DALLAS — A lawsuit filed before the Texas Supreme Court seeks to strike down the state’s tax on business, claiming it violates the constitution’s prohibition on levying a personal income tax without voter approval.
The lawsuit, filed on behalf of plaintiffs Allcat Claims Services and one of its partners, John Weakly, challenges levies of the Texas Margin Tax, as it is known officially, for 2008 and 2009. The suit seeks to stop enforcement of the tax passed by the Legislature under House Bill 3 in 2006. Allcat is an insurance claims adjustment company in the San Antonio area.
The lawsuit claims that the state, in effect, levied an income tax on Weakly’s personal income by taxing his share of partnership income. Under the 1993 so-called Bullock Amendment to the state constitution, no personal income tax can be levied unless a majority of the registered voters first approve it in a statewide referendum.
A spokeswoman for Gov. Rick Perry’s office said that the tax is not an income tax and the Texas Association of Business and other groups had supported it as part of a deal to reduce property taxes. She also pointed out that taxpayers making less than $1 million need not pay.
Suits that allege violations of the Texas Constitution are filed directly in the state Supreme Court, bypassing all the lower courts.
The Supreme Court must rule on the challenge within 120 days of its filing on Aug. 5.
The franchise tax was part of Perry’s plan to bring relief to property taxpayers by redistributing the tax load.
The pre-2006 version of the franchise tax had so many loopholes that businesses in the state considered it optional. The revamp in the tax came after the school finance system was declared unconstitutional in 2005.
A blue-ribbon panel led by former Comptroller John Sharp proposed the new state business tax and a list of other measures to compensate for lower local property taxes.
The effectiveness of the business tax has also come into question as revenues forecast by Perry and other Republican leaders fell short of projections.
The $4 billion it provides in revenue each year and the effect of the lower property taxes leaves a $10 billion shortfall every two years, according to an estimate from the state comptroller’s office.
Standard & Poor’s, which rates the state’s general obligation debt AA-plus, cited the structural imbalance in a July report in explaining why an upgrade in the next two years was unlikely.
“The rating could be pressured if revenue collections perform significantly below current estimates, additional budget gaps develop in the upcoming biennium, and state officials do not take prompt corrective action,” analysts noted.