The effort to revise Texas' franchise tax began in 1996, driven
by concerns that Texas was overly dependent on sales and property
taxes. The existing franchise tax was easy to avoid. It was often
characterized as "optional" - even for large businesses.
For years, Texas was heavily dependent on the oil and gas
industry for tax revenue. However, that sector is shrinking. Growth
in Texas' economy now is driven by "service-sector industries,"
such as health care. Legislators had to develop a new tax system
that would grow with the state's economy. After eight years, four
regular legislative sessions, and numerous special sessions, the
state still had not resolved the issue. In 2004, a state court
declared the school finance system unconstitutional, and the
governor appointed a special commission headed by John Sharp to
resolve the problem.
The Texas Tax Reform Commission devised an innovative method for
levying a franchise tax, which was passed virtually unchanged by
the 2005 legislature in a third special session. The new and
unusual tax is levied only on business types that have some
protection for owners from personal liability. Thus, sole
proprietors and general partnerships with no corporate owners are
not subject to the tax. The new tax is levied on gross receipts
minus either cost of goods sold or employee compensation and
benefit cost.
The revised franchise tax was designed to treat all businesses
equally because any appearance of favoritism would render the bill
impossible to pass. The legislature was careful not to carve out
exceptions or special treatment for any industry, so almost all tax
credits and exceptions were removed from the bill.
As a result of TMA's lobbying efforts, special exclusions for
health care businesses were added to the tax bill virtually on the
eve of its passage. Physicians and other health care businesses can
exclude all revenues from Medicare, Medicaid, the Children's Health
Insurance Program (CHIP), workers' compensation plans, and the
TRICARE military benefits program. Health care facilities are
permitted to exclude half of those revenues. Health care businesses
who keep auditable records also can shelter a portion of their
revenues from taxation to allow for the cost of uncompensated
care.
Because the total franchise tax revenues will increase
dramatically as a result of the tax bill, the legislature was able
to mandate roll-backs of up to one-third in local school property
taxes and boost the state's share of funding for local schools.
Physicians with business or personal real estate holdings will
benefit to some degree from these tax cuts.
In 2007, the legislature passed multiple technical revisions to
the bill language. Legislators were careful to avoid any
substantive revisions until the impact of the tax can be assessed
after the initial tax returns are filed in May 2008.
TMA also focused its efforts on defending the existing health
care revenue exclusions. One proposal to cut the exclusions in half
was identified quickly and stopped; TMA's grassroots action caused
the author to withdraw his proposed amendment. Because the tax
exclusion for health care is unusual, it will continue to be a
target for revision or removal from the tax bill. Rulemaking and
implementation for the tax are likely to be difficult and
problem-filled because of the lack of experience or precedents in
this or any other state.
Taxes TMA Staff Team:
Legislative: Greg Herzog
Policy: Rich Johnson and Donna Kinney
Legal: Lee Spangler, JD
Overview
|
Managed Care/Insurance Reform
|
Scope of Practice
|
Retail Health Clinics
|
Responsible Ownership
|
Corporate Practice of Medicine
|
Health Care Funding
|
Medicaid, CHIP, and the
Uninsured
|
Public Health
|
Border Health
|
Mental Health
|
Emergency Medical Services and
Trauma Care
|
Rural Health
|
Medical Science and Quality
|
Physician Workforce, Licensure,
and Discipline
|
Health Information Technology
|
Prescription Drugs
|
Long-Term Care
|
Workers' Compensation
|
Abortion