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Texas Drops Two Spots in National Business Tax Ranking

Texas dropped two spots, from ninth to 11th, on the Tax Foundation's widely cited State Business Tax Climate Index. But the index did not factor changes lawmakers made to the franchise tax this year.

Gov. Rick Perry announced plans for a tax cut aimed at Texas small businesses on April 15, 2013, at the Austin Chamber of Commerce.

Editor's note: This story has been updated throughout.

Texas has the 11th-best business tax climate in the country, according to the latest version of a widely cited national report.

It’s the first time Texas didn’t make it into the top 10 of the Tax Foundation’s annual State Business Tax Climate Index. Texas had ranked ninth among all 50 states in the last two years.

“Texas has been a top ten state in the Index for several years, but this year was ousted by Indiana, which has made steady strides to improve its code in recent years,” the report reads.

The Washington D.C.-based group, which advocates for lower taxes, also took aim at Texas’ franchise tax, also known as the margins tax, which taxes businesses on gross receipts rather than income. Business groups have complained about the tax since the Legislature created it in 2006 to pay for a tax reform package that included lowered property taxes.

“Texas has been successful in spite of the very complex margins tax,” said Scott Drenkard, an economist with the Tax Foundation. “This is one of the most destructive taxes around and is an affront to the principle of sound tax policy”

During this year’s Legislative session, lawmakers passed House Bill 500, which reformed the franchise tax and included hundreds of millions of dollars in exemptions and cuts. Drenkard said the group’s latest rankings do not factor in that bill, most of which does not go into effect until next year.

“I don’t know if it will be enough to bump the state up to 10th place,” Drenkard said.

The Tax Foundation ranked Wyoming as the state with the lowest tax burden in the country, as it did in its 2013 report. Most of the states in the top 10 have benefited from increased energy production in recent years. New York maintained its spot as the 50th-ranked state on the list.

Along with criticism of the margins tax, the group also dropped Texas in its “property tax ranking” from 32nd to 35th. Drenkard said the change was because of a slight increase in property tax collections in Texas.

Chuck DeVore, vice president of policy at the Texas Public Policy Foundation, an Austin-based conservative think tank, said the list is one of many factors that companies and entrepreneurs consider when thinking about where to do business.

“Losing a position is not fatal, but I do think that it signals to policymakers that they cannot rest on their laurels,” DeVore said.

Gov. Rick Perry and other state leaders often cite the Tax Foundation's rankings when touting Texas’ economic performance and why more businesses should move here. Perry has pointed to the state’s top 10 ranking in the group’s business tax climate report in recent job-poaching campaigns he has made in a handful of states in the last year.

“According to the Tax Foundation, Texas is one of the top 10 best state tax climates, while New York ranks last,” read a June release from Perry’s office announcing the governor’s campaign targeting businesses in New York and Connecticut.

The group’s reports can also influence other high-profile rankings, In May, Site Selection magazine ranked Texas as the “most competitive state.” The Tax Foundation’s state tax climate rankings were part of the magazine’s criteria.

Lucy Nashed, a spokeswoman for Perry’s office, framed the news in context of Perry’s recent efforts to highlight how states' tax policies differ.

“This is exactly what Gov. Perry means when he talks about competition between the states – more states are recognizing what Texas has known for a long time: that they can’t tax themselves to prosperity,” Nashed said. “This session, Texas cut more than $1 billion in taxes, made the small business tax cut permanent, cut the rate on the business tax, and implemented tax credits for research and development.”

David Maly contributed to this report.

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