One of the most obvious ways states influence their overall business climate is through tax policy. Everyone recognizes that the cost of providing for schools, infrastructure, and public health and safety (as well as maintaining an effective regulatory framework and performing other essential government functions) must be recouped. In doing so, the objectives are to be fair and equitable in allocating fiscal burdens and to be prudent and efficient in the use of public resources.
Texas has a relatively low per capita tax burden. The state also prides itself on the absence of a personal income tax, which is viewed positively by firms seeking new locations (although it is perceived much more positively internally than externally).
Despite these positive attributes, the Texas tax structure is typically ranked near or below the middle among all states in attractiveness for new business activity and is not particularly well regarded by site selection consultants. Moreover, while low taxes are generally regarded favorably, it is also important to ensure sufficient revenue to meet the needs of a growing economy through funding mechanisms that expand in accordance with requirements.
Currently, there is notable concern within the state regarding both the adequacy of the public school finance system and the mechanism by which school funding is achieved. Because this segment of state and local government budgets is large in absolute and relative magnitude, alternatives can only be explored within the context of overall fiscal reforms. A budget crisis leads inevitably to patching things together, but should also compel us to focus on fundamentally new approaches.
Texas currently relies of such mechanisms as (1) a property tax, (2) a sales tax that applies primarily to goods at a time when consumption is shifting more toward services (and Internet purchases), (3) a franchise tax partially based on the capital stock of firms, and (4) an oil and gas severance tax in an era of gradually declining production. Thus, the current tax structure is not well suited to increase in line with either the expansion of the economy or the accompanying revenue requests.
Another problem with the Texas tax structure is the fact that it places a greater relative burden on capital-intensive firms than those in competing areas. Approximately 60% of state and local taxes in the Lone Star State are paid by businesses, whereas most competing states have roughly an equal division between businesses and households.
By far, the most significant segment of this imbalance occurs as a result of the heavy reliance on property taxes to fund much of the county, municipal, and (especially) school district activity. Almost half of the state and local taxes are based in some manner on the value of assets, with the burden thus being weighted toward firms with large, expensive facilities. Although manufacturing and utilities represent only about 26% of gross state product, these sectors pay well over half of all business property taxes. As a further complication, the fact that the Texas franchise tax is partially levied on the capital assets of a company creates substantial liabilities for capital-intensive enterprises irrespective of their economic performance.
The bottom line is that the tax consequences of locating a large facility in Texas have material adverse effects. Among the 10 most populous states in the US, only Florida (which also lags in the number of selections for new business sites) collects a comparably disproportionate percentage of taxes from the corporate sector.
As we focus on the immediate concerns of a massive budget shortfall, options that could enhance the overall equity, efficiency, and ability to respond to increasing fiscal needs are clearly worthy of further exploration and discussion. The only way we can ultimately resolve our fiscal imbalances in a sustainable manner is with comprehensive tax restructuring.