Office of the Governor Rick Perry

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Business Tax Reform

Summary of Achievement

For years, an outdated business tax structure had been placing an unfair burden on the state’s largest employers and while allowing other companies to make little or no contribution the state’s vital services. To explore the best approaches to resolve the disparity, Gov. Perry creating the Texas Tax Reform Commission which studied the state’s tax system and recommended improvements. When the 79th Legislature codified the Commission’s comprehensive business tax reform plan into law, Gov. Perry pledged to revisit the tax in subsequent sessions. As a result, the 81st Legislature responded to the governor’s call to raise the revenue exemption to $1 million, essentially extending a tax cut to approximately 40,000 small businesses in Texas.

The Challenge

When the basic structure of our state’s tax system was developed, most business was driven by products rather than services.  As the Texas economy evolved, the tax system was never reformed to keep pace.  For example, the franchise tax was mainly applied to corporations, excluding business entities such as limited-liability partnerships, limited partnerships or professional associations that received liability protection from the state.  This conflicted with the original purpose of the franchise tax, namely, to collect a modest levy in return for the benefit of the state-provided liability shield.  Furthermore, those actually paying the tax were forced to pay the higher of two tax bases: either net income or net worth. Neither of which is a reliable indicator of business activities.

Action / Initiative

Governor Perry created the Texas Tax Reform Commission to tackle the Texas tax challenge.  He charged them to revise the tax system to meet five key objectives:

  • be easily understandable to tax payers,
  • provide a level playing field for all businesses,
  • have a broad base that includes all business entities that receive liability protection from the state,
  • be competitive with other states to maintain Texas’ reputation for having one of the best business climates in America.
  • reflect the realities of a rapidly evolving economy

To ensure all viewpoints were represented, Gov. Perry appointed members from a broad range of industries and political affiliations to the task force.  After the commission had developed a revised franchise tax structure, the governor worked with legislators and professional groups to build awareness and support for the plan in the business community, support which ultimately helped ensure its passage.  Its supporters included the Texas Association of Business; the Texas Association of Mexican American Chambers of Commerce; the Greater Houston Partnership; the Texas Trial Lawyers Association; the Dallas, Corpus Christi, San Antonio and Arlington chambers of commerce; and the Texas associations of manufacturers, homebuilders and realtors.

The Outcome

The new franchise tax went into effect January 1, 2008, replacing the anemic franchise tax structure with a broader, fairer tax assessed at a lower rate. Furthermore, it closed loopholes so that more businesses pay their share of education costs, while also lowering the primary franchise tax rate from 4.5 to 1 percent or .5 percent depending on the type of business.

When implemented, the tax exempted small businesses with total revenue less than $300,000, and implementing graduated discounts for businesses with more than $300,000 but less than $1 million in total revenue. It also exempts businesses whose total tax liability is $1,000 or less. At Gov. Perry’s urging, the 81st Legislature revisited the tax and raised the revenue exemption to $1 million, granting a tax break for 40,000 small businesses in Texas.

Under the reformed tax, businesses are rewarded for making good business choices. Every time a business puts a Texan to work, pays for health insurance or invests in a pension plan, their tax liability decreases.  However, the tax also penalizes bad business practices, such as hiring illegal immigrants.

These fair changes to the business tax code continue to stimulate our state’s economy and encourage the entrepreneurial spirit that sets Texas apart.