At the beginning of the month, we reported on the tax reduction plan passed by the Texas Senate that focuses on reducing the 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. and property taxes. Today, the House passed a slightly larger tax cut overall; the difference is that it has a bigger reduction in the margin tax and cuts the 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. rate instead of the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. .
Here’s a rundown of the main points of each package:
|
House Plan |
Senate Plan |
|
|---|---|---|
|
Margin Tax Rate |
Reduces rates by 25 percent: from 1 percent to 0.75 percent for most businesses and from 0.5 percent to 0.375 percent on wholesalers and retailers. |
Reduces rates by 15 percent: from 1 percent to 0.85 percent for most businesses and from 0.5 percent to 0.425 percent on wholesalers and retailers. |
|
Margin Tax Exemption |
No change |
Increases from $1 million to $4 million in gross receipts |
|
Cut in Margin Tax |
||
|
Sales Tax |
Reduces rate from 6.25 percent 5.95 percent. |
No change |
|
Property Tax |
No change |
Asks voters to approve constitutional amendment to increase homestead exemption from $15,000 to floating 25 percent of median home price (estimated to be $33,625 in 2016). |
|
Total Tax Cut |
$4.9 billion |
$4.6 billion |
The biggest take away is that House plan represents a deeper rate cut to the margin tax, and it does so in an across-the-board manner, which is good practice. I wrote earlier this month that the Senate’s generous exemption “might have the unintended consequence of dampening the support for future reform, as there will be fewer interested parties.”
Other beneficial inclusions in the House plan are a study on eliminating the margin tax and a provision that additional revenues in the future be put toward reductions in the margin tax rate.
It looks like the House and Senate will have to iron this out in some sort of compromise. The Texas Public Policy Foundation notes in a recent commentary that if the legislature were to stay focused on just the margin tax, it could eliminate the tax entirely with $4.7 billion, which is conveniently right in between the Senate and House proposals. That’s where the real growth is.
Check out our comprehensive review of the margin tax here.