This commentary originally appeared in the Austin American-Statesman on December 28, 2015.
Businesses don’t pay taxes; people do in the form of higher prices, lower wages, and fewer jobs available. Given that taxes exist to fund essential government services, conservative budgets must be funded with the least burdensome taxes. No matter how you evaluate Texas’ business franchise tax, commonly called the margin tax, it fails this test and should be eliminated.
Gov. Greg Abbott lit the torch last session by saying that he wouldn’t sign a budget without business tax relief. Conservative legislators carried this torch by debating how much to cut in taxes rather than the typical discussion of how to spend every dime.
These actions led to a generous 25 percent reduction in the margin tax that begins on Jan. 1 for a total cut of about $2.6 billion. This not only has the effect of reducing the size of government, but employers will also have more money to invest in Texas’ future to boost the slowing job market.
Although this may have been the appropriate cut given the initial state revenue estimate during the current budget period, which has since been revised lower as oil prices remain subdued, elected officials shouldn’t take their eyes off the ball. The recent Texas Public Policy Foundation report Failure of Texas’ Business Margin Tax outlines how this tax is bad public policy and must be eliminated for Texans to reach their full potential.
Problems with the margin tax are numerous. Since the margin tax’s inception in January 2008, the Texas comptroller’s office has had difficulty accurately estimating its revenue as noted by the cumulative $2.8 billion less in actual collections than estimated. In addition, the comptroller’s analysis shows that it disproportionately burdens lower income Texans as they pay more of it as a percent of their total household income than other income groups.
Ask employers about the margin tax. They’ll tell you that the compliance cost can often be more than their tax bill. Their first $1 million in revenue is exempt, which benefits some small businesses, but many surpass that quickly. They then must determine their tax base from multiple taxable margins dependent on their gross revenue and then multiply that base by different rates to get their tax owed.
While employers may choose the cheapest option after spending countless hours and dollars on determining their tax bill, it’s made more difficult because the calculations are substantially different than for the federal corporate income tax. To comply with the complexity and both tax codes, accountants are paid vast sums to keep track of multiple financial books.
There are many difficult decisions that employers make every day to remain profitable. Dealing with such an onerous tax shouldn’t be one of them.
Imagine that you have to keep two sets of financial books for your household. One book is more complex to track of, and both are a headache that requires you to sacrifice time with your family and more productive activities. If you had the opportunity, you would surely eliminate the more complex book to ease your stress.
Phasing out the margin tax over four years with certainty it will be eliminated and not replaced with another tax is a good option. A combination of potential budget surpluses, increased tax revenue from economic growth and modest restraint on spending increases would offset state revenue.
Studies show that eliminating this tax would boost job creation and economic prosperity. It would also increase the state’s competitiveness as Texas would be one of only three states to not have a personal income tax or general business tax.
Legislators should build on last session’s progress by considering a path to eliminating the margin tax for a brighter Texas.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.