Death by a Thousand Cuts – Cutting the Texas Margin Tax

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Texas is a typical, liberal tax and spend state, said no one ever.  But listening to rhetoric flowing from one side of Governor Rick Perry's mouth last Monday – Tax Day – you might think that was the case.  

Last Monday, the Austin American-Statesman reported that Rick Perry called for changes to the margin tax.  Perry's proposal called for the following tax reductions:

o   $1.6 billion in tax relief for 109,000 Texas businesses;

o   85,000 small- and medium-sized businesses could deduct the first $1 million in gross receipts from their franchise tax bills;

o   Relief would be limited to companies with under $20 million in gross receipts.

More tax relief?  But wait – I thought Texas already was a low-tax, business friendly state.  Is it?

To find out, read below the jump.  Currently, the margin tax supplies Texas with approximately $4.6 billion per year, or a mere 5% of its annual revenue, according to figures from the state comptroller's Annual Cash Report for Fiscal Year 2012 and a piece by Texas Forward .

The state comptroller's March 2013 report Tax Exemptions & Tax Incidence: A Report to the Governor and the 83rd Texas Legislature is similarly illuminating, seeming to indicate that many businesses, either through fortuity, or astute planning, do manage to take advantage of the thresholds and exceptions and avoid liability under the current margin tax scheme.

What is the Margin Tax?

The margin tax is a state income tax for businesses.  Texans don't pay a state income tax personally, but businesses, if they qualify, are liable to pay an income tax.  Long called the franchise tax, it is now known as the margin tax because of the method of calculating the tax.   The rate of the margin tax is one percent. Yep. One percent.

How many businesses have to pay the margin tax?  Generally speaking, all businesses are subject to the margin tax, except for sole proprietorships, general partnerships that are owned by people (i.e.: not other business entities), and other passive entities.  However, under current law, taxable entities that have total revenue of $1 million or less are not required to pay margin tax, under the small business exemption.  The legislative changes in 2007 actually reduced the number of businesses owing tax by one-third – from 167,000 in 2007 to 109,000 in 2012, according to the Comptroller's report .  And now Perry seeks to extend relief to businesses with under $20 million in gross receipts.  

Governors Call Perry's Bluff

Low taxes and tax cuts are Governor Perry's calling card.  He has long preached the economic healing power of low taxes in Texas, and he took his anti-tax revival roadshow to California in February and just this month to Illinois. The governors of those respective states weren't having any of it.    

As the Texas Tribune's Ross Ramsey reported in February, Perry went to California on a four-day business recruitment trip in February touting the low taxes and light regulatory touch of the Lone Star State. In a statement, California's governor, Jerry Brown, dismissed Perry's overtures :

“No state has ever poached their way to long-term prosperity.”

Governor Pat Quinn of Illinois was less diplomatic than his Californian counterpart, giving Perry some of the Chicago treatment as he similarly rebuffed Perry's tired sales pitch in Illinois:

“He's a big talker – I think people saw that in the presidential campaign,” Quinn said Wednesday morning in response to a question at a press briefing.  “Companies are coming to Illinois because of … our highly skilled, educated workforce, because of our excellent transportation and because of a government that works with companies.

“We know how to do it in Illinois – we don't need advice from Gov. Perry,” he said. “His state, frankly, is water-challenged, and any company thinking of going to Texas better check on their water.”

It's the Fundamentals, Stupid

Brown and Quinn (but especially the blunt-spoken Quinn) hit on something crucial.  As the Texas governor tries to sell a bill of goods to Illinois and California out of one side of his mouth (see, e.g.: low taxes perfect for business growth) and cravenly appeal to constituents out of the other side (see, e.g.: appeal to further lower taxes), Texas is being cut to the bone.  

Any attempt to poach businesses from California, Illinois, or other like states has to highlight the lack of a state-level personal income tax.  Those businesses have to bring their own workers as Texas is simply incapable of supplying them.  Years of budget cuts in the name of growth driven by low taxes has starved Texas of essential infrastructure and services and destroyed what was once one of the proudest public education systems in the country.  

The Texas tax burden is already shockingly low.  Further, the margin tax, this allegedly oppressive tax, accounts for only 5% of Texas revenue (it's federal government expenditures, in fact, that account for a whopping 35% of Texas revenue).  

Ben Sherman last week pointed out several structural problems with Texas, as did Texas on the Brink by the Texas Legislative Study Group.  

If the already low taxes that no one has to pay anyway aren't drawing enough new businesses or jobs to Texas, then maybe high taxes aren't the problem.  Maybe it's the lack of everything that Illinois' governor pointed out – the things for which we want business growth in the first place – and a failure to make choices that are actually and not rhetorically hard, here and now for a solid investment in Texas' future.  

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