NCPA - National Center for Policy Analysis

Help the Poor by Repealing the Texas Franchise Tax

June 24, 2014

Repealing the state franchise tax would benefit low- and middle-income Texans the most, according to a new report from Ryan Murphy for the National Center for Policy Analysis.

Texas' franchise tax is assessed on companies doing business in Texas. It is a tax on a business' capital, generally equal to 1 percent of a corporation's revenue, after employee compensation and the cost of goods sold have been subtracted. While the government refers to it as a "fee," it is a tax, with all of the economic consequences of a tax on capital:

  • When the government taxes something, people produce less of it.
  • Therefore, a tax on capital discourages investment. A decrease in investment, in turn, reduces productivity and workers' wages.

A 2013 study by the Beacon Hill Institute modeled the elimination of the Texas franchise tax. According to the study, had the tax been eliminated in 2013, investment would have surged by $3.2 billion, Texans would have gained $6.4 billion in disposable income in 2013 and private sector employment would have grown by 31,500 jobs in just one year.

Using this model, Murphy explains that by eliminating the franchise tax, it is the Texas households with incomes of less than $100,000 per year that would benefit the most from repeal:

  • Texas households with incomes below $10,000 earned just 3.34 percent of income in 2010. By repealing the franchise tax, these households would earn 4 percent of the additional income generated from 2013 to 2017.
  • Households earning $50,000 or less each year received 30.2 percent of income in 2013. With the repeal of the franchise tax, these households would receive more than 35.58 percent of the additional income.
  • Households with incomes of $75,000 or less received 48.43 percent of income in 2010. With the franchise tax elimination, these households would receive 56.31 percent of the increase.
  • Households earning less than $150,000 in 2010 received three-fourths of Texas income. With the franchise tax repeal, these households would receive more than four-fifths of the increase.
  • Over a five-year period, households earning less than $35,000 annually would gain $2.2 billion in economic benefits if the tax was eliminated. Households earning less than $100,000 per year would receive $6.9 billion in economic benefits.

Texas' poor would see genuine economic benefits from the elimination of the state's franchise tax. Taxes on capital are an inefficient way to raise revenue, and eliminating them would help all Texans across the income spectrum.

Source: Ryan Murphy, "Benefits to the Poor of Texas Franchise Tax Repeal," National Center for Policy Analysis, June 2014. 


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