Copying the Texas Margin Tax is a Bad Idea
October 31, 2014
Next week, Nevada voters will cast their ballots and decide whether or not Nevada will institute a margin tax. The tax is a modified gross receipts tax (a type of tax only five other states have) and is modeled after the Texas margin tax. Last March, I explained two big reasons why the Texas margin tax is the poster child for poor tax policy: it’s overly complicated and it’s not neutral.
Both explanations are worth repeating here:
Overly complicated tax calculations create compliance and administrative costs that are a loss to society. The calculation of a business’s margin tax liability is far from simple. Businesses subject to the tax must choose one of three bases. The definitions used in determining these tax bases are statutorily defined and different from definitions set by the federal government. Since calculations are so complicated, compliance and administrative costs are high. In a 2010 interim report of the House Committee on Ways and Means, one taxpayer…reported an increase from $400 to $2,500 in compliance costs after the margin tax was implemented. Economic resources wasted on complying with a complicated tax could be utilized more efficiently elsewhere in the economy.
Taxes should be neutral, and the margin tax favors certain industries, practices, and business types by design. [The tax]…isn’t horizontally equitable, meaning that businesses that are similarly situated don’t face the same liability. For example, as described by the Texas Taxpayers and Research Association (TTARA):… ‘A company that hires its own employees may deduct salaries as compensation; however, a company engaged in the same line of business that chooses to use independent contractors to conduct its operations may not. Companies in the business of renting equipment may not deduct the cost of their equipment as cost of goods sold, while companies that sell that same equipment may.’…The tax treats businesses differently based on the industry in which they operate, how they are organized, and on minute operating and organizational details. Again, this implicitly favors certain activities over others—something the tax code shouldn’t do.