Texas Public Policy Foundation calls for repeal of business franchise tax
The Texas Public Policy Foundation says the state’s franchise tax is complex, costly and should be repealed, citing revenue projections and its own economic model.
The Texas Public Policy Foundation is calling for Texas to eliminate its business franchise tax, saying the levy is costly, complex and still affects many small and medium-sized businesses.
The tax remains a major source of state revenue even after lawmakers lifted the no-tax-due threshold in 2023. The foundation says repealing the tax could raise personal income and jobs over five years, based on its own model.
In the foundation’s overview, Texas’s business franchise tax, also called the margins tax, is imposed annually on certain entities doing business in the state, with exceptions for sole proprietorships, some general partnerships and passive entities. It says taxable margin is calculated using the lowest of four formulas: 70% of total revenue; total revenue minus costs of goods sold; total revenue minus compensation and benefits; or total revenue minus $1 million.
The report says most taxable entities pay 0.75% of taxable margin in 2026 and 2027, while retail and wholesale entities pay 0.375%. It also says the 88th Texas Legislature set a no-tax-due threshold in 2023 for entities with annualized revenue of $2.47 million or less, which it says freed 67,000 small to medium-sized businesses from paying the tax. The threshold stayed fixed for the 2025 report year and rises to $2.65 million in 2026 and 2027, the foundation says.
The group places the tax in the context of Texas state finances. It says the 2026-27 biennial budget is $338.2 billion, with franchise tax revenue projected at $7.3 billion in fiscal 2026 and $7.4 billion in fiscal 2027. The report says that would make the tax 8.4% of all tax collections in fiscal 2026 and 4.1% of all state revenue projected for that year. It also describes the franchise tax as the state’s second-largest tax revenue source, behind sales tax and ahead of the motor vehicle sales and rental tax.
The foundation cites its own 2015 dynamic model, using a three-variable recursive vector autoregressive model, to argue that the tax reduced real income and private-sector employment after it took effect in 2008. It says total repeal could create at least $16 billion in new inflation-adjusted personal income and more than 130,000 jobs over five years.
“This is the appropriate thing to do, to eliminate this bad tax,” the report quotes.
The report does not include a response from Texas tax officials or lawmakers. It says higher business taxes can show up in prices, wages, hiring and investment decisions, but those effects are presented as the foundation’s view.
The foundation is using the report to argue for repeal, but the brief provided does not show whether Texas lawmakers plan to take up the proposal.
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