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Texas Continues Nationwide Trend Away from Gross Receipts Taxes

2 min readBy: Scott Drenkard

Lawmakers in Texas have voted a bill along to Governor Rick Perry that starts to make limitations to the state’s problematic Margin 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. . HB 500 makes permanent the $1 million exemption level on the tax, and decreases the rate from the current 1 percent to 0.95 percent. Both reforms help to curb some of the destructive nature of the tax, which is based on gross receipts.

This change comes in the wake of the repeal and replacement of the Michigan Business Tax (another gross-receipts tax) last year with a flat 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. , a move which improved the state’s score in the corporate component of our State Business Tax Climate Index from 49th to 7th. Virginia gubernatorial candidates this year are recommending cutting or eliminating that state’s Business Professional Occupational License (BPOL) tax.

Texas’ Margin Tax took full effect in 2008, and has been highly unpopular in the business community since then. We have previously chronicled the problems with calculating the cryptic tax here, and we’ve written extensively on the economic problems of gross receipts taxes. The biggest problem with gross receipts taxes (though there are many) is that they are like a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. that is levied at every point along the production chain, meaning that industries with long supply chains get disproportionately burdened by them. This creates a host of distortions in the economy, and is a serious transparency issue, as the true tax burden is baked into the price of products as they move through the production structure.

I hope other states are watching this move. Texas has a very competitive tax code and good environment for business, and other states seem to notice this. But sometimes politicians suggest mimicking the state’s Margin Tax, which is a highly destructive part of an otherwise good code. This move by Perry demonstrates what those of us in the tax world already know—the Margin Tax experiment is failing.

More on Texas.

Follow Scott Drenkard on Twitter @ScottDrenkard.