Margin Tax Results Mixed in Meeting Policy Goals

The Texas Taxpayers and Research Association (TTARA) has issued a new analysis of the Texas margin tax: Understanding the Texas Franchise – or “Margin” – Tax.  The analysis reviews the results of the margin tax against the original policy goals for the tax. The results are mixed. The scorecard:

  • Align the tax with a modern economy: Somewhat successful, especially in raising tax revenue from the service sector that is more in line with that sector’s share of the economy.
  • Create a simpler business tax: The tax is more complicated than anticipated and more complicated than the former franchise tax.
  • Eliminate tax planning opportunities: The tax did eliminate the massive tax avoidance schemes successful under the former franchise tax.
  • Raise roughly $3 billion in new state revenue annually: The tax has collected between $1.4 billion and $2.5 billion less revenue per year than projected.

Even though the tax only met two out of four goals, TTARA says not meeting the revenue goal is a good thing because it keeps the primary Texas business tax more in line with other states. If the original revenue goals had been met Texas would have one of the higher state business tax.

TTARA also points out that while the tax does match the economy closer than the previous tax, the overall tax burden is still heavier on manufacturing and production companies than other sectors. The analysis also shows that this closer matching of the economy resulted in huge tax increases for some sectors. The tax liability on the information technology sector increased 162%, transportation sector 101% and for professional services, including CPAs, the increase was 88%. The result is likely a combination of making unincorporated entities subject to the tax plus more limited deductions for the service sector businesses. In terms of size, very small businesses saw their tax burden drop 46% while the next size category, businesses with revenues of $1 to $10 million, saw the largest percentage increase at 72% as compared to the average overall increase of 46%.

The analysis ends with speculation about reforming the franchise tax – again. Two possibilities are mentioned:

  1. Simplify the tax by reducing deductions and making it more like a gross receipts tax, or
  2. Shifting the tax base to net income.

Both concepts have pros and cons. Going to gross receipts trades off simplicity for potentially making the tax less reflective of the economy. Going the income tax way likely requires a higher tax rate than palatable to business entities.

For a short review of the analysis you can read Kate Alexander’s article in the Austin American-Statesman, but for a full understanding read the entire report, which is only six pages.

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