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Margins tax lawsuit goes to Supreme Court

Oral arguments for the lawsuit that claims the business margins tax is an unconstitutional income tax are being heard by the State Supreme Court this week.

In a lawsuit filed in July, Allcat Claims Service LP , a Boerne insurance adjustment firm, said the margins tax runs afoul of a constitutional provision that requires the Legislature to get voter approval before imposing an income tax.

The case will turn on whether the margins tax — implemented in 2006 as part of the court-ordered school finance fix — is effectively an income tax when applied to certain business partnerships.

Late last week, another challenge to the margins tax was filed by food behemoth Nestle USA, Inc. and two other companies. Their arguments, which are different from Allcat’s claims, [were not] heard by the court [Monday].

If any of the challenges are successful, the implications could be significant for the state because the margins tax is a major source of funding for public education.

That’s why legislators wrote into the 2006 law that any legal challenge to the margins tax would go straight to the Supreme Court.


The total tax paid by partnerships such as Allcat is estimated to be pretty small, though exact figures weren’t immediately available from the Texas comptroller.

But the implications could be huge if the court sides with Allcat, the state says.

“If Plaintiffs are right and any tax imposed on a partnership is an indirect tax on the net income of the partners, the State of Texas cannot lawfully impose any tax on any business entity, including a corporation,” [Attorney General Greg] Abbott argues in court documents.

If the court finds the tax unconstitutional, the remedy could range from a targeted exemption for the partnerships, which is what Allcat is requesting, to tossing out the tax for all businesses.

“It’s sort of wide open what the court might do,” said John Kennedy of the Texas Taxpayers and Research Association, which supports the state’s position that the tax is constitutional.

See here and here for some background. The argument before the Court now is whether or not it has jurisdiction in the case, since it has not been heard by any lower court as yet. It’s entirely possible they could rule that despite the Lege’s intent that the case go straight to them, it needs to go through the system like any other lawsuit would. Add this to the school finance lawsuits, and you’ve got some litigation out there that could profoundly affect Texas’ budget and tax system. Isn’t that a happy thought?

One more thing:

The state estimated the margins tax would raise almost $12 billion in the 2008-09 budget. It actually brought in $8.7 billion in its first two years.

Earlier this year, legislative leaders highlighted the need to reform the tax, but there was little appetite for tackling another complicated issue while grappling with a massive budget shortfall.

Lawmakers have promised to discuss how to fix the margins tax leading up the 2013 legislative session.

No, there was little appetite for doing anything that might raise revenues and thus mitigate the worst of the cuts. The fact that the underperformance of the margins tax was a huge driver of that massive shortfall was blithely ignored by nearly every Republican in Austin. I guarantee you, the more Republicans that are in the Lege in 2013, the more they will continue to pretend that Texas doesn’t really have a revenue problem at all. The Trib has more.

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