Texas Tax Guide 2026

Constitutional bar on personal income tax

Texas voters approved Proposition 4 in November 2019, adding Article VIII §24 to the state constitution: 'The legislature may not impose a tax on the net incomes of natural persons, including a person's share of partnership and unincorporated association income.' Repealing or amending the prohibition requires another constitutional amendment passed by a two-thirds legislative supermajority and ratified by voters — a substantially higher bar than statutory enactment elsewhere.

The Franchise (Margin) Tax

Texas's Franchise Tax (also called the Margin Tax) applies to taxable entities (corporations, LLCs, partnerships, business trusts) doing business in Texas. The base is 'taxable margin' — the lesser of (a) total revenue minus cost of goods sold, (b) total revenue minus compensation, (c) 70% of total revenue, or (d) total revenue minus $1M. Rates: • 0.375% — wholesalers and retailers • 0.75% — all other taxable entities • OR elect the EZ Computation: 0.331% × total revenue (no margin deduction), available if revenue ≤ $20M No-tax-due threshold for 2026: $2,470,000 of annualised total revenue. Entities below this owe no Franchise Tax, but the No Tax Due Report (Form 05-163) is no longer required as of 2024 — entities below threshold simply don't file.

Sales tax (destination-sourced for remote sellers)

State rate 6.25%. Cities, counties, transit authorities, and special purpose districts may add up to 2% combined (cap is statutory). Most Texas cities sit at the 8.25% combined ceiling. For in-state sellers, origin-sourcing applies (the seller's location's rate); for remote sellers (post-Wayfair), destination-sourcing applies. Economic nexus threshold: $500,000 of total Texas revenue in the prior 12 months. Marketplace facilitator law (Texas Tax Code §151.0242) makes platforms responsible for collecting on third-party sales.

Property tax — the offset

Texas has no state property tax; counties, school districts, cities, and special districts levy locally. School districts dominate (typically 50–60% of a homeowner's bill). Statewide average effective rate ~1.74% — Travis County (Austin) ~1.97%, Harris County (Houston) ~2.03%, Tarrant County (Fort Worth) ~2.05%. Higher than CA, NY, FL, much of the country. Homestead exemption: $100,000 off school district assessed value (raised by Prop 4 of 2023). Disabled, elderly, and veterans get additional exemptions. Annual assessment cap: 10% on homestead-occupied property (Texas Property Tax Code §23.23).

No local income tax

No Texas city or county levies a personal income tax. The only local-level personal levy is property tax. Some cities have hotel occupancy taxes, mixed-beverage taxes, and 911 fees, but no income tax.

Self-employed and small business considerations

Texas is among the friendliest states for sole proprietors below the Franchise Tax threshold. No income tax filing burden, no entity-level fee on LLCs below $2.47M (vs CA's $800 floor, NY's biennial Publication requirement). LLC formation is $300 (Secretary of State Form 205); annual Public Information Report (Form 05-102) is the only ongoing entity filing for most small businesses. Unemployment tax (TWC) applies to W-2 employees only — sole proprietors and S-corp owner-employees of single-owner entities can elect coverage but typically don't.

Residency for departing Californians and New Yorkers

Establishing TX residency requires: physical relocation, TX driver's license (within 90 days), voter registration, vehicle registration, and meaningful day-count presence. Texas doesn't tax income, so it doesn't audit residency claims — but California and New York DO, aggressively, when high-income residents claim to have left. A clean break (sell or rent out CA/NY home, professional ties severed, family relocated) is essential to defeat FTB / NY DTF clawbacks.

Worked example: James Whitman, single, software engineer relocated from CA to Austin

James earned $285,000 W-2 from a remote employer headquartered in Austin in 2026. He has $40,000 of LTCG from index funds. Compare to his prior-year California liability.

Texas state tax: $0 — no personal income tax. No tax on the LTCG either. California equivalent (his prior-year burden): Top of his bracket: 9.3% reaching into 10.3% bracket on $285k + LTCG fully taxed (CA does not have preferential LTCG rates). Estimated CA tax: ~$26,500 + ~$3,700 on the LTCG = ~$30,200 CA SDI: 1.2% × first $185k of wage base (uncapped in 2024+) = $3,420 Total CA: ~$33,620 Texas annual savings vs CA: ~$33,620. Offsetting Texas property tax (if James buys a $600k Austin home): 1.97% × (600,000 − 100,000 homestead) = ~$9,850/year. Net savings: ~$23,770/year. Franchise (Margin) Tax: not applicable — James is a W-2 employee with no business entity.

Statute references

• Constitutional prohibition on personal income tax — Tex. Const. Art. VIII §24
• Franchise (Margin) Tax — Tex. Tax Code §§171.001–171.501
• No-tax-due threshold — Tex. Tax Code §171.002(d)
• Sales and use tax — Tex. Tax Code §§151.001–151.802
• Property tax homestead cap — Tex. Tax Code §23.23
• Marketplace provider sales tax — Tex. Tax Code §151.0242

Related pages

• State Tax Comparison →
• Multi-State Tax Guide →
• Wayfair Sales Tax Nexus →