By Kolten Morris and Vance Ginn, Ph.D.

There is a lively discussion going on at the Texas Capitol over how best to provide meaningful, lasting tax relief to Texans statewide. If proposed tax cuts pass both houses, this could be the largest tax relief in the state’s history.

With spending above population growth and inflation since 2004 and plenty of funds available this session, the best opportunity to improve the well-being of Texans is to repeal the onerous business franchise tax, otherwise known as the margin tax, according to the Foundation’s research.

There is little dispute the margin tax has been a failure. It’s a poor and inefficient mechanism for generating state revenues, and the costly, complex nature of the tax makes it highly unpopular.

Complying with the margin tax can be very expensive because of several variables.

Though there is currently a $1 million revenue exemption for small businesses, many firms near that level, or any arbitrary floor, incur additional record-keeping expenses in case they happen to exceed that threshold. After making that determination, firms decide whether their gross revenue minus cost of goods sold, compensation, or 30 percent of gross revenue provides them with the lowest tax liability. With different rules for calculating cost of goods sold for the state and federal government and other nuances, firms must keep multiple reports just to see if they owe taxes. Finally, the firm’s type of business dictates which of two rates are paid.

It’s obvious that compliance cost can get out of hand in a hurry.

Overall, this tax defies common sense and is a huge burden. Keep in mind that businesses don’t pay taxes; individuals do in the form of higher prices, reduced wages, and fewer jobs.

Our extensive research on this topic and supporting research find that an immediate repeal of the margin tax would provide the greatest economic benefit for all Texans. Table 1 presents the findings of eliminating the margin tax during different periods by the Foundation, Beacon Hill Institute, and Merrifield and DeAngelis.

Table 1: Three Dynamic Models Show Substantial Income Gains and Job Creation After Eliminating Texas’ Margin Tax

Clearly, there is robust evidence that Texans from all walks of life would benefit from margin tax repeal. The Foundation’s look at the economic effects considers the loss of private sector activity from the almost $5 billion collected annually by the margin tax and its associated high compliance costs. Together, ending these economic distortions will free more resources to grow businesses and hire workers.

Texans should no longer have to endure the burden of the margin tax. Lawmakers should provide meaningful, lasting tax relief while unleashing an even larger wave of economic growth by funding essential government services within population growth and inflation, then use all available funds to buy down and eliminate the margin tax.