Texas has gained a reputation for being a low-tax, small government state, mainly in comparison to the other 49 (or is it 56?) states. While we get kudos for doing better than many, the Lone Star State still has a ways to go if we want to be truly entrepreneur-friendly, and not just friendlier than the other guys. Eliminating the inefficient tax on business would be a great start.

In order to satisfy a school finance lawsuit, legislators took a poor-performing tax—the state’s franchise tax—and made it overly complicated and imposed it on businesses in Texas. The so-called “gross margins” tax has been called an income tax by the Financial Accounting Standards Board, even though the state supreme court has ruled it otherwise. Income taxes in Texas are explicitly unconstitutional. (The imposition of the margins tax came because of a court ruling, so they couldn’t well turn it down.)

The tax brings in very little revenues, just a few billion out of the state’s $180+ billion budget. Its chief cheerleader, moderate State Rep. Jim Keffer of Eastland, claimed the tax he authored would lower property taxes — but property tax burdens have continued to rise. (Mr. Keffer, apparently a big-tax Republican, has recently come out strongly opposed to property tax reforms.)

Now comes word that the Tax Foundation rating of the states’ business tax environment going into 2013 has Texas’ place holding at #9… because of the gross margins tax.

Former State Rep. Talmadge Heflin, now the director of the Center for Fiscal Policy at the Texas Public Policy Foundation, says the margins tax needs to go. “Texas’ margin tax has dulled the state’s competitive edge and without significant reform it will spell trouble for the state’s future economic prospects.”

Taxes on business are inherently regressive, hidden as they are in the costs of goods and services, or passed on to employees through lost wages and opportunities, or serving as a barrier to new entrepreneurs’ profitability.

Businesses don’t pay taxes, they remit taxes; people pay the cost of the tax. Business taxes are only useful as a way to hide the true cost of government.

When the legislature convenes in January, the margins tax should be on the chopping block.

Michael Quinn Sullivan

Michael Quinn Sullivan is the publisher of Texas Scorecard. He is a native Texan, a graduate of Texas A&M, and an Eagle Scout. Previously, he has worked as a newspaper reporter, magazine contributor, Capitol Hill staffer, and think tank vice president. Michael and his wife have three adult children, a son-in-law, and a dog. Michael is the author of three books, including "Reflections on Life and Liberty."