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.
This commentary, written by Dr. Vance Ginn and Nozim Ishankulov, originally appeared in print in the Midland Reporter-Telegram on December 27, 2015.
Despite slower economic activity in Midland County, property taxes owed continue to skyrocket. Therefore, lawmakers should consider options to provide permanent relief of these onerous taxes to fund essential local government services.
Contributing to the slower economy is a sustained drop in oil prices that’s led to a 22 percent decline in active rigs to only 32 in the County according to Baker Hughes. Less employment related to oil and gas activity has pushed the unemployment rate up from a cyclical low of 2.2 percent last December to 3.5 percent in October.
Although this mild slowdown suggests a weaker housing market, homeowners noticed that their home appraisal increased, on average, by 12 percent. They would ordinarily cheer the increase as it improves their wealth, but it also means that they face higher property tax bills that may not be associated with an increase in income.
Add to that the 11 percent increase in the County’s property tax rate excluding any other changes and many will risk living paycheck-to-paycheck or losing their home from a mounting property tax burden. This isn’t just in Midland, homeowners statewide face the 14th highest property tax burden in the nation according to the Tax Foundation.
Increases in the average appraisal value and tax rate in Midland will hurt those with low and fixed income the most, particularly the working poor and elderly, as property taxes rise from factors out of their control. A new school nearby may raise their home value forcing them to move to another area with cheaper housing and worse living conditions.
This type of life-changing event determined by the government and not voluntary exchanges in a market has reasonably created unrest among homeowners. For example, there were 701 people in Midland who signed a petition protesting the increase in the County’s property tax rate. Being politically engaged is important to confront higher taxes from excessive spending, but far too often citizens are unaware of their property tax liability.
To alleviate some of this burden, last month voters overwhelmingly approved the constitutional amendment passed by the Texas Legislature known as Prop 1. It increases the homestead exemption for school property taxes by $10,000 to $25,000. The recent Texas Public Policy Foundation’s report The Freedom to Own Property outlines how this will provide only short-term relief while eliminating property taxes and replacing lost revenue with a reformed sales tax advances liberty and prosperity.
The reformed sales tax could be as low as an 11 percent total rate compared with the current 8.25 percent state and local combined rate by broadening the base to include the sale of property and most goods and services taxed in at least one other state.
Unlike property taxes that are many times hidden in homeowners’ escrow account or in renters’ rent, the sales tax is easy to see on every receipt. While property taxes must be paid regardless of affordability, the sales tax is based on an individual’s discretion to purchase something.
By having more disposable income from paying lower mortgage payments and rent, Texans can allocate their income as they see fit whether it be to put food on their table, save for a rainy day, or hire new workers. Research highlighted in the Foundation’s paper finds that this swap could lead to substantial economic gains in the ballpark of $60 billion in new personal income and 340,000 new jobs over five years compared with the current trajectory.
Finally, and most importantly, this swap gives Texans the freedom to own property instead of renting from the government.
For the working poor and all Texans to benefit from owning property, more job opportunities, and more economic prosperity, lawmakers should consider long-term solutions to resolve skyrocketing property taxes with ending them being the best option.
New Texas employment report shows unemployment rate has been at or below the U.S. average for 107 consecutive months
AUSTIN – Today, the Texas Workforce Commission released Texas labor market data for November 2015. The Texas Public Policy Foundation’s Center for Fiscal Policy Economist Dr. Vance Ginn issued the following statement:
“Texas continues to defy those who wish to hail the demise of the state’s model of no personal income tax, low taxes overall, limited government spending, and less regulation from the drop in oil prices with yet another month of positive job creation in November. The 16,300 net nonfarm jobs created last month brings the remarkable streak of more jobs added to 60 out of the last 62 months contributing to the state’s 4.6 percent unemployment rate being at or below the national average for 107 straight months.
“Although the mining and logging industry, which is dominated by the oil and gas sector, has lost 30,300 jobs during the last 12 months, the industry has reason for optimism as Congress looks poised to lift the arcane 40-year ban on oil exports. Considering the oil and gas sector has been a bright spot in an otherwise dismal national economic recovery with Texas creating a large share of U.S. jobs since the Great Recession, lifting the ban will likely help boost job creation in Texas and nationwide.”
by KATHLEEN HARTNETT WHITE, VANCE GINN
AUSTIN – The Texas Public Policy Foundation’s (TPPF) Distinguished Senior Fellow-in-Residence and Armstrong Center for Energy & the Environment Director Kathleen Hartnett White and Center for Fiscal Policy Economist Dr. Vance Ginn issued the following statements on the agreement announced this morning to end the 40-year ban on oil exports:
“Ending the outdated ban on exporting domestic crude oil would provide a substantial stimulus to our sluggish economy and could help stabilize the now shaky geopolitical order,” said the Honorable Kathleen Hartnett White, distinguished senior fellow-in-residence and director of the Armstrong Center for Energy & the Environment at TPPF. “In only the last few years, the shale revolution has made the United States the world’s largest energy producer. Allowing our burgeoning supplies of crude oil and natural gas to enter the world markets would change the global energy landscape. “
“We applaud the action taken by Congress to end the antiquated ban on oil exports,” said Dr. Vance Ginn, economist at the Center for Fiscal Policy at the Texas Public Policy Foundation. “Limiting the global oil supply by prohibiting sale of domestically produced oil has distorted global oil prices for far too long. However, it is preferable that all energy sources be allowed to compete on a level playing field without government support of production tax credits and the like so that Texans and all Americans can benefit from greater prosperity.”
Recent TPPF commentary on this issue ran in The Hill, Real Clear Policy, and the McAllen Monitor.
The Honorable Kathleen Hartnett White is a Distinguished Senior Fellow-in-Residence and the Director for the Armstrong Center for Energy & the Environment. She is also former Chairman for the Texas Commission on Environmental Quality (2001-2007).
Dr. Vance Ginn is an economist in the Center for Fiscal Policy at the Texas Public Policy Foundation.
The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin, Texas.
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.
Vance Ginn, Ph.D.