By chron.com ---->

Thousands of small Texas companies would get a two-year break from the state business tax under a measure preliminarily adopted in the House on Monday.

The new tax, which businesses are currently paying for just the second time, was designed to fix the state's franchise tax and school funding system. But small businesses have complained that the tax is hitting them especially hard.

After a chorus of complaints from the business community, the plan by Rep. Rene Oliveira would temporarily increase the exemption to include businesses making $1 million or less. The exemption currently stands at $300,000.

"Because Texas and the United States are currently in a severe recession, what we have done here is provided some temporary relief," said Oliveira, D-Brownsville.

But increasing the exemption would cost the state more than $172 million in lost revenue at a time when state revenue is already plummeting.

Lawmakers agreed to make the increased exemption temporary, "in recognition that when we return in the next biennium, estimates are we may be as much as $12 billion in the hole," Oliveira said. "If that is true, we will have to revisit this."

The Legislature adopted the business tax under court order in 2006 to help cover the $14 billion cost of reducing school property tax rates. But the revenue from the business tax, known as the margins tax, has fallen more than $1.5 billion short of projections.

Under the tax structure, companies are taxed at 1 percent — 0.5 percent for retailers — of gross receipts. Companies can deduct for costs of goods or employee benefits like salary and health care.

Businesses also are lobbying for a measure that would ease their tax burden in years when they're not profitable. But, in recognition of the looming state budget quagmire, more than a dozen proposed amendments to the plan were withdrawn and the legislation was adopted without changes.

The new business tax was intended to overhaul the state's old franchise tax, which was so full of loopholes it was widely considered an optional tax.

Lawmakers spent years trying to fix it, but stumbled over how to structure a new tax within legal constraints that would apply equally to different business structures.