The Texas House will begin slowly and selectively whittling down the state business tax this week, as Republicans work to make good on a promise to cut taxes.
The House got warmed up on Friday, passing House Bill 3390, which allows school districts and counties to continue to grant property tax breaks to attract local investment. In the coming week, the House will consider at least $410 million in credits and exemptions to the state franchise tax, one of the most maligned sources of state revenue.
Liberals hate the franchise tax, also called the margins tax, because it consistently delivers $4 billion less per budget cycle than promised when the Legislature created it in 2006. Conservatives hate it because it's complicated and demands taxes from businesses that lose money. Businesses hate it because it adds on to the sales and property taxes they are already paying.
Many Republicans want to do away with it completely, but that would leave a $5.6 billion hole in state revenue. It is the third largest state revenue source after the sales tax, which is 64 percent of revenue, and the motor vehicle sales tax and rental tax, which is 9 percent. The Texas Constitution prohibits an income tax on either individuals or businesses.
While the House Ways and Means Committee considers bills to phase out the tax by either 2016 or 2018, other lawmakers have more viable proposals to take it apart piecemeal. On Monday, the House will vote on a bill to provide a credit for companies that perform research and development with Texas universities, cutting $10.3 million.
The big cuts, though, come before the House on Tuesday with House Bill 500, which would cut $396 million from the franchise tax. The complicated nine-page measure changes how the tax is applied to specific industries, including rental, auto repair, transportation, real estate and medical businesses. All of these industries have complained of unfair treatment.
Lawmakers are expected to file dozens of amendments to add even more exemptions and new credits when the bill comes up for debate. The bill's author, Ways and Means Chairman Harvey Hilderbran, R-Kerrville, has promised to limit how much the House cuts in franchises taxes, but on Friday he refused to provide a number.
Whatever amount the House authorizes, it will add to $37.7 billion in existing exemptions in Texas' sales, franchise, gasoline and motor vehicle sales taxes, according to the state comptroller.
Democrats have long complained about the myriad tax code that provides tax exemptions that range from franchise tax credits for oil and natural gas hydraulic fracturing to property tax exemptions for disabled veterans. Rep. Mike Villarreal, D-San Antonio, has long called for a systematic review of all exemptions and credits.
"We scrub the budget every two years to determine which programs to continue funding instead of committing expenditures in perpetuity," Villarreal said. "We need to scrub our tax code and put an expiration date on our tax expenditures."
The Republican-controlled Legislature, though, has little appetite for repealing tax breaks, and conservatives have called for more. Gov. Rick Perry wants $1.6 billion in tax relief, but has left how to reach that number to lawmakers.
The rightwing Texas Public Policy Foundation complained that House Bill 500 could be more aggressive.
"Rather than tweak the Texas business franchise tax in such a way as to be unnoticed by most Texans, we recommend putting the tax on a path toward extinction," Chuck DeVore, the foundation's vice president for policy, said.
On one of the last days to hear bills, the House Ways and Means Committee considered bills Saturday to limit any increase in real estate appraisals for property tax purposes to 5 percent a year. Those measures could result in tax cuts ranging from $976 million to $1.9 billion for property owners between 2014 and 2018, if those bills make it to the House floor for a vote.
In the Senate, Finance Committee Chairman Tommy Williams, R-The Woodlands, has a bill to give $730 million in rebates to 80 percent of electricity customers. The money would come from a fund established to help poor people pay their utility bills, but the money was never appropriated by the Legislature because it was needed to balance the budget.
These tax cuts still have a long way to go before becoming law, needing to pass the House and the Senate before making it to the governor for his signature. But there is little doubt at least some people will see lower taxes in the years ahead.