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New Foundation paper dispels myths about Texas margin tax

AUSTIN – The Texas Public Policy Foundation released a new report today that debunks several popular misconceptions about the margin tax, Texas’ primary business tax. The report, “The Margin Tax Debunked,” is available for download on the Foundation’s website, www.TexasPolicy.com.

“As we inch closer to the next legislative session, the calls to ‘fix’ the margin tax are sure to grow louder by those who want to increase state spending,” said The Honorable Talmadge Heflin, Director of the Foundation’s Center for Fiscal Policy and former chairman of the Texas House Committee on Appropriations. “But this ‘solution’ would only aggravate the real danger to Texas’ fiscal state – increased spending. Before lawmakers decide to go down that road, it is important that they are aware of all the facts.”

The margin tax – a cross between a gross receipts tax and a corporate income tax – was created in 2006 as a replacement for the state’s corporate franchise tax. On Monday, the Texas Supreme Court ruled that the tax did not violate the Texas Constitution’s ban on a personal income tax. The Texas House Committee on Ways & Means was recently assigned the task to “evaluate the franchise (margins) tax and determine whether the tax structure should continue to exist in its current form or in a revised form, or whether the existing tax structure should be repealed and replaced with a different business tax.”

The report takes on three common myths regarding the margin tax:

• The margin tax’s revenue shortfalls have crippled the state’s revenue system and created a “structural deficit.” The margin tax raised $500 million less than projected in fiscal years 2010 and 2011, a tiny portion of the $10 billion to $15 billion budget shortfall the Texas Legislature faced this year and a mere 1.4 percent of estimated total tax collections during the 2010-2011 biennium.

• The state’s margin tax needs to be “fixed” to increase state revenue. Between fiscal years 1990 and 2010, state revenue increased by 270.3 percent. This far outstrips most of Texas’ major economic indicators – notably state personal income (223.5 percent), per capita personal income (118.5 percent), consumer price index (66.8 percent), and population growth (48 percent).

• The margin tax was intended to completely absorb the cost of statewide property tax relief. While it’s true that part of the cost of statewide property tax relief is paid for via revenue from the new margin tax, it was never intended to pay for the entirety of that tax relief. Instead, it was intended to make sizeable contributions to the tax relief effort, along with revenue from other sources such as increases in the cigarette and tobacco taxes and the application of the state sales-and-use tax to motor vehicles.

Talmadge Heflin is director of the Center for Fiscal Policy at the Texas Public Policy Foundation. Heflin served 11 terms in the Texas House and chaired the Appropriations Committee in 2003, leading the Legislature's successful efforts to close a $10 billion budget deficit without a tax increase.

The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin.

Primary website: www.TexasPolicy.com Facebook page: www.Facebook.com/TexasPublicPolicyFoundation Twitter feed: www.Twitter.com/TPPF

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