Tuesday, 26 March 2013 11:38

Texas VAT Bill Would Threaten State’s Prosperity

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Boasting the laudable goal of eliminating property taxes throughout the State of Texas, a recently filed Value-Added-Tax (VAT) bill — House Bill 3472 — would replace not only property taxes, but also business franchise taxes, a limited statewide sales tax, and various other local sales taxes with a VAT. Texans have never experienced the economically depressing effects of a VAT, but once they realize what those effects would be, they will oppose any VAT in order to preserve their state’s prosperity.

As reported by The New American, in 2009 and 2010 Democrats pushed for a national VAT to balance the federal budget and finance a massive expansion of unconstitutional federal spending. Some Republicans are willing to consider implementing a VAT, even though a VAT is “the most effective way to increase the size of government.” More coverage by The New American concerning the VAT can be found here, here, and here, pointing out the prodigious revenue-raising capacity of a VAT as well as the detrimental economic effects of a VAT. Many of these observations about the effects of a national VAT would also apply to the proposed Texas state VAT.

As of March 26, House Bill 3742 has no State Senate sponsor in the Texas State Legislature — a legislative requirement for passage through the Texas legislature — and no House co-sponsors among other Texas state representatives. But that could change overnight if the necessary sponsors materialize, thereby allowing the bill to move forward in the legislative process.

To pay for the statewide elimination of property taxes and other current state taxes, HB 3742 proposes a state VAT of seven percent (Sec. 220.104) that would apply generally to “any person who in this state supplies any service or property in the ordinary course of a trade or business in which the person engages for the purpose of profit” (Sec. 220.101), with a few exemptions carved out for governmental entities; religious, educational, and public service organizations; and very small businesses with taxable receipts of less than $100,000 in the preceding 12-month period (Sections 220.151—220.153). 

According to HB 3742, all businesses subject to the VAT would be required to submit to the Texas Comptroller a quarterly tax report that would include, among other calculations, “the aggregate output taxes [VAT charged to customers] and input taxes [the aggregate VAT already paid to all suppliers] that accrued during the preceding quarterly period” (Sec. 220.302). This excerpt gives the reader some idea of the complexity of the business bookkeeping — as well as the state governmental oversight — that would be required by the proposed VAT.

Without getting bogged down in the details of HB 3742 — now approaching 300 pages, with various sections reserved for expansion during committee mark-up — the most urgent need for Texans deliberating on this bill is to take a closer look at some of the presuppositions as well as the predictable economic effects of the proposed Texas VAT.

To start with, any VAT — just like any business tax — represents a craven concession to the sheer demagoguery of the now-commonplace declaration that “Businesses have to pay ‘their fair share’ of taxes!” Anyone with a modicum of business experience understands that in order to stay solvent, businesses must surreptitiously charge the retail consumer of their services or products for any “business” taxes that the government imposes. Businesses do this by adding the cumulative cost of such taxes into the price that is ultimately charged to the retail consumer. Thus, businesses are able to balance their books and stay in business. In a political atmosphere that deliberately obscures the identity of who ultimately pays for ALL taxes — i.e., the retail consumer — businesses simply calculate any government-imposed “business” tax as one more cost of doing business that is necessarily passed on to the retail consumer.

But that lack of understanding of simple free-market economics is not the only demerit of the proposed Texas VAT. A VAT applied to businesses would also distort the marketplace in ways that most citizens may not have anticipated. Each business-to-business purchase in the process of commercializing a service or product adds more “value” and puts more tax into the final retail price. In order to cut costs, big businesses would then tend to reduce their outsourcing of services and subcomponent production to smaller, subcontracting businesses. Furthermore, in order to compensate for reducing their contracts with small businesses, big businesses would tend to invest in building more internal capacity to provide these services or produce those subcomponents in house

From an economic perspective, a VAT would inexorably reduce the size and number of most small businesses while encouraging the expansion and vertical consolidation of many big businesses — thereby leaving the State of Texas much further away from the free market economy that America once enjoyed.

In addition to these economic distortions, the historically prodigious revenue-raising capacity of any VAT would become an ongoing political temptation to those state legislators who are intent upon expanding Texas state government. Quiet lobbying by influential public officials in Austin for gradually raising the VAT — a fraction of a percentage point during each legislative session — would most likely not be reported in today’s news media. 

Citizen opposition to a slowly rising tax burden would likely be muted because the aggregate VAT paid for any service or product is never printed on the retail sales receipt, and because the aggregate VAT varies for each service or product, depending on how many business transactions required the addition of yet another VAT into the price during the course of production before the final service or product was purchased by the retail consumer. This process would continue from the initial stage of extracting raw materials that go into a product, its subsequent manufacture, assembly, and even distribution, until it is placed on the store shelves. Thus, most Texans would have a difficult enough time discovering just how much VAT they would be paying for their own individual purchases, not to mention the difficulty of figuring out the total VAT “tax bite” that is being taken out of the whole Texas economy.

To sum up, eliminating property taxes along with several other state and local taxes is a laudable goal — but not at the expense of subjecting the relatively vibrant Texas economy to the damaging effects of a VAT. As proposed, the Texas VAT bill, HB 3742, would downsize or eliminate many small businesses, encourage vertical consolidation among big businesses, and facilitate the growth of state government by gradually increasing the VAT rate.

In contrast, a similarly broad-based retail sales tax paid only by retail consumers would be visible on every purchase receipt, and this visibility would help to rein in the natural tendency of some state legislators to raise taxes, because Texans would be able to keep track of the tax burden on every Texan, with a glance at the retail sales tax rate on any Texas sales receipt. Furthermore, as we have already seen above, because this sales tax would be applied only once — at the final point of purchase by the consumer — such a retail sales tax would not distort the Texas economy as the cumulative, hidden effects of a VAT would.

While many of the details of HB 3742 could be successfully worked out in the 2013 Texas Legislative session, it should be clear by now that, all other things being equal, a VAT would smother the Texas economy, while a broad-based retail sales tax on all services and products purchased by retail consumers would allow the Texas economy to flourish.

3 comments

  • Comment Link REMant Friday, 05 April 2013 17:13 posted by REMant

    Sales taxes generally reduce consumption, not a bad thing if it means more savings, but removing the property tax will likely mean the money will go not into savings, but towards pushing up the price of real estate. And since, as with all excises, the effect on price is rarely detected, especially in an inflated market, it will surely serve to further increase that inflation. As mentioned it would also favor make over buy decisions, hampering the development of the division of labor. In sum the VAT can be seen to be part and parcel of Keynesian/monetarist finance which strives to maintain "wealth effect." That is no doubt why some may consider it "business friendly."

  • Comment Link Greg Stuessel Monday, 01 April 2013 22:26 posted by Greg Stuessel

    The biggest problem with the point of sale tax that the author is in favor of is that it is insufficient to generate the necessary revenue to offset the loss of the property tax. That is the entire problem. Most people will agree that government spends to much BUT, to have any hope of getting a property tax elimination bill passed you HAVE to at least be revenue neutral (being able to come up with other sources of tax revenue to offset the loss the state feels from the elimination of the property tax). The only way this is possible is through a VAT. Now, if state spending would miraculously be slashed some way, then yes, a modified sales tax would work. It's an incremental step to freedom. Property ownership is VITAL to a free society! If you have property tax you do not own your property. Get that eliminated first, then start hacking away at the spending and fight the VAT.

    The other problem with the modified sales tax, when you look at that proposal on a county by county basis, it leaves a majority of Texas counties in the red. Because there are so many counties in our state that would be at the mercy of state government, the proposal would see Austin Robin-Hooding sales tax revenue much like they currently do public school funding. While retail activity varies greatly from county to county, economic business activity is roughly dispersed throughout Texas in proportion to local government services.

    If you want to read about this from a group that has been doing extensive work on the elimination of property tax, start by reading this article: http://wetexans.com/bold-plan-free-texas/

  • Comment Link Peter Devlin Wednesday, 27 March 2013 21:58 posted by Peter Devlin

    T Dan - here is where your argument loses credibility: "Without getting bogged down in the details of HB 3742 ". Why not give the people/readers some of these details. Details like how business friendly a VAT is. If it was not, why would over 150 countries around the world embrace such a tax, including all of the US major trading partners, all other members of the OECD except the US and even GOP lawmakers like Governor Bobby Jindal of Louisiana think it is a grand idea. Why, here let me help you understand why. First, if you were to delve into some of the details you would discover that your comment "ach business-to-business purchase in the process of commercializing a service or product adds more “value” and puts more tax into the final retail price." is also incorrect.
    To give your readers and this forum some credit, you could have researched how a VAT works, instead of making assumptions based on your understanding / reading or the garbage you are fed by the likes of Grover Norquist. I won't get bogged down in the details here of how the VAT works, but suffice to say, it is a business friendly tax. This means, while business do pay VAT and charge VAT and collect VAT for the government, the VAT itself is not meant to be a cost to business. Unlike the retail sales tax you favour, a VAT is not a cost to business, instead it is a tax that is paid by the final consumer. But the VAT that we as final consumers pay is not a cascaded amount of VAT throughout the supply chain. The VAT borne by the final consumers is the VAT rate x the price of the goods or services, nothing more and nothing less.
    It is for this reason that the VAT is so popular globally. Easy to understand and administer, it taxes all goods and services equally and gets rid of the special interest loopholes that riddle the current tax system in the US. This explanation might help you and the TNA readers: http://www.nationalreview.com/agenda/344058/many-happy-tax-returns-reihan-salam

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