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1 Joseph Henchman, Texas Margin Tax Experiment Failing due to Collection Shortfalls, Perceived Unfairness for Taxing Unprofitable and Small Businesses, and Confusing Rules 1 (2011)

handle is hein.taxfoundation/ffchjxz0001 and id is 1 raw text is: 111 ....... \%\... I@ FOUNDATION % 1%.-, .,-' .,., -' August 17, 2011 No. 279 Texas Margin Tax Experiment Failing Due to Collection Shortfalls, Perceived Unfairness for Taxing Unprofitable and Small Businesses, and Confusing Rules By Joseph Henchman Texas's tax system has many notable aspects. The state imposes no individual income tax and no corporate income tax. Texans pay just 7.9 percent of their income in state-local taxes, 45th highest nationally and below the national average of 9.78 percent.' Their tax structure is the 13th most business-friendly in the country, according to our most recent State Business Tax Climate Index. Texas's Tax Freedom Day- the day of the year when Texans have paid all their federal, state, and local taxes-came on April 7, five days before the national Tax Freedom Day. Between 2000 and 2008 (the last year data is available), Texas faced a net inbound migration4 of 586,000 individuals representing $12 billion worth of income. One aspect of Texas's tax system faces strong criticism, however. In 2006, Texas faced a court mandate to boost education spending from a source other than local property taxes.5 Taking the opportunity to replace the corporate income tax (known in Texas as the franchise tax) with a tax that reached pass-through entities such as limited-liability corporations and partnerships, the state enacted a tax on business margin, a modified gross receipts tax and corporate income tax defined with some complexity as follows: * Business taxpayers can choose one of three options for a tax base: o Total revenue minus cost of goods sold; or o Total revenue minus wages (limited to $300,000 per person) and benefits; or o 70% of total revenue. * Cost of goods sold is specially defined by statute: excludes services, selling costs, distribution costs, advertising, taxes, and compensation * Tax is 1%, with a special rate of 0.5% for retailers and wholesalers. (The unequal rate, intended to reduce the negative effects of tax pyramiding, may be challenged in court.) Joseph Henchman is Vice President of State & Legal Projects at the Tax Foundation. I http://www.taxfoundation.org/research/show/22320.html 2 http://www.taxfoundation.org/taxdata/show/22661.html 3 http://www.taxfoundation.org/taxfreedomday/ 4 http://interactive.taxfoundation.org/migration/ 5 See Chris Atkins, Appropriation by Litigation: Estimating the Cost of Judicial Mandates for State and Local Education Spending, Tax Foundation Background Paper No. 55 (Jul. 2007), at http:iwwxx,.taxfoundatiOnorgifiesbp5 5.pci.

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