Texas Margin Tax Repeal Would Improve Lone Star Business Tax Climate

November 12, 2012

Today, Senator Craig Estes introduced a bill in the Texas legislature to abolish the Texas margin tax, a complicated and cumbersome tax on businesses that we have been critical of since its enactment in 2008.

Texas is a low tax state with a good tax system. We rank them 9th in the country on our State Business Tax Climate Index. For the most part, they count on the right types of taxes to raise revenue. They do not have a personal income tax, and lean instead on sales and property taxes to fund 73 percent of their government services.

However, the margin tax is major impediment to growth in a state that is otherwise poised to make major strides in the next decade. Leading tax economist John Mikesell describes the tax as "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."

For all these reasons, the Texas margin tax scores very poorly in our State Business Tax Climate Index. If the tax were repealed as of the snapshot date of our latest Index edition, the state’s score would improve both in the corporate tax component of the Index and in the overall score. Check out the numbers:

Figure 1: Texas State Business Tax Climate Index With Margin Tax Repeal
  Current Rank With TMT Repeal
Overall 9 5
Corporate 38 1
Individual 7 7
Sales 36 36
Unemployment Insurance 14 14
Property 32 32

Bear in mind that these ranks assume that the margin tax is not replaced with any other corporate levy, which is the way the bill is currently written. This may be difficult, as the TMT brings in about 10 percent of the state’s revenue. Regardless, we’ll be following this one closely. The margin tax is a poor part of an otherwise very attractive tax system.

More on the Texas margin tax here.

Follow Scott Drenkard on Twitter @ScottDrenkard.

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