By Dr. Vance Ginn and Nozim Ishankulov
The Tax Foundation recently released the 2016 State Business Tax Climate Index report that estimates relative state tax burdens nationwide. The authors define the Index as the following:
“The Index deals with such questions by comparing the states on over 100 different variables in the five major areas of taxation (corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes) and then adding the results up to yield a final, overall ranking. This approach rewards states on particularly strong aspects of their tax systems (or penalizes them on particularly weak aspects), while also measuring the general competitiveness of their overall tax systems. The result is a score that can be compared to other states’ scores.”
According to the report, Texas tax system ranks as the 10th best for doing business. Despite substantial burdens of property (34th), sales (37th), and corporate (41st) taxes, the absence of an individual income tax (6th) and a low unemployment insurance tax (15th) contribute to the Lone Star State’s favorable ranking, as shown in Chart 1.
Chart 1: Texas has the 10th best business tax climate
Source: Tax Foundation
Although there are no corporate income taxes in Texas, the authors account for the existence of a “complicated gross receipts tax, styled the Margin Tax” that reduces businesses ability to reach their full potential. This onerous tax is a complicated tax to file contributing to a high cost of compliance along with the amount paid, making it a complete failure of good public policy.
The Tax Foundation estimates in another report that if the margin tax was eliminated Texas’ business climate would rank 3rd best making it more competitive and advancing more job growth and economic prosperity. This is supported by a Texas Public Policy Foundation report that finds Texas forgoes billions of dollars in new real personal income and hundreds of thousands of new private sector jobs during the next five years if it’s not eliminated.
Texas has been the bastion of free enterprise and economic opportunity for almost two decades. To advance the Texas model and improve its competitive advantage by having the best possible business tax climate, the Tax Foundation’s report provides evidence that the margin tax has to go. If it did so, Texas would join only Wyoming and South Dakota, which are the top two ranked states, as the only states without personal income and business taxes, improving the outlook for all Texans.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.