A PRIMER ON TAX POLICY FOR THE 2015 LEGISLATIVE SESSION
By Chelsea McCullough
No one likes to talk taxes. Fewer like to talk about legislative policy. But almost everyone likes to talk about innovation and the incredible advancements we are experiencing at the hand of technology. So how do we bridge the gap between these conversations? This is precisely the question many will be asking during the 2015 Texas Legislative Session as elected officials gather at the Capitol in Austin.
For those reading this outside of the Lone Star State, here is a quick primer and some facts to keep in mind as you read on. (1) Our legislative body meets every two years. (2) Texas does not have a state income tax. (3) Texas’ business tax is formally called the Franchise Tax but is more commonly known as the Margins Tax. Texas has levied this tax in some form or another since the 1800s and it was revamped in 2006.
The above list is essentially all that everyone will agree on coming into this legislative session, but there is much to discuss. During the last legislative session in 2013, lawmakers only set the tax rates for 2014 and 2015, so this topic falls into the “must address” category. And because personal state income tax doesn’t exist in Texas and instead we rely on property and franchise taxes to fund government functions, this really falls to the business community to make their wants, needs and opinions heard.
So a little bit about the Margins Tax, which provides $5 billion to the state annually. Found at Chapter 171 of the Texas Tax Code, it provides that taxable entities not engaged in retail or wholesale business will pay one percent; however only 70 percent of gross revenues are taxed so the tax is essentially 0.7 percent. No tax is due if the total tax liability is less than $1,000 or if revenue for a small business is less than $1 million.
Since small employers make up 98.6 percent of all employers in the state and many small businesses are currently exempted from the Margins Tax, the tax burden then falls to larger employer firms. These large companies are a critical part of the state economy and the tech sector is becoming an increasingly important presence, providing thousands of employment opportunities, contributing greatly to research & development and investing billions in national, state and local infrastructure.
It is important that we honor the incredible contributions of all sized business and encourage our legislators to seek a broad-based business tax structure that allows everyone to contribute in a way that is fair and equitable. Even though we enter this legislative session with a budget surplus, there is always a need to look to the future in an ever-changing economic landscape. We must ensure that we don’t strangle our future prosperity in times of abundance. While our elected leadership is considering spending levels for education, transportation and other critical infrastructure items, it is critical that we continue to invest in the technologies that will contribute to the current and future economy.
The ability for both urban and rural communities to connect to information and education sources beyond their own localities enables a new reality. From the tiniest town in Texas to the state’s largest metropolitan areas, location does not need to be a deterrent to the innovation economy. All that is required is a laptop and high-speed Internet. In the recent past, private sector companies including cable and telecomm providers have been pouring in billions to build out the network, competing to build a foundation on which entrepreneurs, investors and executives connect to share ideas, all free from the heavy hand of government interference.
Texas seems to understand this well and to date our elected officials and tech industry leaders have done an admirable job of working together to craft smart regulatory and tax policies that support private sector investment, business formation, expansion and growth.
It seems perfectly appropriate that in Texas, an entrepreneur can launch a company in a dorm room and change technology for the masses. These types of innovative stories are examples of what keeps Texas competitive. Putting the right policies and infrastructure in place today will ensure that we can continue to connect far into the future.
Chelsea McCullough is Executive Director of Texans for Economic Progress (TEP), an Austin-based, non-profit advocacy group that monitors the competitive process in key sectors of the Texas economy.