SENATOR CHARLES SCHWERTNER, MD

SENATE DISTRICT 5

March 24, 2015 Tony Bennett, Texas Association of Manufacturers Dale Craymer, Texas Taxpayers and Research Association John Fainter, Association of Electric Companies of Texas Bill Hammond, Texas Association of Business Hector Rivero, Texas Chemical Council Todd Staples, Texas Oil and Gas Association Ronnie Volkening, Texas Association of Retailers To those opposing the Small Business Tax Relief Act (SB 8): I am writing in response to your letter of March 20, in which you expressed your collective opposition to the tax relief package being considered by the Texas Senate – and specifically your opposition to the Small Business Tax Relief Act (SB 8). I welcome your input, and I appreciate the opportunity to respond to your concerns, as I believe civil discourse sharpens ideas and ensures sound public policy. As you are well aware, the state franchise tax represents an unreasonable and unnecessary regulatory obstacle that limits job growth and stifles new investment for many Texas businesses. After hearing countless stories from around my district about the undue financial burden the franchise tax places upon small business, I made the decision to author the Small Business Tax Relief Act (SB 8). This commonsense, pro-business legislation raises the franchise tax’s total revenue exemption from $1 million to $4 million, providing critical tax relief to tens of thousands of small businesses that create jobs and drive the Texas economy. Estimates from the Texas Comptroller's Office indicate that the Small Business Tax Relief Act would provide over $380 million in annual tax relief and completely eliminate the onerous franchise tax for over 61,000 small businesses in Texas. These small businesses serve as the backbone of our Texas economy and represent more than 52% of those who are currently required to remit payment under the franchise tax. As consistent and vocal advocates for a total repeal of the state franchise tax, I would think this legislation would be a welcome relief to the businesses you represent. Which is why I find your active opposition to this landmark tax relief so disappointing and discouraging. This opposition is particularly troubling since many of your organizations – namely, the Texas Association of Business – claim to not only represent the interests of big business, but also the very same small businesses that stand to realize substantial tax relief under SB 8.

The Texas Association of Business claims to be "the voice of business in Texas," but how can that claim be reconciled with an active opposition to legislation that would relieve over half of Texas businesses from the burden of the franchise tax? The tone of your letter to Lt. Governor Patrick seems to indicate a general lack of support for tax relief – which I must say, I find surprising – but also a specific disregard for the tax burden borne by Texas’ small businesspeople. Rather than see struggling small businesses lifted from the quagmire of the state franchise tax, it appears you’d prefer to pull them back down. Despite your stated concerns regarding the impact these tax cuts would have on state revenues, I would note that you are not opposing SB 7, legislation which would provide a 15% franchise rate reduction to all Texas businesses at an annual cost of $850 million. By contrast, the Small Business Tax Relief Act (SB 8) would reduce franchise tax collections by $380 million a year – less than 8% of the $4.8 billion the franchise tax currently brings in. If you’ll forgive me, it doesn’t seem as though you’re concerned with the state of Texas providing tax relief per se, just in providing tax relief that doesn’t directly benefit big business. Let me be perfectly clear: the positive contributions made to the state of Texas by big businesses can neither be understated nor denied. Texas’ big businesses represent a key driving force behind our state’s robust economy and have contributed immeasurably to Texas’ place at the forefront of our national economic recovery. Were there the political will and available revenue to do so, I would be the first to advocate for a complete repeal of the state franchise tax. However, sometimes politics is the art of the possible, and I believe SB 8 represents real and substantial tax relief that is both fiscally responsible and possible today. While I will continue to support legislation that seeks to provide broad tax relief for all Texas businesses, I think it is important to provide enhanced tax relief to those struggling small and medium-sized businesses that need it the most. It is well documented that small businesses feel the effects of economic change more quickly and have more difficulty securing capital, which requires them to lean more heavily on their profits for growth. Small businesses also provide a unique benefit to the state, as they generate higher incomes for their employees than larger businesses and offer rapid economic mobility for minorities, women, and veterans. Small businesses account for two out of every three new jobs, represent 96 percent of all businesses in Texas, and employ more than half the total private sector workforce. They’re also engines of innovation, holding 13 times more patents than larger firms. For every $100 spent at locally owned businesses, $68 stays in the local economy, as compared to $43 if spent at a national chain. Seventy percent of small-business owners start their business with less than $20,000 – an amount of funding that can hardly withstand franchise taxation. Further, as the franchise tax is based on revenues and not profits, it can be imposed on those businesses that operate at a loss. Small businesses are far more likely to fall into that category than big businesses.

Finally – and most importantly – small businesses are disproportionately burdened by the added cost of complying with the franchise tax. Estimates suggest that many small businesses pay more for the accounting services to calculate their franchise tax obligation than their franchise tax obligation itself. Larger businesses commonly have internal accounting departments to assist with tax compliance – employees that would be on staff with or without the franchise tax. Small businesses, on the other hand, are forced to contract for outside accounting services, adding an expense they would otherwise not incur, but for the franchise tax. For these reasons, the Small Business Tax Relief Act has garnered the vocal support of the National Federation of Independent Business (NFIB), the Texas Association of REALTORS, the Texas Association of Builders, the Texas Mortgage Bankers Association, The Texas Land Title Association, the Texas Self Storage Association, The Texas Manufactured Housing Association, the Texas Hotel and Lodging Association, and the Independent Insurance Agents of Texas – as well as a broad, bipartisan coalition of 24 members of the Texas Senate. I believe the Texas Senate, as a whole, recognizes the burden that the franchise tax places on businesses – both large and small. This is clearly evidenced by the abundance of bills that have been filed this session to provide some form of franchise tax relief to Texas business owners. The Small Business Tax Relief Act is simply one component of the Senate’s effort to provide comprehensive relief and represents our first step in repealing the franchise tax entirely. Given the undeniable economic benefit of supporting small businesses, their sensitivity to economic change, their reliance on profits for growth, the disproportionate compliance burden the franchise tax has on them, and the fact that the Small Business Tax Relief Act does nothing at all to shift the tax burden to other businesses, I would respectfully request that you reevaluate your position on the bill. Sincerely,

Senator Charles Schwertner Cc: Governor Greg Abbott Lieutenant Governor Dan Patrick Speaker of the House Joe Straus Senate Finance Committee Chairman Jane Nelson House Ways and Means Chairman Dennis Bonnen Members of the Texas Senate Members of the Texas House of Representatives