Commentary: How the Texas tax pyramid stalls business growth

Last month, President Trump traveled to the annual World Economic Forum in Davos, Switzerland to deliver a message: America is once again open for business. That’s great news for Austin and the rest of the nation.

Thanks to tax reform, foreign companies are giddy about expanding their operations in the United States. Ulrich Spiesshofer, CEO of Swiss robotics giant ABB, told President Trump the tax bill is a game changer for his company. During a roundtable with the president, Spiesshofer exclaimed that ABB, which already employs 26,000 people in the United States, now plans to “grow further and invest significantly” more.

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Such foreign direct investment, which currently totals $3.7 trillion and supports 13 million U.S. jobs, is set to surge thanks to the passage of federal tax reform.

But investors won’t set up shop just anywhere.

The Lone Star State’s lack of individual and corporate income tax has rightfully made it a hotspot for foreign investors. Texas hosts almost half a million jobs at U.S. subsidiaries of global companies. Companies like Spain’s Grifols and South Korea’s Samsung have become mainstays of Austin’s local community and economy.

Austin is well-acquainted with the benefits these foreign firms can bring. Over the past six years, 11 percent of the state’s foreign direct investment projects have been based in Austin. And in 2016, German-based e-commerce firm Shopgate and Chinese-owned automation company KUKA brought their business and a combined 275 jobs to the city. Austin’s economy grew nearly 5 percent that year.

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Though Texas has a relatively business friendly tax code, there is still plenty that Gov. Greg Abbott and lawmakers can do to make the state even more attractive to the foreign capital that is expected to flow into the U.S. following federal tax reform. The most significant improvement that Gov. Abbott and lawmakers could enact is repeal of the margin tax, the most harmful provision in the state tax code, one that imposes a complex levy on the gross receipts of Texas employers.

Among the worst aspects of the Texas margin tax is that businesses that lose money can still have a tax liability, since the tax applies to total revenue and not net profits. The nonpartisan Tax Foundation highlighted other problems with this tax in a recent report, such as “The Margin Tax creates tax pyramiding, the process of taxes stacking on top of other taxes as a product moves through the production chain,” and that it has attracted numerous lawsuits. If state lawmakers were to eliminate the margin tax when they return to Austin in 2019, Texas’s ranking on the annual Business Tax Climate Index would improve from 10th to 3rd best in the country.

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Economists across the political spectrum agree that gross receipts taxes are one of the most economically damaging forms of taxation. One report finds that repeal of the margin tax would lead to the creation of over 45,000 new jobs in the Lone Star State, $3.4 billion in additional investment, along with an increase of $9.8 billion in disposable income over four years. Only three other states have a gross receipts-style tax like Texas’ — and a handful of states have repealed such taxes over the last decade and a half. If Texas lawmakers want to be the best state to live, work, and invest in the U.S. would be wise to scrap the margin tax. Switzerland’s cantons offer U.S. states a proven model for the sort of tax competition that will allow state economies to flourish in the improved tax and regulatory environment.

President Trump and Congress rolled out the welcome mat for foreign businesses by slashing the U.S. corporate tax rate from 35 percent — the highest in the developed world — to 21 percent. So far, because of the Tax Cuts and Jobs Act, at least 377 companies have announced wage and salary increases, bonuses, or 401(k) match increases.

Now that foreign companies have decided to grow their operations in the United States, executives face a crucial question: to which states should we expand? Texas is already an ideal spot. Other governors and legislators can attract these investors by embracing the Swiss model of local tax competition.

Getting rid of the dreaded margin tax is a great place to start.

Gleason is director of State Affairs at Americans for Tax Reform.

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