Yesterday Texas joined a growing list of states with gross receipt style taxes when Governor Perry signed into law a new franchise 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. to comply with a court mandate to improve education funding. The updated franchise tax levies a 1 percent tax on the gross receipts of businesses in Texas (retailers pay a .5 percent rate), but exempts sole proprietorships and general partnerships. Businesses can elect to deduct either the cost of goods sold or employment costs. See story here.
Texas joins the group of states with similar style taxes that includes Michigan’s Single Business Tax (SBT), Washington’s Business and Occupations Tax (B&O) and the newly enacted Ohio Corporate Activity Tax (CAT).
Lawmakers like gross receipts type taxes because they raise large amounts of money while often being hidden from individual taxpayers, and they are a more stable source of revenue than traditional corporate income taxes. While they might be a stable and ample source of revenue, gross receipts taxes can be economically crippling- just ask Michgan. See our Michigan Index Analysis.
Gross receipts taxes work best when they are a value added (VAT) style tax that allows for the full deduction of the entire cost of production. None of the states listed above, including Texas, levies a true VAT. Texas lawmakers might have solved the immediate problem of funding education in the state, but might have inadvertently created a tax that will harm Texas’ stellar business tax climate.
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