April 22, 2006
Strayhorn revisits constitutionality of the TTRC plan

Remember how the issue of whether or not the Texas Tax Reform Commission plan was an unconstitutional income tax or not was settled by an opinion from AG Greg Abbott? Well, maybe it's not so settled. Comptroller Carole Keeton Strayhorn says that isn't good enough, and she may have a point.

Attorney General Greg Abbott's office earlier this week put out a letter saying Perry's plan did not appear to be an income tax as defined by the constitution.

Strayhorn said that letter was inadequate because it was written by Abbott's first assistant, Barry McBee, and was not signed as an official opinion by the attorney general.

She formally requested an official opinion from Abbott, a legal process that could take 180 days.

The key legal question is whether a tax on the income of a partnership such as a law firm could count as a tax on the income of the individual partners.

McBee, in the letter for Abbott, said it would only become an income tax if it was on the net profit of the partnership. Strayhorn general counsel Timothy Mashburn said a court could interpret the constitution differently, nullifying the tax without a popular vote.

The Statesman is a bit more specific on the letter:

Earlier this week, Abbott's first assistant, Barry McBee, said in a letter that lawmakers never intended to restrict taxation on businesses, only on individuals.

The letter stressed that he could not give "blanket assurances," but that he believed that a tax on a partnership - rather than a partner's share of that partnership income - would not require a public referendum.

Doesn't sound quite so unequivocal to me. The Morning News has more details, including the action that Strayhorn could take if she's not satisfied.

"I am waving the red flag," she said. "I believe Governor Perry's margins tax is an income tax."

The comptroller, an independent candidate for governor against Mr. Perry, denied playing politics, though the governor's camp said she was.

"I do not want to put the integrity of our state's finances at risk," she said.

Mrs. Strayhorn's statement carries no legal weight, and the question would ultimately have to be decided by the courts. She could, however, decline to declare that the bills keep the state budget in balance, and that would invalidate the tax plan.


On Monday, a top assistant to Attorney General Greg Abbott, Barry McBee, said in an advisory letter to Deirdre Delisi, Mr. Perry's chief of staff, that he doesn't think the governor's business tax requires such a referendum. He said it treats partnerships as separate from the individuals involved in them and taxes gross receipts, not the net income mentioned in the Bullock amendment.

Mrs. Strayhorn dismissed the letter as "staffer to staffer communications." She wrote Mr. Abbott requesting a formal legal opinion.

A spokeswoman for the attorney general said: "The comptroller's position fails to provide any new, meaningful legal analysis."

Mrs. Strayhorn declined to say whether she would refuse to certify the tax bills if Mr. Abbott had not supplied a formal opinion by the time bills cross her desk. The comptroller's certification is required before the bills can take effect.

"I am going to do what we believe I am required to do," she said.

I think we can safely say that a non-certification by Strayhorn would count as another all-hell-breaks-loose scenario. Bear in mind, Strayhorn has done this sort of thing before, though she reversed course pretty quickly in that case. I don't doubt for a minute that she might take this step, and neither should you. What happens after that is anybody's guess.

Oh, and for those of you who enjoy a little recreational conspiracy theorizing, chew on this.

First Assistant Attorney General Barry McBee, who wrote the letter largely embracing the governor's tax plan, is Perry's former chief of staff.

Knock me over with a feather, I tell you. Seriously, can it hurt for AG Abbott to sign a letter himself? We all know that the final say is with the courts, after all. Instead of having his spokesperson dodge the question, Abbott could take all the wind out of Strayhorn's sails by speaking up officially. I don't see why that should be an issue.

On a side note, the Express News points out that what we've got so far is not quite what we were promised.

The business tax plan working its way through the Legislature is billed as mild but broad-based, but it contains special breaks for a few lucky businesses - favors that will cost the state more than $1.5 billion a year in revenue.

Most of the exemptions and deductions originated with the blue-ribbon commission that created the plan, but lawmakers have added their own.

The loopholes resemble "a big piece of Swiss cheese," said one Republican on the House Ways and Means Committee, which approved the plan Thursday.

In a bill due to hit the House floor Monday, retailers and restaurants would be taxed at one-half a percent of gross annual receipts, not the 1 percent that would hit other businesses.

Doctors convinced lawmakers to grant them a tax deduction for serving Medicaid and Medicare patients, part of their so-called "charity work" though they receive government reimbursement for such cases.

Oil and gas companies would be able to deduct the cost of certain expenses, like drilling.

Small businesses whose gross receipts are less than $300,000 a year would be exempt from the tax. So would "passive investment" firms, which invest in other businesses without managing them - a break that would save them, and cost the state, $800 million a year, according to Texas comptroller's office estimates.

"It's a little bothersome to me because this was originally sold as a broad-based business tax where everyone would pay just a little," said Rep. John Smithee of Amarillo. "Once you start letting somebody out or cutting their tax, everybody wants the same thing. You go from every man paying just a little to every man out for himself."

Gosh. Where have I heard those concerns before? Link via the Chris Bell blog, who ties the loopholes back to his call for ethics reform to be added to the special session agenda.

Finally, Vince examines the debate-restricting provisions more closely, and tallies up the Yea and Nay votes for each. That Statesman story I linked above answers your questions about Rep. Rose, by the way.

Rose said passing the tax bills quickly will allow the Legislature to turn to pay raises and insurance stipends for teachers, among other measures.

"We're here to lower property taxes," Rose said. "The quicker we do that, the sooner we can work on education reforms."

Nice to know one person still has faith. We'll know soon enough if it's misguided or not.

Posted by Charles Kuffner on April 22, 2006 to Budget ballyhoo | TrackBack

Remember, the A.G.'s office has an Opinion Committee and a formalized process for rendering opinions. I am not sure about the form of Abbott's sign-off on the Perry Plan, but anything other than an Opinion Committee letter is worth exactly the paper it's printed on.

Posted by: Boddhisattva on April 23, 2006 12:57 PM