Oct. 25 (Bloomberg) -- Texas Governor Rick Perry may have to call a special legislative session to address a revenue shortfall if the state supreme court rules a 2006 business tax unconstitutional because it wasn’t approved by voters, a lawyer for the state said.
“In an era when every penny counts, taking the state’s ability to tax partnerships away would obviously send the legislature back into a special session,” Danica Milios, a deputy solicitor general for Texas Attorney General Greg Abbott, said at a court hearing yesterday in Austin.
The franchise tax is expected to raise $5.8 billion over the next two years, about 8.6 percent of Texas’s general revenue, Texas Comptroller Susan Combs estimated in January. It’s expected to be the state’s second-biggest revenue generator behind the sales tax, which makes up almost two-thirds of collections, she said in a report.
The legislature, which meets every odd-numbered year, isn’t scheduled to reconvene until January 2013. Perry, a Republican, is competing for the party’s U.S. presidential nomination against a field of candidates led by former Massachusetts Governor Mitt Romney. Perry is set to unveil a plan for a flat tax later this week to replace the U.S. Internal Revenue Code.
Attorneys representing Allcat Claims Service LP, an insurance adjuster in Boerne, Texas, petitioned the Texas Supreme Court on July 29, arguing the revised margins tax represented an income tax on some partnerships. Since 1993, Texas has required a popular vote to add a state income tax.
Revised Business Tax
The legislature revised its main business tax in 2006 after the supreme court ruled in 2005 that the state’s school finance system was unconstitutional. Legislators then cut local property tax rates by one-third and expanded the so-called franchise tax to apply to more businesses.
The tax has brought in less revenue than expected, partly because of the weaker economy, prompting the legislature in June to trim school funding by more than $4 billion over the next two years compared with the previous biennium. A group of more than 150 Texas school districts earlier this month sued the state, arguing the current funding system is inadequate, according to the Equity Center, an Austin-based group that represents districts on education issues.
Under the 2006 revision of the tax law, any challenges to the legislation must go directly to the high court, jumping over trial and intermediate appellate courts.
Texas Supreme Court justices questioned James Martens, an Austin attorney representing Allcat, and Milios, asking if it was the legislature’s intent that the high court be the initial venue for the lawsuit.
The state isn’t taking a position on the jurisdiction issue, Milios said. The law passed in 2005 clearly intended for the supreme court to decide, responded Martens.
Neither lawyer would estimate the amount of revenue that would be affected should Allcat prevail.
“It’s a chunk,” said Milios.
A ruling is expected within 30 days, Martens said.
The case is Allcat Claims Service LP and John Weakly vs. Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General for the State of Texas, 11-00589, Texas Supreme Court (Austin).
--Editors: David E. Rovella, Glenn Holdcraft
To contact the reporter on this story: David Mildenberg at the Texas Supreme Court in Austin at email@example.com.
To contact the editor responsible for this story: Mark Tannenbaum at firstname.lastname@example.org.