Chris Tomlinson Oct. 17, 2017 Updated: Oct. 18, 2017 1:19 p.m.
2of5Valero Energy Corp. has been criticized by Texas City Mayor Matt Doyle regarding the city's tax dispute with the company.
Most economists agree that how a government levies taxes is just as important as how much it collects. And each year, the right-leaning Tax Foundation tries to call attention to this principle by publishing the State Business Tax Climate Index to compare the effectiveness of state tax policies in promoting growth and investment.
Texas ranked 13th in the 2017 edition, the same spot it occupied in 2016. Not bad, but certainly disappointing for a state that lacks both personal and corporate income taxes.
Texas should get used to the disappointment. It will never break the Top 10 as long as the state maintains an astronomical property tax, a high sales tax and the most stupid business tax in the nation.
"Taxation is inevitable, but the specifics of a state's tax structure matter greatly," the foundation's report said. "The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth."
Wyoming and Alaska, both energy-producing states without income taxes, rank the highest. California, New York and New Jersey, each with a plethora of taxes, rank the lowest.
For Texas, the biggest black eye is the Margin Tax, which the Tax Foundation ranked as the second-worst business tax behind Delaware's Manufacturers' and Merchants' License Tax. And since the Margin Tax is paid by limited liability corporations and other companies that pass profits through to individuals, the Margin Tax becomes an indirect income tax and hurts Texas' ranking on that front.
The state comptroller levies the Margin Tax based on a company's gross receipts, or how much business it did in the previous fiscal year. Economists hate margin taxes because they are not based on profit or income, so money-losing businesses can end up paying taxes.
State lawmakers imposed the Margin Tax in 2007 to fix the school finance system, which relies on property taxes levied by school districts. School property taxes had reached statutory maximums, effectively imposing a state property tax. The Texas Supreme Court declared that unconstitutional.
Lawmakers, eager to avoid an income tax, chose to transform the tiny franchise tax that Texas charged corporations for doing business in the state. Legislators needed to raise $10 billion to transfer to school districts, which would allow them to cut property taxes.
State law allows accountants to calculate a company's margin using one of four methods, which requires businesses to keep a special set of books. Accountants often run all four options to find the one that generates the lowest tax, which also runs up bookkeeping fees.
The Margin Tax, though, never brought in as much money as expected and has created budget shortfalls ever since. And special interests have spent years lobbying lawmakers to carve out special exemptions, turning the tax code into Swiss cheese.
Legislators have managed to raise the basic exemption to $1 million in gross revenues. As a result, only 6 percent of Texas businesses pay the tax. But 100 percent have to file returns.
For years now, I've joined critics in begging lawmakers to eliminate the Margin Tax, but lawmakers don't want to replace the lost income from somewhere else because they fear conservative opponents will say they raised taxes.
When it comes to property taxes, Lt. Gov. Dan Patrick likes to make a lot of noise about helping homeowners, but he'd done nothing to help Texas business. That's put Texas at 37th in the nation for property taxes in a ranking that goes from best to worst.
Businesses in Texas pay tax on 100 percent of the value of inventory, placing a significant burden on retail businesses. Some industries have special methods for calculating the tax, but most states don't tax inventory.
Texas' 6.25 percent state sales tax, plus the maximum 2 percent local sales tax, puts the state 37th in the nation for sales taxes. The state tax on goods purchased by businesses inhibits investment.
The Tax Foundation also lowered Texas' ranking on the unemployment tax from 13th in the nation last year to 26th for 2017. The Texas Workforce Commission raised the average tax rate from 1.64 percent of the first $9,000 paid to an employee compared with 1.46 percent after claims outpaced payments in 2016.
No wonder that five out of the top 10 most serious problems expressed by Texas members of the National Federation of Independent Businesses are related to taxes. As the foundation points out, taxes are necessary, but how we tax whom can make a huge difference in whether government inhibits economic development or promotes greater business activity.
Generally speaking, government should never tax what it wants to encourage and heavily tax what it wants to stop. A smaller tax on more people and businesses is also better than a high tax on only a few.
Texas' tax system is as broken as the federal system and desperately needs an overhaul. We need the Legislature to stop punishing business and investment, and instead tax conspicuous consumption, bad behavior and extreme income.
Maybe then Texas' economy will grow in a way that benefits everyone.