How nixing a business tax will help all Texans

Photo by Muliadi Soenaryo

How do Texans win during the 2015 legislative session?

By making sure that lawmakers follow through on proposals to cut taxes substantially while restraining government spending to boost the economy. That will give everyone along the economic ladder, particularly those at the bottom, more opportunities to prosper.

This is a historic moment in Texas history, with the governor and leadership in both chambers discussing potentially record-breaking tax cuts that follow a prescription recommended for years by the Texas Public Policy Foundation (TPPF).

Of the tax reductions up for discussion, studies by TPPF and the Legislative Budget Board (LBB) that use dynamic economic analyses have found that eliminating the business franchise tax, also known as the margins tax, would generate the most prosperity and jobs.  

Because we live in an economy in which changing tax policy influences taxpayer behavior, the LBB’s use of dynamic scoring is a key step to understanding the economic effects of tax cuts. Since antiquated static models don’t capture these effects, TPPF has advocated using dynamic modeling for taxes and the economy for years. The LBB should be commended for this move, and should continue it.

Critics argue that unmet needs should be fully funded before there’s any discussion over tax cuts. But the state budget has increased roughly 12 percent faster than population growth and inflation since 2004, and the House and Senate versions of the upcoming two-year budget increase funding for legislative priorities — such as education, health care and transportation — by at least $7.7 billion.

When it comes to basic government services, state legislators have met Texans’ needs — and then some. And now it’s time to let taxpayers keep more of their hard-earned dollars.

Gov. Greg Abbott has been clear that he will not sign a budget that does not include business tax relief. Both the House, in its $4.9 billion tax cut plan, and the Senate, in its $4.6 billion plan, heeded his call by including margins-tax cuts as part of their proposed budgets.

Deliberations between the chambers during the next few weeks should include a debate over which tax cuts would most improve the lives of Texans.

Rising personal income and private nonfarm job creation are two good measures of opportunity and prosperity. Using those measures as benchmarks, both the LBB and TPPF economic models show the strongest benefit resulting from eliminating the margins tax — which, with a price tag of $4.7 billion, is in the range of both tax cut packages. 

TPPF’s research shows that there could be gains of $16 billion in personal income and 129,000 jobs by 2020 if this complex tax is eliminated. The LBB’s research examines a 25 percent cut in the margins tax, so we multiply that result by four to get approximate effects of elimination. The results show increases of $8 billion in personal income and 110,000 jobs during the same period.

Though it remains to be seen which tax package makes it to the governor’s desk, it’s noteworthy that the discussion is over who can cut taxes the most. This is terrific news for Texans.

There’s time for legislators to determine the best package, but letting Texans keep more money and have more job opportunities provides the best path to prosperity, particularly for the working poor. The House and Senate should be complimented on their resolve to see that some of the state’s surplus dollars are returned to taxpayers.

Eliminating the margins tax would be the best course to take the Texas model to the next level as the nation’s and world’s beacon of opportunity.

Disclosure: The Texas Public Policy Foundation is a corporate sponsor of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.

Brooke Rollins

President and CEO of the Texas Public Policy Foundation


Vance Ginn

Economist, Texas Public Policy Foundation