NFIB Study: Franchise Tax Phase-Out Will Lead to 16,000 Jobs
April 2, 2013 – Austin, TX – NFIB/Texas, the state’s leading small business association, today revealed the results of a new study by the association’s Research Foundation, which found that a complete phase-out of the franchise tax would lead to 16,000 new private sector jobs in Texas.
The results of the study indicate reducing the tax by one-fourth over four years will allow taxable business entities to retain more of their pre-tax income to finance business expansion, build cash reserves, enhance worker compensation and provide better returns to shareholders.
Originally, the franchise tax was intended to produce approximate $6 billion per year, but the tax has failed to generate that amount; instead, the franchise tax is generating an average of $4.2 billion per year.
“With this amount in mind, we undertook a study to show what we have suspected all along,” said NFIB/Texas Executive Director Will Newton. “Eliminating the tax and allowing businesses to retain more of their pre-tax income will result in reinvestment into the economy in the form of new jobs, business expansion, investments in technologies and inventory, enhanced worker compensation and the like.”
In a recent survey of NFIB/Texas members, 57 percent of respondents said they have paid the franchise tax even when they did not make a profit. Forty-eight percent said their tax doubled or more since the tax was restructured.
“When a small business is unprofitable and must pay the tax, they use their personal savings, mortgage their home or borrow money from their family to meet their obligation,” Newton said.
House Bill 2584, authored by Rep. Linda Harper-Brown, begins to address this issue by lowering the rate of the franchise tax. For tax payers remitting at 1 percent, the rate would be lowered to three-quarters of a percent; for those remitting at .5 percent the rate would be lowered to .25 percent.
“This rate reduction allows small business owners to keep more of the revenue they have generated to address the increasing cost of doing business,” Newton added. “We have simply heard too many horror stories from business owners who have been dealt a tax bill far beyond the scope of what is deemed fair.”
Small business owner Sherry Mckean of Amarillo is just one of those horror stories. In 2012, Mckean was audited for her 2009 margins tax and was assessed nearly $53,000 as well as interest charges of $6,800. This is in stark contrast to the franchise tax payment she used to remit, which ranged between $500 and $2,000.
“Small business is willing and able to pay taxes, but the scales must be balanced,” says Mckean, whose business, Indian Ink, has six employees. “But in order for lawmakers to be part of the solution, they must understand that there is a problem.”
Rep. Harper-Brown’s bill also includes language that would make the $1 million franchise tax exemption permanent for Texas business owners. Making the small business exemption permanent has been a key NFIB/Texas reform measure since the inception of this tax.
New Braunfels business owner Ralph Marcantonio says the exemption must remain in place to protect businesses like his.
Last year, Marcantonio says he operated at a loss. If the exemption did not exist, he estimates he would have owed the state $4,000 in franchise tax dollars.
“It would have hurt to pay the state of Texas during years when I have not made a profit,” Marcantonio said. "Businesses like mine that qualify for this exemption are struggling; in some cases, they are closing their doors. I am grateful that the Legislature put this exemption in place and I ask that they do not take it away.”
The National Federation of Independent Business is the nation’s leading small business association, with offices in Washington, D.C., and all 50 state capitals. Founded in 1943 as a nonprofit, nonpartisan organization, NFIB gives small and independent business owners a voice in shaping the public policy issues that affect their business. NFIB’s powerful network of grassroots activists sends their views directly to state and federal lawmakers through our unique member-only ballot, thus playing a critical role in supporting America’s free enterprise system. NFIB’s mission is to promote and protect the right of our members to own, operate and grow their businesses. More information about NFIB is available online at www.NFIB.com/newsroom.