On May 28, 2015, the Texas state legislation passed CSHB 32, a bill to reduce the Texas franchise taxes across the board by 25%, and increases the number of taxpayers allowed to use the E-Z computation and rate. The Texas franchise tax, or “margins tax” has routinely been the subject of debate from tax scholars since it went into effect in 2008 because of the complexity of its calculation and resulting unintended economic distortions.  Taxpayers determine one of four possible revenue tax bases before applying deductions, apportionment, various tax rates depending on the type of business, then various tax credits, to arrive at the Texas tax liability.  The gross receipts tax is applied to the sale of the same product at each stage of production, thereby increasing the tax base more than the former franchise tax. This modified gross receipts-style tax applies to every taxable entity that does business in Texas or is organized in the state. Texas is just one of five states currently still using a gross receipts-style tax (Texas, Ohio, Virginia, Delaware, & Washington).

Several other states have repealed this style of tax over the past fifteen years. The recent house bill, CSHB 32, was passed in a 133-10 vote in the Texas state House and Senate and now awaits the Governor’s approval.  The bill will take effect January 1, 2016, and will decrease the franchise tax rate from 1 percent to 0.75 percent, or for wholesalers and retailers, from 0.5 percent to 0.375 percent.  The provisions of bill CSHB 32 are expected to greatly reduce the economic burden on businesses operating in the state of Texas.  Supporters say CSHB 32 would reduce compliance costs and business overhead. The tax relief will free up money for the use of creating jobs, increasing production, and other investment opportunities. Opponents of CSHB 32 say the bill would cost the state $2.56 billion in revenue during 2016-2017, and that a significant portion of the benefits from this tax cut would go to out-of-state consumers and businesses.[1]

[1] House Research Organization bill analysis 4/28/2015 (CSHB 32).