Earlier today, the Tax Foundation released its 2014 State Business Tax Climate Index, which helps policymakers and the public gauge the competitiveness of their respective state tax systems. The latest rankings show a slight decline in Texas’ tax competitiveness.                        

Texas’ tax ranking among the states worsened slightly this year, falling out of the top ten to settle in the 11th spot in this year’s index. One of the big reasons cited for the state’s decline was the margin tax.

From the report:

“Texas has been a top ten state in the Index for several years, but this year was ousted by Indiana, which has made steady strides to improve its code in recent years. Indiana has been in the process of phasing down its corporate income tax rate from a rate of 8.5 percent in FY 2012 to an eventual 6.5 percent in FY 2016. By 2017, the individual income tax rate will fall from its current 3.4 percent rate to 3.23 percent. This year, the state also eliminated its inheritance tax.

By contrast, Texas’s code has remained mostly constant, and its problematic Margin Tax (a modified gross receipts tax) hurts both its corporate component score and individual component score, because both C-corporations and pass-through businesses that usually file in the individual code have to comply with the tax. While economically successful, in part due to having no state income tax, Texas will need to address the Margin Tax to regain a top ten ranking.”

Interestingly, the Tax Foundation’s criticism of the margin tax comes in spite of the tax reforms enacted during the last legislative session which were designed to make it more palatable.

Another reason for the state’s decline was its property tax system which continues to punish jobs and investment. Escalating local property tax levies and collections meant that Texas’ sub-ranking in the property tax index slipped 3 positions compared to last year.

Other states to rank highly in this year’s index include: Wyoming (#1); South Dakota (#2); and Nevada (#3). States ranking poorly include: California (#48); New Jersey (#49); and New York (#50).

 

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