The Texas House on Thursday approved a proposal that would phase out an unpopular business tax that provides funding for public schools.
The proposal by state Rep. Dennis Bonnen, R-Angleton, would not reduce the state’s franchise tax during the current penny-pinching legislative session, but it would do so in future years. Under Bonnen’s bill, economic growth would trigger reductions in the tax, which currently brings in about $8 billion every two-year budget cycle, until it ultimately disappears.
About $1.8 billion in franchise tax revenue in the current two-year budget cycle goes to the Property Tax Relief Fund, which pays for public schools. Democrats, arguing that the tax cut would cause lawmakers in later years to underfund crucial public programs, railed against the proposal for nearly two hours. They offered a series of amendments that would have lessened the extent of the tax cut or redirected funds for college tuition, pre-kindergarten and other priorities, but all were defeated.
The final vote took place late Thursday evening at the end of a long day on the House floor, which followed a marathon debate Wednesday over “sanctuary” jurisdictions that lasted until roughly 3 a.m. When Bonnen’s proposal finally hit the floor, few Republicans offered any remarks in response to Democrats’ outrage; most lawmakers in the chamber appeared to be paying little attention.
Businesses dislike the franchise tax, often called a “margin tax,” because they say it’s overly complicated and can punish them in less-prosperous years. Because it’s based on a business’s gross receipts, a business can still be required to pay the tax even in years it takes a loss. Many call the tax, which was passed as a way to reform the state’s school finance system, an unnecessary burden, and high-profile Republicans including Gov. Greg Abbott have sought its demise.
Lawmakers in 2015 cut the tax rate by 25 percent, which gave them $2.6 billion less revenue to help craft a budget this year. Proponents of the tax’s elimination argue it would stimulate the state’s economy and create jobs.
In the short term, it’s difficult to say just how much revenue is at stake in Bonnen’s proposal because the tax is highly dependent on economic conditions. A fiscal note written by the state’s Legislative Budget Board estimated it could cut public school funds by up to $3.5 billion in the 2020-2021 biennium.
I mean, look, I know the margins tax was a poorly conceived kludge that everyone hates (or at least claims to) and which has been a top GOP whipping boy for a couple of sessions, but please do keep two things in mind. One, this tax, which replaced the also-hated and seldom-paid franchise tax, was created in 2006 to help fill the revenue void left by the Supreme Court school finance decision in 2005 that led to a mandated across-the-board property tax cut. It was never going to fully fill that void, and indeed its poor design and regular underperformance has been a problem, but it at least made up for some of the funding for schools that disappeared when the previous system was declared to have been an unconstitutional statewide property tax. Something is going to need to replace the revenue lost to this tax being (eventually) eliminated, and all we have right now is wishful thinking about economic growth, a continued reliance on local property taxes, and a handful of magic beans. And two, it’s probably not a coincidence that the amount of revenue lost in this biennium to the previous one’s margins tax cut is almost precisely the amount the House and Senate are arguing about in order to make this session’s budget “balance”. Cause and effect, y’all. You should have one of your interns Google it.