11 May 2010

Texas Margins Tax Violates Texas Constitution

There has been a great deal of controversy in Texas about the Texas Margin Tax. Many suspected the tax violates the prohibition in the Texas Constitution that no state income tax can be imposed unless the public is able to vote on the law.

I thought someone would have sued over this issue, but no one has. Apparently, some suits are expected this next year:
Right now the Texas Comptroller's office is preparing to challenge some of the ways in which some companies have interpreted the law in order to lower their taxes in their 2008 returns.
“Some of the companies will take the comptroller's office to court and it would be natural to challenge the tax's constitutionality as part of that suit,” said one tax law expert.
If it is challenged, it won't languish in the courts.
The law requires that any such suit goes directly to the state Supreme Court, and that the court rule within 120 days.
With the Legislature already facing a large shortfall due to the economy, a tax lawsuit this spring would add to the drama.
A law review article examines the Texas Margin Tax and concludes that it violates the Texas Constitution. Here's the cite:

Laing, Nikki, An Income Tax by Any Other Name is Still an Income Tax: The Constitutionality of the Texas 'Margin' Tax as Applied to Partnerships and Other Unincorporated Associations (February 15, 2010). Note, Baylor Law Review, Vol. 62, Spring 2010.
Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1558644

Here's a few highlights:

The tax as revised is still referred to in the Texas Tax Code as the “franchise tax,” though it is commonly called the “margin tax.”

The tax was collected for the first time in May 2008, and “[a]t that point, many taxpayers awoke to its implications for the first time.” The margin tax has had a significant effect on thousands of individuals who conduct business via partnerships and unincorporated associations.

The Texas Constitution prohibits an income tax on an individual’s share of income from partnerships and unincorporated associations, absent a statewide referendum approving such a tax.

“Texas has long prided itself on being one of the handful of states that do not impose income taxes on individuals or businesses,” and the constitutional amendment that enacted this prohibition was passed overwhelmingly by Texas voters in 1993.

Just thirteen years later, the Texas legislature passed H.B. 3—a law that violates this prohibition.

Perhaps realizing the similarities between margin tax and income tax calculations, the Texas legislature apparently attempted to dispel any constitutional misgivings up front by stating in H.B. 3 that the margin tax “is not an income tax.” However, merely labeling the tax as a margin tax instead of an income tax does not make it so.

In 2006, the Texas legislature passed H.B. 3, imposing a margin tax on partnerships and other unincorporated entities, to take effect on January 1, 2008. This margin tax calculation ... is essentially the same as an income tax calculation. H.B. 3 should have included a provision requiring a statewide referendum on the tax for two reasons.

First, the constitutional amendment passed only a few years prior explicitly prohibits an income tax on a natural person’s share of partnership and unincorporated association income. Second, H.B. 3 imposes a tax on partnership and other unincorporated entities owned by natural persons that consists of the same basic calculations as an income tax. Because H.B. 3 did not include a statewide referendum, and the tax imposed by H.B. 3 was not approved by Texas voters, the margin tax is unconstitutional when applied to the earnings of partnerships and other unincorporated associations owned by natural persons.

So how do you like that? The Texas Legislature decided to get around the issue by specifying in the law itself that the Margins Tax was not an income tax! Hoo-boy. As if that would be controlling. And politicians wonder why people don't trust them.

And was the Margins Tax enacted by a bunch of "tax and spend" Democrats? Oh, no! It was enacted by a Republican-controlled legislature and signed by Republican Rick "Secession" Perry, the supposed darling of the tax-hatin' and Constitution-lovin' Tea Party movement.

And yet you hear the GOP pols go on about how Democrats are the party of tax and spend, and don't respect the Constitution. The pot calling the kettle black. Face it: neither the Democrats nor the Republicans give a damn about low taxes or the Constitution.

Hypocrisy in politics? I am shocked. Shocked!

The Modern Whig Party of Texas has a position on this issue:
Small Business – The state “Margins Tax” is a Small Business Income Tax, is overly complex, is an unfair burden on small business during hard economic times, and should be repealed. Small business creates over 75% of all new jobs in Texas, and state laws and regulations must keep in mind the impact on small business.


marion said...
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Septimus said...

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