R Street welcomes bill repealing Texas’ margins tax
Created during a 2006 special legislative session, the tax imposes a 1 percent levy on “taxable margins” for most businesses, or 0.5 percent for wholesalers and retailers . In practice, it operates much like an income tax, asking that companies pay the least of “total revenue minus cost of goods sold; total revenue minus compensation; or total revenue times 70 percent” for the right to continue to operate a business in the state.
“The margins tax has not worked as advertised and has failed to achieve any of the goals its creators set for it,” said R Street Institute Texas Director Julie Drenner. “It is needlessly complicated, riddled with exemptions, hurts Texas’ competitiveness by double-taxing domestic companies and has failed to produce promised revenues for the state.”
While not technically recognized as a corporate income tax, Texas receives slightly more than 4 percent of its revenues from the margins tax, a little less than half of the 8.7 percent Florida receives from its corporate income tax, but nearly double the 2.1 percent New York receives from its own franchise tax.
Nonetheless, the tax has consistently fallen far short, by between $500 million and $1.6 billion a year, of projections that it would raise at least $5.9 billion annually. Part of this is due to the needless complexity of the tax, including a schedule of five available discounts and more than 15 specific “exclusions from revenue” listed by the state comptroller’s office.
A November 2011 poll by the National Federal of Independent Business found more than 80 percent of the NFIB’s members preferred returning to the simpler, but higher-rate, 4.5 percent franchise tax that preceded the margins tax.