Confirmed: Margin Tax Drags Down Texas - Texas Scorecard

The Tax Foundation released a report today that analyzed the Texas Margin Tax and confirmed its insidious consequences for Texas’ business environment.

The margin tax was created in 2006 as an attempt to haul in extra revenue for school financing after the statewide property tax had been ruled unconstitutional in 2005. The margin tax expanded the Franchise Tax, which had previously applied only to corporations, to include a greater number of businesses and partnerships. Due to its unfairness and significant disadvantages, the margin tax has rightly been a popular target for legislators since it took effect in 2008.

The unnecessary complexity of the margin tax has forced high compliance costs and accounting fees upon businesses. Several corporations have challenged the tax due to problems instigated by its textual inconsistency and obscurity.

In contrast to the retail tax, which is collected at the final sale of a product, the margin tax causes gross receipt taxes to accumulate every time a product changes hands. This means even unprofitable businesses must pay exorbitant costs to market their products, and it creates an uneven tax rate between industries that differ in their production processes. Economists and government officials have denounced gross receipt taxes for their harm and inefficiency.

Historically, the margin tax has been detrimental wherever it has been effected, and most states and countries that have experimented with the tax over the past century have repealed it. It is time for Texas to follow suit and leave the group of five states that still enforce gross receipt taxes. The Tax Foundation report states that doing so would give Texas the nation’s most competitive tax environment, increase job growth, and promote investments.

The report has confirmed what we already know: restrictive taxation stifles the business climate, crushes entrepreneurial incentive, and complicates tax compliance in a way that penalizes businesses. In order for Texas to remain a shining economic star that attracts jobs and facilitates prosperity, the margin tax should be repealed as soon as possible.