AUSTIN — As many as 26,000 companies statewide — or almost one in four across Texas — will see tax savings this year thanks to a major new deduction passed by the Republican-controlled Legislature, according to a report published Sunday.
The law approved last year softens what small-business owners used to call “the cliff” for the state’s franchise, or business margins, tax.
Since 2006, earning anything over $1 million in gross annual receipts suddenly meant a tax bill for businesses that shot from zero to thousands of dollars because the companies were taxed on all of their gross receipts, not just the amount above $1 million. Now, the cliff has become something of a slope.
Businesses making between $1 million and $3.3 million in gross receipts in 2014 will face a more gradual franchise tax bill because they will be able to deduct $1 million from their gross receipts, according to The Austin American Statesman.
Many are happy to see the “cliff” fall away.
“The next dollar you earn could take you to a $7,000 tax,” said Dale Craymer, president of the Texas Taxpayers and Research Association. “It created a disincentive for businesses to keep operating at the end of the year. You were better off closing your doors.”
Texas’ smallest businesses, with less than $1 million in gross receipts, remain exempt from the margins tax, and the new law won’t affect tax rates for companies making more than $3.3 million in gross receipts.
Critics note the change will mean less state revenue for things like public schools. But some business owners are cheering.
“Any kind of break helps,” said Mike Bennett, co-owner of Central Machine Works in East Austin, which will see its tax bill for the year fall by at least hundreds of dollars.
With nine employees, Central Machine Works in some years hovered just below or above the $1 million mark that defined when the state tax was owed.
“We usually don’t have to try too hard to stay under it,” joked Bennett. “We may have gone over it a couple of times.”
But Patricia Whiteside, a certified public accountant in Austin who represents the company, told the newspaper she sometimes had to advise several clients at the end of the year, “Don’t send out any more bills.”
Dick Lavine with the left-leaning Center for Public Policy Priorities said of the change: “It’s probably a better design because you avoid the $1 million mark.”
But he also notes the change has a price.
“It reduces revenue before we have restored funding to schools and other public services,” Lavine said.