Proposition 4, a tax relief package focusing on property taxes in Texas, passed in the legislature in the summer of 2023. It was then put before votes on November 7, 2023 as an amendment to the Texas State Constitution. It is what is referred to as a legislatively referred constitutional amendment. The reason for wanting this to be a constitutional amendment is that while laws can be amended by the legislature, constitutional amendments require voter approval. Essentially it makes it more difficult to repeal. Taxpayers rarely vote to increase their taxes, while legislatures sometimes do. Over 83 percent of voters voted for the amendment.
At its heart this amendment’s aim was to reduce property taxes but there is another important component; this proposition also changes the state’s franchise tax.
First of all, what is a franchise tax? The Texas Comptroller’s office defines a franchise tax as, “The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas. For general information, see the Franchise Tax Overview.” The term “franchise” here does not refer to the type of business. It isn’t a tax aimed solely at businesses like McDonalds. It is a “privilege” tax; you pay it for the privilege of doing business in the state. The tax allows the company to be chartered and do business in a given state. Generally non-profits, fraternal orders and other similar businesses are exempt from franchise taxes. Corporations, partnerships and some (but not all) limited liability companies are all subject to franchise taxes.
Not all states have a franchise tax. Pennsylvania, West Virginia, Kansas and Missouri have recently done away with their franchise tax. Other states may be considering it. In Texas, however, the tax endures but is much reduced.
The recently passed Texas amendment doubles the amount of money a business can take in before the tax applies. The limit used to be $1.24 million. It will now be $2.47 million. Previously businesses that didn’t meet the threshold to pay still had to report and file forms. That will no longer be the case. Businesses pay at a rate of .576 percent if they make less than $10 million in a year and 1% if they make more than $10 million.
Such a reduction for small to medium sized businesses is significant and it will make it easier on the bottom line. If you feel like extrapolating it might even create jobs.
If your business needs help with franchise taxes in your state please feel free to contact Hito with any questions.