88th LegislatureEducationTaxes & SpendingOvershadowed by Property Taxes, Business Tax Reform is Something to Watch in 2023 Session

Texas has one of the most attractive business climates, topping the list of Chief Executive’s 2022 best states for business list — as it has for 18 years in a row. The CEOs in the survey said that “[Texas’] combination of a fast-growth population and a low-tax, low-regulation business climate is proven catnip for companies.”

But a new report from the Tax Foundation indicates there’s more room to grow.

Analyzing the tax climate throughout the 50 states, the Tax Foundation pegged Texas at the 13th-best, with Wyoming, South Dakota, and Alaska in sequential order at the top. At the bottom are New Jersey, New York, and California.

Texas’ closest comparable in terms of population size and political leaning, Florida, placed fourth.

The State of Texas has no income tax, something that has commanded the attention of businesses looking to relocate here. Massive investments by corporations have recently been made in the state; Samsung is currently building a $17 billion microchip facility in Taylor, Tesla’s Cybertruck plant and new company headquarters are now operational in Western Travis County, and Caterpillar announced in June the relocation of its headquarters from Illinois to Irving.

Income tax accounts for a plurality of the weight in the Tax Foundation’s ranking, which helps put Texas higher despite lesser showings elsewhere. But instead of ranking first in income tax, Texas ranks seventh because it applies the gross receipts tax — a tax on total receipts brought in by an entity — to S corporations and limited liability corporations, two categories of business “generally taxed through the individual code.”

Per the Tax Foundation, the state also ranks well, at number 12, on the unemployment insurance tax — a tax withheld by employers paid to the state to finance its unemployment rolls. Texas’ unemployment insurance tax rate is 0.1 percent of wages paid by an employer. That amounts to roughly $3.33 per month taken out of a paycheck for someone making $40,000 per year.

Janelle Fritts, a policy analyst with the Tax Foundation, told The Texan, “Texas is doing well overall, but some things are still holding them back.”

Those two things are the state’s corporate tax and local property taxes.

The latter item has been spoken of frequently by Republicans across the state, Abbott chief among them. He’s called for the “largest property tax cut in the history of the State of Texas” by using at least half of the state’s projected $27 billion treasury surplus to buy down local rates.

The Texas Legislature has already compressed — the official term for a “bought down” — local rates in both of the last two regular sessions; they also set aside $3 billion in federal aid from the American Rescue Plan Act for compression next session.

But compression is a Band-Aid solution; it applies only as far as the state is willing to buy down rates consecutively across biennia. A more permanent solution is to eliminate the school district Maintenance & Operations tax rate — the single largest component of property tax bills — and replace those collections in the school finance system with state consumption tax remittances of some sort.

But that has its own trade-offs, as all these options do.

The biggest drag on Texas’ overall ranking is its corporate tax, which ranks 47th out of 50.

The State of Texas levies a 0.375 percent retail tax and a 0.75 percent wholesale tax on a given company’s overall profit margin provided they eclipse $1.23 million in revenues. That means for every dollar of profit made — income after expenses are accounted for — a retail business will pay 37.5 cents for every $100 brought in.

That comes on top of sales taxes paid with each transaction — 6.25 percent at the state level and an optional 2 percent tax at the local level — and the local property taxes.

In contrast, Florida has a more traditional corporate income tax of 4.45 percent. The Tax Foundation describes Florida’s corporate rate as a single-rate system that “[is] consistent with the sound tax principles of simplicity and neutrality.”

Something business tax-related lawmakers have discussed for a few years now is reforming the business personal property tax. It is a tax collected on the value of tangible personal property, defined as anything the business owns as part of its operations; for example, the value of a forklift used to move pallets of goods in a warehouse.

Because it is a property tax, the state has little oversight on rates set by localities — it can set parameters, but not rates. Last year, the Texas Legislature exempted “income-producing” tangible personal property from taxation that’s valued at less than $2,500.

During his primary campaign, Abbott proposed an exemption on the first $100,000 of business personal property. The proposal is specifically aimed at small businesses that may pay taxes on less than, close to, or slightly more than six figures in business personal property.

A similar strategy from the Legislature has been applied to homeowners after raising the state homestead exemption from $25,000 to $40,000 last year, a constitutional amendment passed overwhelmingly by Texas voters in May.

So far, no legislation has yet been filed ahead of the 2023 session to establish that business exemption, but with the governor’s blessing, it could be included among his list of emergency items or either of the two chambers’ priority slates.

A brewing fight this coming session will be over a potential revival of the Chapter 313 tax abatement program; when building operations in Texas, companies may be granted reductions in the taxable value of their property by local governments.

The section of code which grants this for school districts is Chapter 313, which is set to expire at the end of this year after the Legislature declined to renew it. Legislators who blocked its renewal, such as state Sen. Lois Kolkhorst (R-Brenham), cited issues with the program’s transparency and how school districts tend to hand out the agreements like candy on Halloween.

Since the end of the 2021 session, which set in motion the program’s demise, 468 separate 313 agreements have been filed by school district-company duos with the Texas Comptroller of Public Accounts.

A total of 1,074 agreements have been filed with the comptroller over the program’s 20-year lifespan. 

Speaker Dade Phelan (R-Beaumont) has made clear his intention to revive the program in some form, calling it “a crucial incentive program to attract businesses to Texas.”

As currently constituted, in exchange for building operations in a given jurisdiction, the recipient business is granted a 10-year reduction on the taxable value of their property — drastically reducing the amount in school-driven property taxes they’ll pay over a decade.

Samsung received a Chapter 313 abatement from Taylor ISD — a 90 percent reduction worth $670 million in reduced value in the first year alone — along with a $27 million grant from the state’s Texas Enterprise Fund.

Similar abatements and other incentives are available under Chapters 311 and 312 for other political subdivisions. But the one that’s garnered the most attention is the 313 due to how large the school component is in taxpayers’ overall tax bill and the lightning rod issue that is school funding.

Just this month, Abbott has touted Texas as a business magnet and job creator seven times on Twitter, and it was among the top themes of his re-election messaging. Other state officials tout the same frequently, and while the tax-related spotlight next session will be trained on property taxes, there are a number of business tax-related possibilities in front of legislators.

Correction: A previous version of this story misreported Texas’ unemployment insurance tax for someone making $40,000 a year. We regret the error.