The Texas Lesson on Business Taxes August 17, 2011 State’s Margin Tax Confusing, Unfair, and Underperforming Washington, DC, August 17, 2011–Texas’ state business tax, enacted in 2006, has proven to be a failed experiment desperately needing reform, according to a new report by the Tax Foundation. The Lone Star State’s so-called “margin” tax, which has become notorious for its complexity, has aroused controversy both for placing dramatically different burdens on businesses in different sectors and failing even at providing the projected amount of revenue for the state treasury. The Texas margin tax replaced the state’s corporate income tax, with the goal of broadening the base of businesses subject to it. Arguments that the tax created an unacceptable burden on small and unprofitable businesses, however, led to significant exemptions which undermined its ostensible goal. In 2009 alone, an additional 100 proposals to modify the tax made their way through the Texas state legislature. “Far from solving the problems of the previous corporate franchise tax, the margin tax seems to have only aggravated them.” said Tax Foundation Vice President of Legal & State Projects Joseph Henchman. There have even been disagreements as to what the terms of law themselves mean. One of the three options for calculating a company’s liability under the margin tax is based on “total revenue minus cost of goods sold.” The state’s definition of “costs of goods sold,” however, differs significantly from that in federal law, creating widespread confusion as to what deductions are and are not allowed. “Of course, there’s more to Texas’s tax system than just the margin tax.” said Henchman. “The state imposes no individual income tax, with Texans paying just 7.9 percent of their income in state and local taxes, ranking them 45th highest nationally. Their tax structure is also the 13th most business-friendly in the country, according to the most recent State Business Tax Climate Index. That said, there’s always room for improvement.” With the Texas margin tax collecting far less in revenue than expected, causing significant confusion and compliance costs, resulting in significant litigation, and facing calls for substantial overhaul and even repeal, it should not be used as a model tax reform for any other state. Tax Foundation Fiscal Fact No. 279, “Texas Margin Tax Experiment Failing Due to Collection Shortfalls, Perceived Unfairness for Taxing Unprofitable and Small Businesses, and Confusing Rules” by Joseph Henchman, is available online. The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or email@example.com.