AUSTIN – The best solution for the problems associated with Texas’ margin tax is to phase out the tax over the next five years, according to a paper released today by the Texas Public Policy Foundation.

“A lack of revenue is not the problem with the margin tax,” said Talmadge Heflin, director of the Center for Fiscal Policy. “Instead, its problem is that it is a highly com­plex tax with high administrative costs that contributes to the high tax burden on Texas businesses.”

In 2006, as part of an effort to reduce Tex­as’ high property tax burden, the business franchise tax was substantially revised to apply to the taxable margin of most busi­nesses, including unincorporated business­es with liability protection. Many small businesses have seen exponential increases in their tax burden, while overall the tax has brought in less revenue than had been initially projected.

“The margin tax accounts for only 6.4 percent of the state’s revenue from taxes, fees and lottery sales,” said Chuck DeVore, senior fellow in the Center for Fiscal Policy. “Phasing out the margin tax would provide the state the opportunity to adjust to the change in revenue. Plus, it is high­ly likely that any revenue shortfalls would be short lived with the increased economic growth from Texas being the only major state without income or business taxes.”

“State revenues have grown much faster than the economy as a whole during the last two years,” said James Quintero, policy analyst in the Foundation’s Center for Fiscal Policy. “The largest component of state revenue, the sales tax, increased by more than 12 percent during the 2012 fiscal year. Now is the time to eliminate the margin tax, which would vastly improve Texas’ business climate and accelerate Texas’ economic growth.”

The paper, “Fixing” the Texas Margin Tax, is available on the Foundation’s website,

Talmadge Heflin is the Director of the Texas Public Policy Foundation’s Center for Fiscal Policy.

Chuck DeVore is Vice President of Communications and Senior Fellow for Fiscal Policy at the Texas Public Policy Foundation.

James Quintero is a fiscal policy analyst at the Texas Public Policy Foundation.

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

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