A Fairer Tax for Texas
Passed by the Texas Legislature in 2006 and starting in 2007, the new reformed franchise tax is broader, fairer and lower than the old franchise tax it replaces. It will keep Texas as the 10th-largest economy in the world by providing the state with a business tax that better reflects the 21st century business structure and our diverse economy.
Throughout years our old franchise tax system became pocked with exceptions that created an unfair business tax in Texas. In fact, by 2005 only one out of 16 businesses were actually paying the tax that helped fund public education in Texas.
Unlike previous business tax proposals, the new system rewards – not punishes – employers for hiring people and providing health and retirement benefits, as all three lower their tax. To calculate the new tax, a business applies one percent to its revenue, minus either employee compensation or cost of goods sold. Wholesalers or retailers apply only half a percent to their total revenue.
The new reformed tax system closes all loopholes so everyone pays their share but also increases the small business exemption so small employers can continue to grow and create jobs. It supplants the weak franchise tax and spreads the financial burden of paying for the state across a broader section of the economy. Regardless of the way businesses are formed, the new tax says if you want the state’s limited liability coverage, you are subject to the tax.
And this reformed system protects the little guys: Sole proprietorships and general partnerships are not taxed under the new law.
We want a low and fair business tax in Texas and I believe the new system meets those goals by broadly spreading the tax across different economic sectors instead of singling out one industry. In a new system where no one has done the new calculations, it’s too soon to tell if there are any unintended consequences. If this tax does over burden any one sector of our economy the legislature should look for opportunities to ease those effects.
It is in Texas’ best interest to keep attracting new industries to our state by retaining our strong business climate. With this new system in place Texas will remain the best place in the country to do business and continue to defy the national trend by creating jobs and opportunities for Texas families.
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