Franchise Tax |

As described in Texas law, the franchise tax is levied in exchange for the “privilege” of doing business in the state. Part of this privilege includes liability protections under state law.

A business’ tax liability is based on its “margin,” which state law uniquely defines as total revenue minus one of four possible deductions (some of which are highly complex).

Once determined, this margin is multiplied by the percentage of the firm’s business revenues earned in Texas during the year. The tax typically is due in May of each year. The current franchise tax is levied on the apportioned margin at the following rates:

0.5 PERCENT for retailers and wholesalers;

1 PERCENT for most other entities (such as manufacturers, construction firms, energy companies, etc.); and

0.575 PERCENT for small businesses with $10 million or less in total revenue for the year (these businesses forego certain other deductions).

For 2015, no tax is due from companies with $1,080,000 or less in total revenues, or with less than $1,000 in tax liability.

The 2013 Legislature enacted a temporary reduction in franchise tax rates. For tax reports due in 2015, the rates will be 0.475 percent for retailers and wholesalers and 0.95 percent for other entities (the small business rate remains unchanged). Under current law, the tax will revert to its previous rates for reports due in 2016.

In terms of its contributions to the state’s tax revenues, the franchise tax is a distant second in size to the sales tax. In 2014, the franchise tax generated 9.3 percent of the state’s total tax collections, while the sale tax accounted for almost 54 percent. Recent projections from the Comptroller’s office have its share of tax collections shrinking to 8.6 percent by fiscal 2017
The History of the Texas Franchise Tax – The Complex Evolution of Our Main Business Tax

Problems:

Delaware Loophole

Water’s Edge Loophole

Solutions:

Close corporate loopholes by:
- Determine a list of tax haven countries for state tax purposes that should be updated regularly.
- Require corporations to include the income of foreign subsidiaries based in state-identified tax havens on their state tax returns.
- Calculate the income subject to taxation based on the sum of domestic and tax haven income.
- Apply the state’s typical apportionment formula to determine the share of reported profits it will tax.

Public Bank

Corporate Income Tax

Revenue Neutral Carbon Tax

Gas Tax

Land Value Tax

Texas Constitution
Code – Tax Code
Chapter – 171 Franchise Tax
Sec. 171.0002. DEFINITION OF TAXABLE ENTITY.
Sec. 171.003. INCREASE IN RATE REQUIRES VOTER APPROVAL.
Sec. 171.1016. E-Z COMPUTATION AND RATE.

Wall Street Journal – Texas Alters Analysis of Tax Cuts To Account for Economic Effect

TTARA – Understanding the Texas Franchise — or “Margin”—Tax

Economist – Blowing up the Delaware Sub

Texas Comptroller – Texas Franchise Tax Rates

CPPP – Impacts of Reducting the Franchise Tax

CPPP – How to Fill the Hole in the Texas Revenue System

CPPP – A Smart Approach to Closing a Costly Loophole

Houston Chronicle – Corporate Franchise Tax Vs. Income Tax

Houston Chronicle – Laffer: End franchise tax, online loopholes

Houston Chronicle – State’s franchise tax is universally despised in Texas Capitol

Tax Foundation – The Texas Margin Tax: A Failed Experiment

Texas DARS – Texas Franchise Tax Credit for Hiring Persons with Disabilities