Eliminating Texas's business franchise tax could create more than 130,000 new jobs and add at least $16 billion in inflation-adjusted personal income over five years, according to a new report published by the Texas Public Policy Foundation on June 25, 2026. The report argues that the state's so-called "margins tax" is costly, complicated, and time-consuming for businesses to navigate, with compliance expenses often exceeding what companies actually pay in taxes. The authors make the case that lawmakers should eliminate the tax entirely to boost job creation and economic growth.
The franchise tax is expected to generate $7.3 billion in fiscal year 2026 and $7.4 billion in FY 2027, making it the state's second-largest tax revenue source behind only sales tax, the report finds. Despite those seemingly large numbers, franchise tax collections represent just 8.4% of all tax revenue and 4.1% of total state revenues in the context of Texas's $338.2 billion budget for the 2026-27 biennium. Revenue growth has been relatively stagnant over the past five years—the tax generated approximately $6.8 billion in FY 2023, climbing to a projected $7.4 billion by FY 2027, which works out to just 9.2% growth over the period. Year-over-year growth rates during that span came in at 0.6%, 3.2%, 2.8%, and 2.3%, respectively. In 2023, state lawmakers doubled the revenue threshold for tax exemptions to $2.47 million, which released "67,000 small to medium-sized [businesses] from paying the franchise tax," and that threshold has since increased to $2.65 million for 2026 and 2027.
The report cites a 2015 economic model created by TPPF scholars that used a three-variable recursive vector autoregressive approach to estimate the tax's impact on income and employment. According to the model, when franchise tax revenue peaked after the tax was implemented in 2008, personal income and employment were significantly depressed. The study found that "a complete elimination of the franchise tax could create at least $16 billion in new inflation-adjusted total personal income and more than 130,000 new jobs over a five-year time horizon." Former Texas House Ways and Means Chairman and Speaker of the House Dennis Bonnen stated in 2017 that "this is the appropriate thing to do, to eliminate this bad tax."
The tax operates through a complex calculation process that requires business owners to determine their taxable margin using the lesser of four different formulas: 70% of total revenue; total revenue minus cost of goods sold; total revenue minus compensation and benefits; or total revenue minus $1 million. Most entities then pay 0.75% of that margin, while retail and wholesale businesses pay 0.375%. The report argues this complexity creates a heavy burden on businesses because taxes on capital have a negative effect on investment—higher costs of doing business prevent expansion, which slows employment and wage growth. The authors emphasize that businesses don't actually pay taxes, people do, meaning higher business taxes get passed along as higher prices, lower wages, fewer job opportunities, lower investment returns, or upstream effects on suppliers.
The report concludes that eliminating the franchise tax would further solidify Texas's economic dominance and incentivize additional job creation, business investment, and income growth while alleviating burdens on existing businesses. The weight of the tax's burden is very much disproportionate to the benefit it provides to state revenues, the authors write, with negative effects felt by consumers, employees, job seekers, shareholders, and suppliers alike. Policymakers should seize the opportunity to phase out or repeal the tax entirely, potentially benefiting a wide array of Texans across the economic spectrum.