As part of their proposed $1.2 billion tax increase, which would be the largest in Nevada history, Democrat Party lawmakers are calling for a “margins” tax modeled after a similar tax in Texas. The proposed margins tax rate would be 0.8 percent, assessed against the least of: (a) 70 percent of total revenue, (b) total revenue minus wages or (c) total revenue minus the cost of goods sold.
The Nevada Policy Research Institute recently interviewed Will Newton, executive director of the Texas office of the National Federation of Independent Business, regarding Texas business owners’ experiences with the tax.
NPRI: In Nevada, legislators are currently debating a margins tax, modeled after the margins tax in Texas. What do businesses in Texas, especially small businesses, think about the margins tax?
Newton: Small businesses in Texas are struggling mightily under the margins tax. After the legislature enacted this tax in 2007, many companies had their tax burden increase tenfold, and a survey of our members showed 40 percent of them saw an increase in their state tax liability of over 500 percent.
This money had to come from somewhere, and a 2008 survey we conducted showed that, because of the tax, roughly 20 percent of small businesses reported they would have to lay off employees, and another one-third reported they would have to leave jobs unfilled.
The margins tax has caused thousands of individuals to lose their job and prevented thousands of businesses from hiring more workers.
NPRI: Proponents of the margin tax in Nevada claim that because the tax rate would be low (currently proposed at 0.8 percent), the tax isn’t a big deal to businesses. Is that true in Texas?
Newton: Absolutely not, since the real Texas rate with minimal deductions is roughly 0.7 percent for businesses (or 0.5 percent for wholesale/retail businesses).
A 500 percent tax increase is a huge deal, especially to smaller businesses. While the rate is low, the tax is assessed on the gross receipts of a business, after certain deductions. Our 2008 survey also showed that 3 percent of small business owners in Texas had decided to close their doors as a result of their increased tax burden under the margins tax, and nearly 14 percent had to drop health care or other benefits.
Also, the margins tax applies to businesses that aren’t profitable, and businesses losing money have had to take out loans to pay their state tax liability.
NPRI: Margins tax proponents in Nevada claim this tax will be predictable for businesses, especially small businesses. Has that been the case in Texas?
Newton: No. When the tax was first implemented, only businesses with less than $300,000 in gross receipts were exempt. Thanks to reforms pushed for by NFIB/Texas and others, we managed to bump that threshold up to $1 million.
Unfortunately, that $1 million exemption is scheduled to drop to $600,000 in 2012.
Small businesses haven’t had any predictability in the tax threshold, and until the tax is repealed, I expect both the tax threshold and the tax amount to be political footballs every legislative session.
Further, the cost of compliance with this tax has skyrocketed due to its complexity.
NPRI: Leaving aside the problems you’ve identified for small businesses in Texas, has the tax at least been a stable source of revenue for state government?
Newton: The margins tax is a lose-lose scenario. Not only is the margins tax crippling the small- and mid-sized businesses, it’s not even bringing in what legislators thought it would. We view the tax as an abject failure. There’s a growing consensus among Texas lawmakers that the tax must be repealed.
NPRI: Texas is often cited as a “business-friendly state,” especially when compared to high-tax states like California. If the margins tax is so harmful, why is business booming in Texas?
Newton: Texas is doing better than the national average in terms of unemployment rate, currently at 8.1 percent, but that’s still higher than we’d like it to be and right now the Texas Legislature is debating how to fill a substantial budget deficit.
Comparisons to California make Texas look great, but almost any state does well compared to California. According to the Tax Foundation, Texas’ business tax climate rank dropped from seventh to 13th best in the nation since instituting the margins tax.
Taxes also aren’t the only factor a business considers, and Texas does very well in many of these other financial categories: Our regulatory burden is fairly low and less onerous than many states, energy is relatively cheap, and our minimum wage is at the federal rate.
I work with small business owners every day and I can tell you that I’ve personally seen how the margins tax has harmed the overwhelming majority of small businesses in Texas to the tune of lay-offs, wage cuts, price hikes and, in some cases, closing of doors.
NPRI: Any other thoughts?
Newton: When this tax first passed in 2007, NFIB/Texas thought the margins tax needed reform. After just four years of watching the destructive impact the margins tax has had on small business owners and their employees in Texas, we now believe this tax should be repealed. It’s fundamentally flawed, hurts small businesses and must be eliminated.
Victor Joecks ([email protected]) is the communications director at the Nevada Policy Research Institute.