Senator Eliot Shapleigh - El Paso, Texas

AUSTIN – There’s good news on the horizon for local business owners who were shocked by last year’s franchise tax bill. Some businesses that didn’t even make a profit had to pay thousands of dollars in taxes.

But now several pieces of legislation have been filed in the Texas House and Senate aimed at easing the burden – especially on small businesses.

Three of the seven bills proposing changes to the franchise tax have been filed by state Sen. Eliot Shapleigh (D-El Paso).

State business associations are already supporting one of Shapleigh’s proposals – to exempt from the tax businesses with total revenues of $1 million. Right now, only businesses with $300,000 or less in total revenues are exempt.

“For us in El Paso, we have 18,000 small businesses and the million-dollar exemption will cover the most serious issues,” Shapleigh said.

The revised franchise tax, or margins tax, is based on gross receipts rather than profits, as it had been in the past. The tax was overhauled in 2006 and went into effect last year.

The revisions expanded the tax to include corporations, partnerships, businesses with limited liability protection and business associations to capture hundreds of thousands of businesses that were able to escape payment before.

In his State of the State address last week, Gov. Rick Perry said lawmakers must take a closer look at the franchise tax and make changes. He also said he supports the $1 million exemption.

“Our guiding priority must be shrinking, not expanding, the burden on the small businesses that are the backbone of our economy,” he said.

“With one franchise tax collection under our belts and plenty of feedback from the state comptroller and business owners, we know enough now to improve it,” he added.

Hit hard

El Paso business owners said they were forced to pay up to 10 times more under the new franchise tax last year.

One of those business owners is Mike Norwich, who owns 14 Jack in the Box franchises in El Paso and West Texas.

“We got hammered by it,” he said. “And there’s really no choice at the end of the day but to pass the extra costs along to our customers – many of whom don’t have the extra money themselves right now.”

Norwich said the tax is unfair because it doesn’t factor in how much a business makes in profit.

“I think there are certain business models that this tax is very punitive to,” he said. “It really adversely affects high-grossing, low-income businesses with tight profit margins.”

El Paso Inc. has reported on several businesses that made little profit, but still had to pay for the tax. One was a local tire company that lost a total of $40,000 but still had to pay $2,600 for the franchise tax last year.

Many people also believe that the franchise tax is a shady way to make up for the state’s lack of an income tax.

Article VIII, Sec. 24(a) of the Texas Constitution states that any “tax on the net incomes of natural persons, including a person’s share of partnership and unincorporated association income” requires voter approval in a statewide referendum before enactment.

“I just think the franchise tax as a whole is a bad way to skirt the income tax issue in Texas,” Norwich said. “No matter how you slice it, there is no fair way to tax someone’s margin because everybody’s business is different.”

Shapleigh has filed two additional bills aimed at softening the tax’s impact on small businesses.

One would exclude start-up businesses without taxable income from the tax.

The other would provide franchise tax deductions for qualified businesses operating in the Texas-Mexico border area.

“Why penalize business startups? Why hurt growing businesses? Why not grow them before we tax them?” Shapleigh said.

A bill filed by another legislator would provide deductions for businesses utilizing renewable energy, while still another calls for an all-out repeal of the tax after 2013.

And the chances of any of the bills becoming law soon?

“The million-dollar exemption and the ‘no tax on a no profit year’ bills seem to have a chance this session,” Shapleigh said.

What’s next

All of the proposed bills would take effect Jan. 1, 2010, so even if they are passed, business owners who have been hit hard by the franchise tax still have another year to deal with it under the current rules.

The process to get the bills through is underway, and the legislative committees of both the House and Senate should be ready for work by the end of this week.

Then the House Ways and Means Committee can begin considering the various tax bills that have been filed by state reps since last November.

Later, the Senate Finance Committee will review tax bills filed by senators, plus any that have passed the House.

Looming over legislators is a recent report by the Comptroller’s Office, anticipating state revenues to drop by $9 billion over the next two years.

Last year, the revised franchise tax brought in about $4.45 billion, according to the Comptroller’s Office, although it was expected to raise $5.8 billion.

Revenues from the tax will be split between the state’s general revenue fund and funding for property tax relief fund, which also puts money toward education.