Despite being more progressive from a tax policy standpoint than most states, Texas still has a major flaw in its tax code: 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. The good news is lawmakers are working to fix this problem during the 2015 legislative session. Two bills that would reduce the margin tax’s burden on Texas employers, Senate Bill 7 & Senate Bill 8, were approved by the Texas Senate Finance Committee this week.
SB 7 would, if signed into law, reduce the margin tax by 15 percent. SB8 would raise the exemption from $1 million to $4 million and exempt businesses that owe less than $1,000. While either of these bills would be better than passing nothing, cutting the tax rate is better approach than raising the exemption. The best outcome would be to put the margin tax on a path to elimination. There are six bills pending in the Texas Senate that would ultimately do away with the margin tax.
Texas is currently ranked as the 10th best business tax climate on the non-partisan Tax Foundation’s annual index. By getting rid of the margin tax, Texas would improve to the 3rd best business tax climate 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.
It’s wise for Texas legislators to use the 2015 legislative session to improve their tax code as much as possible. Other states are working to cut taxes this session, even states with relatively competitive tax codes. One example is Tennessee. Like Texas, Tennessee does not tax worker paychecks. However, Tennessee does tax dividend income. Even though Tennessee has a lower state and local tax burden than Texas and all but three other states Tennessee lawmakers are planning to approve legislation this year to phase out their tax on investment income. With other states working hard to make themselves as attractive as possible to investment and job creation, Texas lawmakers cannot rest on their laurels.
Fortunately it looks like some form of margin tax relief will be approved this year. Texas Gov. Greg Abbott (R) recently declared 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 or at least significantly cut the margin tax.