This week, the Texas Supreme Court ruled on the case challenging the constitutionality of the Texas business franchise tax (aka, Margins Tax). The Court decided that the tax is not unconstitutional, by a 7-2 vote.
The constitutional challenge to the law was filed by an insurance claims adjustment company – Allcat Claims Service. Allcat paid the tax in 2008 and 2009 under protest and then sued the Texas Comptroller to have the tax declared unconstitutional because it is unfairly assessed and imposes an illegal income tax on individual partners’ income. The Texas Supreme Court said the franchise tax is not an unconstitutional income tax because it is not assessed on individuals but on the business, which Texas law considers a separate entity. The Court said that lower courts would have to determine whether the tax was unevenly levied on Allcat.
So the overarching issue as to whether the franchise tax is constitutional has been decided. But that doesn’t mean the tax is well liked or concerns about it are going to go away. It has never raised the amount of revenue that many speculated it would when it was enacted by the legislature in 2006. Many small businesses don’t like it, feeling that it is too costly and complex.
The current Speaker of the Texas House has charged the Ways and Means Committee with evaluating the franchise tax to determine whether it should continue to exist in its current form, a revised form or be repealed. The key questions then become: what are you going to replace it with to raise the necessary revenue for the state, and can you get enough political agreement on an alternative that will pass in the legislature?
Meanwhile, another Supreme Court – this time the big one (U.S.) – will be deciding the constitutional fate of the Affordable Care Act (ACA) in its current session, most likely before next year’s election. Oral arguments for the case are expected in the spring. The law is being challenged by 26 states. The states are objecting to the ACA on a number of fronts, but opposition to the individual mandate to purchase health care coverage is the main thrust of their argument. They argue this violates the Commerce Clause of the Constitution. The Obama administration argues it does not. The administration petitioned the Supreme Court to take the case after an appeals court upheld a lower court ruling that the individual mandate is unconstitutional. Several other appeals courts have upheld the ACA as being constitutional. So there is divided opinion on the issue and the Supreme Court, as the final arbiter, will have to decide.
Cases of this magnitude in Texas and the U.S. bring our court system into greater light as the third branch of government. Some people don’t like that branch, but it is part of our governing structure, established by our founders. I guess that is why they put that word “Supreme” in the name, to help describe its importance. On cases like this, they certainly earn the label.
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