Texas’ new Margins 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. —passed under pressure from a state court that wanted more money spent on schools—grabs one percent of every dollar a Texas company brings in, whether the company is profitable or not. It kicked in January 1 and is starting to show up in prices.
One company has even dared to list it as a separate line item on bills so that its customers know exactly why the price has risen. Sprint Nextel now adds this text each month next to a 1% add-on: “Texas margin fee reimbursement.” Good for them—a little honesty in taxation.
Honesty in taxation? The Texas Comptroller’s office won’t stand for that!
New comptroller Susan Combs is having a conniption over the new phone bill line item, and her threatening letter to Sprint Nextel declares, “No such reimbursement for franchise tax has ever been approved by the comptroller’s office” and “could result in both auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. and collection action by this office.” In other words, she considers herself to be the decider for the wording of phone bills, and she wants companies to bury the tax in their own charges.
Her letter demands the new charge be removed from all statements “until the Legislature has an opportunity to address the issue.” In other words, she thinks the state legislature is supposed to bless the wording of phone bills.
Having invoked the power of the executive branch and the legislative branch over an honestly worded phone bill, Comptroller Combs doesn’t stop there. Let’s get the courts in the act, she demands, threatening “a possible injunction by the Texas Attorney General.”
All this sound and fury aside, what is going on here is a great civics lesson: When government taxes business, everyone pays.
Combs charges Sprint Nextel with “an apparent attempt” to pass Texas’s margins tax directly through to its customers. Duh.
It is no surprise to anyone who understands business taxes that individuals pay all costs. Economists and tax policy experts preach endlessly the basic economic principle that companies don’t pay taxes — people do.
Comptroller Combs appears to have fallen into the same trap many other lawmakers have fallen into: confusing the companies legally responsible for sending tax money to the government with the people who actually bear the burden of the tax.
Companies are comprised of three stakeholder groups. The first is consumers—the people that purchase the company’s product. Second are the employees—the people that work to produce the product. Third are the shareholders—the owners whose investment makes the business possible and who are counting on dividends and capital gains to flow from a profitable firm.
Whenever a tax is imposed on the company, which is just a legal entity, the tax can only be paid by one of these stakeholder groups.
It is no surprise, then, to see Sprint Nextel passing its Texas Margins Tax liability on to its customers. The firm’s management may have concluded that it could not attract employees with lower wages or investors with lower returns on investment. That left only one stakeholder group to carry the bag—the consumers.
The comptroller needs a firmer grasp on the economics of taxation. Naturally, even if Sprint Nextel is coerced and intimidated into changing the text on its phone bills, the customers will still be paying the one-percent tax. But it will be hidden, merged into the actual charges for service, and soon people will forget about the tax component—which is exactly what the comptroller wants.
Curtis S. Dubay is an economist at the Tax Foundation and William Ahern is the Director of Communications at the Tax Foundation, a nonprofit tax research group in Washington, DC.
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