This commentary originally appeared in the McAllen Monitor on March 4, 2015. 

Too many small business owners in McAllen stress enough trying to keep afloat without needing to worry about the costs associated with the state’s business margin tax.

With this being the Senate Finance Committee’s “Tax Week,” lawmakers should consider the Texas Public Policy Foundation’s (TPPF) study showing the costs far outweigh the benefits of the margin tax.

To reduce the stress on business owners and boost the Texas economy, the Texas Legislature should use all available tax revenue to end this cumbersome tax.

Technically named the franchise tax, it was coined the “margin tax” after the Legislature reformed the franchise tax in 2006 to fund lower local property taxes after the Texas Supreme Court ruled the public school financing system unconstitutional.

The reformed tax that went into effect in 2008 includes more businesses, two tax rates and multiple taxable margins — hence the name “margin tax.” It accounts for about 10 percent of annual state revenues at $4.8 billion.

It’s similar to a gross receipts tax, whereby the tax liability derives from revenues not profits. It includes a $1 million revenue exemption to attempt to exclude ultra-small businesses; however, the tax hits many that quickly surpass $1 million in revenue.

To comply with this complex tax, businesses must spend an exorbitant amount of resources paying tax accountants to determine whether they owe taxes or their lowest tax liability. Often the cost of complying with the tax code is as much, or greater, than the tax liability itself.

These costs, along with the general disincentive to invest from the margin tax, slow business activity and thus reduce an owner’s ability to raise wages, hire more workers and keep prices low. In other words: Businesses pay the margin tax but consumers feel a large part of the tax burden.

Despite this stifling tax, more businesses move to Texas than most states. Texas had a record 457,900 net non-farm jobs created last year — that’s more than the next two largest states of California and New York combined. Much of this has to do with the Texas model of no personal income tax, less regulation and sensible lawsuit climate. But the margin tax keeps Texas from reaching her full potential.

The Tax Foundation publishes the state business tax climate index that measures the competitiveness among states based on their relative tax burden. The 2015 index ranks Texas 10th highest nationwide. However, Texas’ corporate income tax ranking fell from 17th in 2007 to 42nd in 2008 — the year the margin tax began. In 2015, this ranking remains at a low 39th place primarily because of the margin tax.

Recently, the Tax Foundation released a study showing that if the margin tax was repealed that the corporate income tax ranking likely would increase to third and the state’s overall index would rank first.

Considering these benefits and because the margin tax has failed to keep property taxes low, collect projected revenue and keep the state out of court over funding public schools, it’s time for the 84th Texas Legislature to repeal it.

Using a dynamic model to examine the economic effects of eliminating the margin tax, TPPF finds this could contribute to cumulative increases in inflation-adjusted personal income of $16 billion and about 130,000 new net nonfarm private sector jobs five years after repeal compared with the status quo. Collectively, these gains over time will generate more tax revenue that could replace most, if not all, of the loss in margin tax revenue making there no need to create a new costly tax.

With Gov. Greg Abbott stating he will not sign a budget that doesn’t include business tax relief and both chambers of the Legislature filing several bills to eliminate it entirely, there is reason to believe that business owners in McAllen and statewide will soon be able to breathe easier creating more opportunities for Texans from all walks of life to prosper.

Dr. Vance Ginn is an economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a nonprofit research institute in Austin. He may be reached at [email protected].