In 2006, Texas fundamentally changed how it taxed businesses in the state. It replaced its long-standing franchise tax on businesses chartered in the state with a new tax on businesses’ margins. The new tax promised to bring in $5.9 billion annually. However, since collections began, the combined total has only amounted to $3.5 billion over a three-year period.
Obviously, during the upcoming legislative session, lawmakers must look to either reform the statute or repeal it entirely. Since it is difficult to determine who ultimately pays the burden of business taxes – what economists call “tax incidence” – direct taxation on business is fundamentally problematic. In many instances, the assessments’ impact comes in the form of lower employee wages and fewer benefits.
Additionally, the margins tax consumes a larger share of commercial profits than the older franchise tax due to its complexity. Small businesses, in particular, cannot sustain the high cost of compliance the law requires.
Eliminating the deductions and loopholes in the system will create simplicity, equity and thus broaden the base. In turn, the broader base will allow for a reduction in rates to achieve the same revenue. This is the approach we advocate in a new Heartland Institute policy paper.
Of course, these options are not viable unless the Legislature is willing to exercise restraint and hold the line on spending. Lawmakers must live within their means just as households all across the state are required to tighten their belt in these economic times.
On the bright side, Texas continues to dominate the top labor markets in the United States. According to the U.S. Bureau of Labor Statistics, four out of the top five cities that have regained all of the jobs lost during the recent recession are in the Lone Star state.