News and Insights

Texas Senate Approves House Bill 3

Tax Development May 04, 2006

On May 2, 2006, the Texas Senate gave final approval for House Bill 3, which is the cornerstone of Governor Rick Perry’s efforts to lower property taxes by replacing this revenue with revenue from new tax sources. The Senate’s approval sends the bill to the Governor, who has twenty days to sign the bill into law.

New Revenue Sources
House Bill 3 would reform the State’s franchise tax by broadening the tax base, lowering the tax rate, and extending the application of the tax to all business entities that receive some liability protection under state law. The revised franchise tax will apply to business entities that are not subject to the current franchise tax, such as partnerships, and will continue to exempt sole proprietorships and any entity that is exempt from franchise tax under current law.

The new tax would be based on the taxable entity’s total revenue reduced by either a cost of goods sold adjustment or a compensation adjustment. In any case, the tax base cannot exceed 70% of the taxable entity’s total revenue.

The tax rate is lowered to 1% and is imposed on a taxable entity’s taxable margin. Business engaged retail and wholesale businesses pay tax at a .5% rate. A copy of the Enrolled House Bill 3 may be found at the Texas Legislature’s website at

School Finance Bills
House Bill 3 is part of a series of five bills (House Bills 1, 2, 3, 4, and 5) that would change the way Texas finances its public school system. The Senate passed House Bills 2 and 4 and sent them to a conference committee. House Bills 1 and 5 are still before the Senate Finance Committee.

These Bills would do the following:

  • House Bill 1 would use part of the State’s current budget surplus to reduce property tax in 2006.
  • House Bill 2 would use the tax revenue generated by House Bills 3, 4, and 5 to reduce property taxes due in 2007.
  • House Bill 4 would reduce sales tax fraud by requiring used car buyers to pay sales tax based on the “blue book” value of the car.
  • House Bill 5 would raise the cigarette tax.

It is expected that the Legislature will take action to pass all five bills before the end of the current special session in mid-May.