There is no doubt that higher state taxes burden choices made by individuals regarding how they spend their hard-earned dollars and by firms with respect to how they invest their profits. The American Legislative Exchange Council (ALEC) released a report entitled the “2013 State Tax Cut Roundup” noting that 18 state legislatures took pro-growth steps by substantially cutting taxes during their respective 2013 legislative sessions. As noted in the report, most states cut their income tax rate and the least cuts were made to state sales tax rates.
Texas made progress by making changes to its franchise tax, also known as the margin tax. This tax applies to the taxable margin of most businesses at either a 0.5% rate for wholesalers and retailers or 1% rate for all others.
ALEC notes in their report the following:
This legislative session, the Lone Star State further solidified its reputation as an excellent state in which to do business. A measure reforming the economically damaging Texas margins tax was approved. Governor Perry had asked the legislature to tackle the issue and the result was a tax cut of more than $1 billion to Texas businesses. The measure included adding a $1 million deduction for Texas businesses and lowered the rates on all businesses, regardless of size.
This reform, paired with the fact that Texas does not levy a personal income tax, signifies a re-dedication to the pro-growth tax and fiscal policies that have made Texas the economic powerhouse that it is today.
The margin tax is an inefficient form of taxation that presents both a financial and compliance burden on small businesses and the Texas economy. Although ALEC ranks Texas as having the 12th best economic outlook after reforming the margin tax—which is great, there is much more the state legislature should do to unshackle productive firms’ resources, particularly eliminating the margin tax.
