A law to exempt nearly 40,000 small businesses from the state’s franchise, or “margins,” tax took effect Friday.

House Bill 4765, which Gov. Rick Perry signed on June 16, 2009, grants franchise tax exemptions to small businesses with less than $1 million in annual revenue.

The franchise tax -- a 1 percent levy on gross revenue -- took effect in 2006, replacing a 4.5 percent tax on “earned surplus,” or profit. The tax change was part of a new public school finance system designed to decrease property taxes.

Since 2006, businesses with less than $300,000 annual revenue and those with a tax liability of less than $1,000 have been exempted.

Proponents of a higher revenue exemption, however, argued that because small companies operate on lower profit margins than large corporations, many small businesses suffered disproportionately from the franchise tax.

A National Federation of Independent Business/ Texas member survey found that after the school finance change, business taxes at least doubled for 80 percent of respondents, said NFIB/Texas spokeswoman Laura Stromberg. Taxes increased by 500 percent or more for 40 percent of survey respondents, Ms. Stromberg said, and some businesses faced tax increases of 1,000 percent.

The survey generated about 2,000 responses from officials representing a diverse set of industries and retail operations, Ms. Stromberg said.

Although the business group spokeswoman said the franchise tax can erode small companies’ profits, she said the new $1 million revenue ceiling will ease the stress on many companies.

State comptroller estimates indicate an additional 39,000 businesses will receive tax exemptions as a result of HB 4765, according to a House Research Organization bill analysis.

Exempt businesses will receive an average tax cut of about $2,200 a year, the Dallas Morning News reported.

Businesses that no longer owe franchise taxes can use their savings, Ms. Stromberg said, to retain employees, keep health care benefits or invest in safety training, research and development.

“These small businesses are the future mid-sized and large businesses of Texas,” Ms. Stromberg said, “and we’ve got to give them the breathing room they need to grow.”

Companies categorized as small businesses generate 70 percent of all net new jobs in Texas, the NFIB/Texas spokeswoman added.

Legislation calls for balancing the $172 million margins tax cut with general fund revenue and a shift to a smokeless tobacco tax based on weight rather than price.

The franchise tax exemption level of $1 million is set to drop to $600,000 in 2012.

State Sen. Dan Patrick (R-Houston), author of the Senate version of the tax cut legislation, has said one of his priorities for the legislature’s 2011 session is to make the $1 million exemption permanent. Rep. Rene Oliveira (D-Brownsville) was the author of House bill.

NFIB/Texas will lobby strongly for making the tax exemption permanent, said Ms. Stromberg. The spokeswoman said she considers permanent approval of the $1 million exemption quite likely if economic conditions improve by May 2011.

“As long as the economy picks up, we think most legislators will understand that the tax revenue is not worth the [negative] ripple effects,” Ms. Stromberg said.