Texas has been a role model in terms of governance, tax reform and job creation, but it still has a major flaw: a gross receipts tax on employers known as the margin tax. The Texas margin tax is complex, unnecessary and keeps small and mid-size businesses from creating jobs. It even applies to companies who don’t make a profit.
Its elimination would move Texas from being currently ranked 10th at Tax Foundation’s Business Tax Climate Index to 3rd best in the nation. A Texas Public Policy Foundation Report found that, based on dynamic econometric models, repealing the margin tax would lead to the creation of 129, 200 jobs in the first five years after its elimination.
The good news is that legislation to get rid of the margin tax, Senate Bill 105, is being considered by legislators. Texas Gov. Greg Abbott stated that he “will reject any budget that does not include genuine tax relief for Texas employers and job creators.” A great way for legislators to send Gov. Abbott what he has requested is to pass legislation to end the margin tax.
Other states are working to make their tax codes more competitive by cutting rates and providing relief to individuals, families, and employers. As such, Texas lawmakers cannot rest on their laurels. Americans for Tax Reform reached out to Texas legislators today to urge them to repeal the margin tax. A copy of s letter can be found below:
March 6, 2015
Dear Members of the Texas Legislature,
On behalf of Americans for Tax Reform and our supporters across the Lone Star State, I urge you to keep taxpayers in mind as you consider the issues that will come across your desk during the 2015 legislative session. There are two main things that you can do to protect Texas taxpayers and stoke economic growth: 1) rein in the unsustainable trajectory of state spending, which can be accomplished by instituting a true and unbustable state spending cap; and 2) eliminate the state’s business tax, otherwise known as the margin tax.
As has been noted in Forbes, even relatively-well governed states like Texas face significant fiscal challenges. A Texas Public Policy Foundation report titled “The Conservative Texas Budget,” outlines a series of smart policy recommendations and reforms to rectify Texas’s overspending problem that, while not as bad as that of some states, is still a major problem. One of those proposed reforms, the institution of clear and achievable spending limits, is the best step that lawmakers could take to protect Texas taxpayers.
I also write today to urge you to use the 2015 session to rid Texas of the margin tax. As you know, legislation, Senate Bill 105, has been filed that would do just that. The Lone Star State has been a model for other states on numerous matters of governance, and for good reason, but the margin tax is the one major blight on the state’s otherwise stellar business tax climate and now is the perfect time to unlock the state’s full economic potential by repealing this misguided tax.
The margin tax reduces the job-creating capacity of Texas businesses and does so in an incredibly onerous way at that. As the Texas chapter of the National Federation of Independent Businesses put it, the margin tax is “crippling the small and mid-sized businesses” throughout the state. In addition to the harm it does to employers, economists of all political stripes agree that it is one of the worst ways to raise revenue. Professor John Mikesell, an expert in public finance at Indiana University, has described the margin tax as a “badly designed business profits tax…combin[ing] all the problems of minimum income taxation in general—excess compliance and administrative cost, penalization of the unsuccessful business, undesirable incentive impacts, doubtful equity basis—with those of taxation according to gross receipts.”
The tax is so complex – it applies variably to different industries and types of businesses – that the costs to comply with this levy for some employers are actually greater than their tax liability. One of the more egregious aspects of the margin tax is that it applies to companies without regard as to whether a profit was generated, meaning businesses that lost money can still end up having a margin tax liability.
A recent TPPF report found that, based on dynamic econometric modeling, eliminating the margin tax could result in a gain of $10.8 billion in new real personal income in the first year and a personal income boost of $16 billion in the first five years. The report also found that repealing the margin tax could generate an additional 129,200 jobs over the next five years. Texas is currently ranked as having the nation’s 10ths business tax climate the 3rd best in the country.
Other states are eager to compete with Texas for jobs. In fact, a number of states have passed tax reform in recent years that seeks to make them more competitive with Texas, and over a dozen are set to pursue such policies in 2015. It’s important for Texas lawmakers to not rest on their laurels. In order to stay ahead of states that wish to entice employers away from Texas, it would behoove legislators to repeal, or begin phasing out, the margin tax in 2015. It’s time to eliminate this unnecessary impediment to private sector growth and job creation. It’s also time to right the unsustainable trajectory of state spending, which can be accomplished with a robust spending cap, like the one proposed by TPPF.
When good ideas come out of Texas, such as smart criminal justice reform, it’s easier to take them elsewhere because other states rightfully want to emulate Texas. But that can cut both ways. For example, a Texas-style margin tax was on the Nevada ballot last year. The pro-margin tax campaign there basically had one talking point: “Texas has a margin tax, so it must be a good idea.” Fortunately Nevada voters were smart enough to reject that ballot measure. Killing the margin tax will be good for the Texas economy, but it will also make it less likely that such a damaging tax will be adopted elsewhere.
I urge you to use the 2015 session to give a boost to the Texas economy by getting rid of the margin tax. Americans for Tax Reform will continue to follow these issues closely throughout session and will be educating your constituents as to how you vote on these important matters. If you have any questions, please contact Patrick Gleason, s director of state affairs, at (202) 785-0266 or [email protected].
President, Americans for Tax Reform