Tax exemption extended for two years

Gov. Rick Perry on July 19 kept his word to prevent a tax increase for thousands of small businesses when he signed into law a budget-related bill that the Legislature passed during the June special session.

Among dozens of changes in law in Senate Bill 1 is a provision that extends the state's business franchise tax exemption through 2013.

Some background: In 2006, legislators revamped the state's corporate franchise tax to help pay for a statewide reduction in local school property taxes. Before the changes, the business levy was essentially a 4.5 percent tax on a company's profit. For the new tax, often called the margins tax, lawmakers reduced the rate to 1 percent while broadening its application. The tax is now applied to the annual revenue of qualifying companies minus one of three options: the cost of goods sold, the cost of employee compensation or 30 percent of total revenue.

As passed in 2006, companies with revenues of $300,000 or less were exempt from the tax. In 2009, after small businesses complained that they were unfairly burdened by the tax, lawmakers raised the exemption threshold to $1 million for 2010 and 2011. That change left more than 130,000 businesses exempt, including almost 40,000 that had to pay the tax in 2008 and 2009, according to the August 2009 issue of Fiscal Notes, a publication of the state comptroller's office.

Without this year's action, the $1 million exemption threshold would have fallen to $600,000 at the end of 2011. According to an April 11 Texas Tribune article, the head of the Texas chapter of the National Federation of Independent Business, which lobbies on behalf of small businesses, told a House committee that if that happened, nearly 28,000 businesses would lose their exemption and be added to the tax roll.

During the regular legislative session, lawmakers filed multiple bills to maintain the $1 million exemption threshold. As of April, though, lawmakers were still trying to figure out how to replace the revenue that would be lost if that happened, House Ways and Means Committee Chairman Harvey Hilderbran, R-Kerrville, told the Austin American-Statesman for an April 11 story.

On May 21, nine days before the end of the regular session, Hilderbran proposed — and the House agreed to — adding a two-year extension of the $1 million exemption in Senate Bill 1811, a budget-related bill. But a Democratic filibuster in the Senate kept that legislation from surviving.

In the special session, backers of the extension proposal revived it by tucking it into SB 1, which was must-pass budget-related legislation.

According to a Legislative Budget Board analysis, the extension of the exemption will cost the state about $150 million in revenue during the 2012-13 biennium. Hilderbran told us in an interview that other provisions in Senate Bill 1 offset the loss of revenue.

A governor's office list of Perry's "accomplishments" during the 2011 legislative session says: "The governor kept his promise in 2009 to reform the small business tax, reducing taxes for 40,000 small businesses. This session, he successfully fought to extend those cuts until 2014."

But in an entry on his campaign blog posted Sept. 29, 2009, months after that year's legislative session had ended, Perry pledged to make the $1 million exemption permanent, not simply extend it for two years.

We rate this promise a Compromise.