One of the major attractions of Texas to businesses across the US and the rest of the world is its low tax burden. While it is easy to see how lower tax liability is attractive, few investors wonder why Texas is like that. The history of taxes in Texas offers a fascinating look at the state’s character.
The early history of taxes in Texas
Today, Texas relies on higher property taxes to fund the state government. This mirrors the tax strategy predominant in the area while the state was Mexican territory, according to a 1951 paper on Texas taxes.
However, that favorable tax situation changed when the Mexican government removed a critical property tax exemption. Scholars consider this one of the driving reasons behind the Texas Revolution.
Texas voted twice to ban state income tax
By popular referendum, the voters of the state of Texas limited the government’s ability to levy a personal income tax. The first time was in 1993, making such a tax only possible by voter referendum. In 2019, the prohibition on state income taxes was strengthened by another popular vote and constitutional amendment.
While the prohibition on income taxes extends to businesses as well as individuals, Texas does have a gross margin tax on businesses that taxes business profits.
Lower taxes are not the only benefit for Texas
Indeed, the tax situation in Texas is favorable, but businesses also benefit from low regulatory interference and robust energy infrastructure. Houston has a highly diverse, skilled population of workers and an increasingly vibrant technology industry.
Texas’ business-friendly reputation arises from the relative lack of regulatory constraints on business as well as lower taxes than many other states.