Gov. Rick Perry on July 19 kept his word to prevent a tax increase for thousands of small businesses when he signed into law a budget-related bill that the Legislature passed during the June special session.

Among dozens of changes in law in Senate Bill 1 is a provision that extends the state's business franchise tax exemption through 2013.

Some background: In 2006, legislators revamped the state's corporate franchise tax to help pay for a statewide reduction in local school property taxes. Before the changes, the business levy was essentially a 4.5 percent tax on a company's profit. For the new tax, often called the margins tax, lawmakers reduced the rate to 1 percent while broadening its application. The tax is now applied to the annual revenue of qualifying companies minus one of three options: the cost of goods sold, the cost of employee compensation or 30 percent of total revenue.

As passed in 2006, companies with revenues of $300,000 or less were exempt from the tax. In 2009, after small businesses complained that they were unfairly burdened by the tax, lawmakers raised the exemption threshold to $1 million for 2010 and 2011. That change left more than 130,000 businesses exempt, including almost 40,000 that had to pay the tax in 2008 and 2009, according to the August 2009 issue of Fiscal Notes, a publication of the state comptroller's office.

Without this year's action, the $1 million exemption threshold would have fallen to $600,000 at the end of 2011. According to an April 11 Texas Tribune article, the head of the Texas chapter of the National Federation of Independent Business, which lobbies on behalf of small businesses, told a House committee that if that happened, nearly 28,000 businesses would lose their exemption and be added to the tax roll.

During the regular legislative session, lawmakers filed multiple bills to maintain the $1 million exemption threshold. As of April, though, lawmakers were still trying to figure out how to replace the revenue that would be lost if that happened, House Ways and Means Committee Chairman Harvey Hilderbran, R-Kerrville, told the Austin American-Statesman for an April 11 story.

On May 21, nine days before the end of the regular session, Hilderbran proposed — and the House agreed to — adding a two-year extension of the $1 million exemption in Senate Bill 1811, a budget-related bill. But a Democratic filibuster in the Senate kept that legislation from surviving.

In the special session, backers of the extension proposal revived it by tucking it into SB 1, which was must-pass budget-related legislation.

According to a Legislative Budget Board analysis, the extension of the exemption will cost the state about $150 million in revenue during the 2012-13 biennium. Hilderbran told us in an interview that other provisions in Senate Bill 1 offset the loss of revenue.

A governor's office list of Perry's "accomplishments" during the 2011 legislative session says: "The governor kept his promise in 2009 to reform the small business tax, reducing taxes for 40,000 small businesses. This session, he successfully fought to extend those cuts until 2014."

But in an entry on his campaign blog posted Sept. 29, 2009, months after that year's legislative session had ended, Perry pledged to make the $1 million exemption permanent, not simply extend it for two years.

We rate this promise a Compromise.

In a Sept. 29, 2009, video posted on his campaign website, Gov. Rick Perry bragged about the state's economy, saying that Texas "is exerting a magnetic pull on jobs, investment and people who want to live free" and calling the state "a safe harbor to this economic storm."

The text introducing the video says that Perry also "offered several new proposals to maintain Texas" positive momentum," including "making permanent the recent tax cut extended to 40,000 small businesses in the last legislative session."

That refers to a bill Perry signed June 16, 2009, increasing the number of businesses that are exempt from paying the state's franchise tax. Previously, companies with less than $300,000 in annual revenue did not have to pay. The 2009 measure raised that threshold to $1 million, exempting more than 130,000 businesses, including almost 40,000 that had to pay the tax in 2008 and 2009, according to the August 2009 issue of Fiscal Notes, a publication of the state comptroller's office.

Under current law, that exemption threshold will drop to $600,000 on Jan. 1, 2012, according to a 2009 House Research Organization report, making more businesses subject to the tax.

However, some lawmakers want to prevent that from happening. On Nov. 8, 2010, GOP state Sen. Dan Patrick of Houston filed a proposal to make the $1 million exemption permanent.

Over in the House, Carolyn Saegert, clerk of the Ways and Means Committee, told us that at least seven similar bills are pending, including House Bill 262, filed March 9 by Rep. Harvey Hilderbran, R-Kerrville. In a March 11 press release, Hilderbran said, "Texas continues to outperform its neighbors because of strong, proven economic policies such as the franchise tax exemption for small businesses. Establishing this exemption as one that is permanent will help keep Texas at the top."

Hilderbran, who leads the House Ways and Means Committee, told the Austin American-Statesman for a March 24 story that many lawmakers want to make the exemption permanent but they have to find a way to replace the lost revenue, amounting to about $75 million a year.

We rate this promise In the Works.