There are several more challenges to the tax, inasmuch as it’s a part of the school finance system, working their way through the courts. Any one of them could result in the whole system being struck down.
The Oct. 19 ruling doesn’t mean the margins tax is a good tax. It’s not. In fact, it should be scrapped, rather than reformed.
“The Texas Supreme Court upheld the state’s much-maligned business tax that provides the second-biggest source of general revenue, preserving current rules for now before lawmakers potentially overhaul the law next year,” the Associated Press reported late last month. “The high court rejected a challenge by Nestle USA Inc. The company argued that the tax runs afoul of the Texas Constitution’s mandate that taxes be applied equally to all.”
One problem is the tax is levied against revenues, not profits. That can hurt a firm that does a lot of business but goes through an unprofitable period.
The Texas Public Policy Foundation has now released a study saying we should end it, not mend it. The tax should be phased out during a five-year period.
“A lack of revenue is not the problem with the margin tax,” said Talmadge Heflin, director of the Center for Fiscal Policy. “Instead, its problem is that it is a highly complex tax with high administrative costs that contributes to the high tax burden on Texas businesses.”
The franchise tax was revised in 2006 to enable the state to collect on a business’ taxable margin. The intent was to replace revenues lost in a property tax cut. The hope was the tax would spread the tax burden to include all economic sectors.
But since going into effect on Jan. 1, 2008, the margins tax has been disappointing. It brings in less revenue than hoped, and has proven to be a bookkeeping nightmare, particularly for small businesses.
“The margin tax accounts for only 6.4 percent of the state’s revenue from taxes, fees and lottery sales,” Chuck DeVore, senior fellow in the Center for Fiscal Policy, said. “Phasing out the margin tax would provide the state the opportunity to adjust to the change in revenue. Plus, it is highly likely that any revenue shortfalls would be short lived with the increased economic growth from Texas being the only major state without income or business taxes.”
The Foundation, which has the ear of many in the Legislature, isn’t saying eliminating the tax is the only solution — it presents five ways to improve it, including a deductions for unprofitable businesses. But ending it is the best solution, it says.
Because of the growth in sales taxes, that wouldn’t necessarily mean a decrease in public school funding (although, we likely face another one in the coming biennium, without touching the tax).
It’s worth considering. What we have now isn’t working.