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Governor Perry’s Texas Marketing Faces Problems on the Margin

2 min readBy: Lyman Stone

After raising the ire of California’s Governor Jerry Brown in California for his comments about the state’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and regulatory environment, Texas Governor Rick Perry’s next stop is New York. While there, he’ll continue to market Texas as an ideal destination for businesses seeking to escape high-tax and strict regulatory environments. Specifically, he will speak to gun manufacturers hit by new gun control regulations.

The Lone Star State’s appeal for companies is obvious. The lack of a personal or corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , in addition to a generally friendly regulatory environment, combine to create the ninth friendliest business tax climate in the U.S., according to our 2013 State Business Tax Climate Index. New York, meanwhile, has the seventh highest top individual income tax rate and a relatively high corporate tax rate (ringing in at 7.1 percent). It’s the worst-ranked state on our Index.

This fact has not been lost on New Yorkers, as Governor Cuomo has proposed creating “Tax-Free NY” areas for startups in select industries, a distortive practice we recently criticized. Although it will lower the tax liability for certain firms, it is poor tax policy. What it does do, however, is acknowledge that taxes matter to business.

The Texas tax code has problems of its own—namely, their pesky Margin Tax. It is excessively complex and non-neutral, and creates major compliance burdens on the firms that pay it. The tax combines the worst elements of different types of taxes, and has an idiosyncratic terminology as well as numerous exclusions, all of which have led to taxpayer confusion, lower-than-expected revenue, and major compliance costs. Recently, Governor Perry proposed that the margin tax be reformed—an idea we’ve discussed several times before (see here and here). Subsequently, the margin tax has been lowered, which is a good start. If Governor Perry wants to brand Texas as competitive and as a powerhouse business location, the Texas tax environment gives him a strong position from which to speak. The recent reform of the margin tax helps his argument, but full repeal would remove one of the state’s major stumbling blocks.

More on Texas here.

UPDATE: An earlier version of this post failed to note that Texas has already passed a reduction and partial reform of the margin tax. It has now been corrected.