gas regulation and cleanup fund.
The total effect of the legislation is to reduce general revenue receipts by about $150 million through fiscal year 2016-17.