(The Center Square) – While Texas doesn’t have a corporate income tax, most businesses pay taxes at a higher rate than other states, according to a new report published by the state’s Texas Taxpayers and Research Association (TTARA) states.
In “The Partial Myth of Texas as a Low Tax State,” the nonpartisan nonprofit organization explains, “Texas is a low tax state for individuals and a high tax state for most businesses.”
While Texans don’t pay personal income tax, TTARA President Dale Craymer said that Texas “remains at a disadvantage when competing with others for new businesses because of a relatively high business tax rate.”
And while major corporations are relocating to Texas from California and elsewhere, smaller businesses pay a disproportionate share of taxes relative to economic output, the report notes. Texas’ effective tax rate on businesses is 5.4%, above the national average of 4.9%.
Citing a December 2022 Ernst & Young analysis, the report notes that Texas businesses pay the 14th highest amount of taxes, more than what businesses pay in the high-tax states of Illinois and California, as well as 34 other states. They also pay roughly half of all sales taxes and about three-fifths of all property taxes collected in Texas, according to the report.
Texas businesses pay taxes on supplies, equipment, utilities, and property values. They also pay corporate franchise taxes, wholesale excise taxes, severance taxes, payroll taxes, utility taxes, and others. And these costs get passed on to the consumer.
“Businesses either pass their taxes forward to consumers in the form of higher prices, backward to investors in the form of lower returns, or internalize them by cutting costs such as payroll,” the report states. “Each of these actions has adverse consequences for the business.”
As a result, Texas’ tax structure falls more heavily on business than the tax structures of 44 other states, the report notes.
Without a state personal income tax, Texas relies on sales and property taxes to fund its budget. These taxes fall on Texas businesses, according to the Ernst & Young report. Texas businesses pay nearly 59.3% of all taxes to state and local governments compared to 43.6% paid by businesses, on average, in other states, according to the study.
Texas’ combined state and local sales tax rate of 8.2% statewide, on average, is the 14th-highest in the U.S.
“Texas’ sales tax base is relatively broad as well, ranking 15th broadest by TTARA estimates,” the report states. “While state sales taxes commonly apply to purchases of tangible personal property, Texas is among the more aggressive states when it comes to taxing purchases of services. All real estate (i.e., land and buildings) is subject to property tax, but businesses must also report and pay tax on the personal property they own (machinery, equipment, supplies, and even inventories of raw materials and finished products).”
Lt. Gov. Dan Patrick has proposed increasing the business personal property tax exemption to $100,000. Patrick, the House speaker and Gov. Greg Abbott have also proposed reducing property taxes, but how much, and who will benefit, has yet to be determined by the legislature.
The effective property tax rate of 2.27% on industrial property in Texas, like manufacturing plants, for example, is roughly a third higher than what homeowners pay. Industrial property taxes in Texas rank 6th-highest in the U.S. and are a “whopping 62 percent above the average rate across the 50 states,” the report notes.
“Texas business property taxes apply not just to land and buildings, but also to tangible personal property used in the production of income, including inventories,” the report states. “Personal property is wholly or largely exempt in 12 states and 43 others provide a specific exemption for business inventories.”
Some local jurisdictions offer a limited “Freeport” exemption, but they only apply to goods that are shipped out of state within a certain time period and don’t apply to inventories in general.
Several Republican lawmakers have filed bills to provide tax relief to business owners, including Reps. Will Metcalf and Craig Goldman, by repealing the franchise tax. Other filed bills relate to providing tax credits for entities that participate in the E-Verify employment authorization program, offering franchise or insurance premium tax credits for certain housing developments, and other tax credits.
