Murphy: Repealing Texas’ Franchise Tax

by Ryan Murphy

Source: Austin American Statesman

Of all major sources of revenue for the state of Texas, the franchise tax causes the most harm for each dollar raised. Also known as the margin tax, the tax is generally equivalent to 1 percent of revenue after certain costs are subtracted. The tax needs to be repealed.

All taxes to raise revenue will cause some harm, but the franchise tax is especially adept at hurting Texans. The franchise tax is a tax on a business’s capital, and capital is what produces investment. But when you tax something, you get less of it, so less capital means less business investment, lower productivity, and lower wages for workers.

So before repeal of the tax is dismissed as nothing more than a boon to businesses, consider who is really impacted by the franchise tax — and who would benefit most from repeal. In 2013, the Beacon Hill Institute at Suffolk University modeled the economic benefits of eliminating Texas’s franchise tax using its State Tax Analysis Modeling Program for Texas, which analyzes how policy changes affect the economic incentives of households and businesses.

According to the model, if Texas had eliminated the franchise tax in 2013:

  • Texans would have gained $6.4 billion in real disposable income in 2013 and, cumulatively, $9.8 billion by 2017.
  • In the first year, private sector employment would have grown 31,500. By 2017, the cumulative total would be 41,500 additional jobs.

Who is getting those additional billions in disposable income? I was able to compare household spending across industries with the Beacon Hill data. Were the franchise tax repealed:

  • Over a five-year period, households earning less than $35,000 per year would receive $2.2 billion in additional income, or 22 percent of the benefits.
  • Households earning less than $100,000 would receive $6.9 billion.
  • Households earning from $35,000 to $100,000 per year would receive 48 percent of the benefits.
  • Households with incomes above $100,000 would receive 30 percent of the benefits.

While higher income households gain more dollars per household with repeal of the tax, lower income households see a larger percentage increase in their incomes. Although many of the benefits will go to the wealthy, poor and middle class Texans would see substantial benefits from repeal of the tax, not to mention the tens of thousands of jobs that repeal would also create. Taxes like the franchise tax negatively impact not just the businesses they directly tax but also third parties who do not own businesses, including the poor.

The franchise tax does, of course, provide the state with revenue. However, Texas’ strong economic growth (per capita GDP rose 4.7 percent in Texas from 2008 to 2012, compared to zero growth in the U.S. overall during that time) has swelled public coffers, giving the state the opportunity to eliminate the counterproductive tax. While Texas has raised $4.2 billion from the tax, it would lose only $3.5 billion from eliminating it, as cutting the franchise tax will increase sales, thereby increasing sales tax revenue without increasing the sales tax rate.

Unfortunately, tax cutting measures are often lambasted as giveaways to the rich, and measures that benefit the wealthy are criticized as contributing to inequality. Taxes such as Texas’ franchise tax — a tax on business revenue — are especially prone to such rhetoric.

But it is a mistake to oppose franchise tax repeal merely on the grounds that repeal would benefit upper-income earners and contribute to “inequality.” Inequality is a measure not of absolute economic well-being but of relative financial position, and preoccupation with “inequality” between two groups obscures the fact that repeal of the franchise tax would help all groups — including the poor — even if it makes official inequality statistics appear worse. Repealing the tax on capital would directly benefit working-class Texans, create jobs and add to their real incomes. Isn’t that — not the fact that the wealthy will also benefit — what we should really care about?

This data is outlined in more detail in my new study for the National Center for Policy Analysis: Benefits to the Poor of Texas Franchise Tax Repeal.

Murphy is a research associate at the O’Neil Center for Global Market and Freedom at the Southern Methodist University Cox School of Business.