Is Texas ready for a second round of tax cuts?
The Texas Legislature wrapped up its biennial legislative session last month by passing a $3.8 billion package of cuts to the state’s property and business franchise taxes, which Gov. Greg Abbott signed into law Monday. Depending on how you calculate it, the package could qualify as the largest tax cuts in Texas history.
But it now looks as if the state might be in for what would be effectively a second, even bigger round of cuts, though not of legislative design.
In April, the Texas Third Court of Appeals took a potentially big bite out of the state’s franchise tax, when it ruled in favor of a suit brought by the movie chain AMC:
The case hinges on a definition of ‘tangible personal property’ that under state law includes ‘personal property that can be seen, weighed, measured, felt or touched, or that is perceptible to the senses in any other manner.’
AMC argued that movies fit under the ‘perceptible to the senses’ definition, meaning it should be able to use its costs for theater space to offset revenue when calculating taxes.
Unless the decision is reversed on appeal, it would result in the franchise tax taking in $1.5 billion less in revenue per year (the state might also be required to refund $6 billion in taxes already collected).
In other news, Texas may soon lose its ability to tax Internet access. Last week the U.S. House passed the Permanent Internet Tax Freedom Act, which makes permanent a prior congressional ban on states taxing Internet access. Prior bans had grandfathered existing Internet access taxes in a handful of states, including Texas. If the new law were to go into effect, that functionally would mean an additional $500 million tax cut per year.
Together, these actions could mean up to $4 billion less revenue flowing into the state coffers per biennium.
It’s worth noting that both the Internet access tax and the franchise tax are horrible and deserve to be repealed fully. But the unexpected nature of these revenue reductions could cause the state government some headaches. Here at R Street, we will be closely monitoring the battles over both taxes.
