Texas Legislature 2019

Did the Texas Legislature accidentally imperil billions of dollars in business taxes?

In their effort to make a future state income tax all but impossible, Texas lawmakers used terminology that experts believe could inadvertently gut the state’s franchise tax.

“The legislative intent of HJR 38 is that an individual is just like what it sounds: a single human being,” says state Sen. Pat Fallon, R-Prosper.

Texas Legislature 2019

The 86th Legislature runs from Jan. 8 to May 27. From the state budget to health care to education policy — and the politics behind it all — we focus on what Texans need to know about the biennial legislative session.

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Was it a symbolic measure meant to make the already remote possibility of a Texas income tax even less likely? Or a stealthy ploy aimed at imperiling a business tax that raises billions of dollars for public schools each year?

Depends on where you sit — and your definition of the word “individual.”

Republicans in the Texas Senate say a measure they passed late Monday night — and that the Texas House has already passed — would simply put a constitutional amendment before voters in November asking them to increase the number of votes future state lawmakers would need to try to levy an unpopular state income tax. It’s all but guaranteed to be adopted.

But Democrats sounded the alarm on the amendment, arguing its use of the term “individual” — instead of “natural persons,” which is used throughout the Texas Constitution’s section on taxation — could open the door to legal challenges to a tax Texas levies on businesses.

The Legislative Budget Board, a nonpartisan state agency that tracks how state funds are collected and spent, seems to agree; it found that the measure “could result in a significant loss of state franchise tax revenue, depending on potential future legal decisions.”

The risk, analysts say, is that a savvy business attorney could argue in court that the word “individual” in the income tax amendment could extend to corporations or business partnerships — putting the franchise tax in jeopardy.

The franchise tax, while unpopular with Texas businesses and Republicans, makes up an important source of public school funding. The Texas comptroller estimates it will bring in roughly $8 billion in revenue in the 2020-21 budget cycle.

State Sen. Pat Fallon, a Republican from Prosper who sponsored House Joint Resolution 38 in the Senate, said his proposal had everything to do with banning a future state income tax — and nothing to do with the current franchise tax on businesses.

“Let me be very clear here for the members of the body,” he said during Monday afternoon’s deliberations. “The legislative intent of HJR 38 is that an individual is just like what it sounds: a single human being.”

Several Senate Democrats were unconvinced. State Sen. Royce West, D-Dallas, offered an amendment that would have substituted the phrase “natural person” for “individual” to bring the language in line with other parts of the Texas Constitution. He stressed the need for consistency by pointing to a section of state law that includes corporations, organizations, business trusts and partnerships under the definition of “person.”

“‘Natural person’ would bring clarity to this, and the fact of the matter is, you could get more support for this particular legislation as opposed to leaving this confusion and inviting litigation concerning the definition,” West said.

Fallon opposed West’s change, saying the two terms were synonymous. Even a single amendment would’ve required another round of approval from two-thirds of the Texas House — no sure bet at this late date in the Texas legislative session.

That prompted more objections from Democrats.

“What we’re going to be left with is a statute that refers to ‘natural persons’ in five places and ‘individuals’ in lieu of ‘natural persons’ once,” said state Sen. Nathan Johnson, D-Dallas. “Does that concern you that we may be muddling legislative intent?”

Since 1993, the Texas Constitution has required voter approval for the state to impose an income tax. But lawmakers could pass a resolution asking for such an election with only a simple majority in the House and Senate. Fallon’s measure would require two-thirds approval from both chambers of the Legislature before it could be put to voters.

Johnson said he opposes a state income tax but is in no rush to push through a measure with ambiguous language. “Nobody in Texas is proposing an income tax — no one in this body, no one in the public,” Johnson said. “There’s no looming income tax around the corner.”

Fallon said his measure simply repurposes language from a proposal that failed in the 2015 legislative session and that there’s no “nefarious intent whatsoever on anybody’s part.”

Earlier this month, amid complaints from a few Democrats, the Texas House narrowly passed its version of the anti-income tax resolution. Whoops and cheers echoed around the chamber.

When the Senate first began debate on the same issue Monday afternoon, it was unclear if it had the votes to pass. After more than an hour of debate, punctuated by long pauses, Fallon agreed to postpone the measure until later that evening.

While the Senate took a break, Republicans amped up the pressure on Democrats to support Fallon’s resolution. Michael Quinn Sullivan, who runs the right-wing political advocacy group Empower Texans, urged his Twitter followers to call the office of state Sen. Beverly Powell, D-Burleson. Powell represents one of the Senate’s few swing districts.

“Will Tarrant County’s senator be the cause of HJR38 failing?” Sullivan wrote.

When the Senate returned to business after 10 p.m., it voted against West’s amendment along party lines. An hour later, when it came time for the final vote on Fallon’s measure, Powell and two other Democrats — Eddie Lucio Jr. of Brownsville and Juan “Chuy” Hinojosa of McAllen — joined with Republicans to push it over the edge.

Unlike most legislation, the measure does not require the approval of Gov. Greg Abbott. It next moves to the secretary of state’s office to be put on a statewide ballot, giving voters the final say in an election to approve or reject the constitutional amendment.

A spokesman for the governor did not respond to a question Tuesday about whether Abbott views the constitutional amendment’s language as a threat to the franchise tax. Abbott, a former Texas Supreme Court justice and attorney general, has said he favors both banning a state income tax via a constitutional amendment and cutting the franchise tax “until it’s in a coffin.”

Eva DeLuna Castro, a state budget expert for the left-leaning Center for Public Policy Priorities, said the measure could achieve both goals at once — intentionally or otherwise.

“Whether it’s a ‘stealth move’ or not, the end result is the same: Billions in state revenue could be lost,” she wrote on Twitter. “Why risk it when [the Legislature] is trying to find billions in state revenue to put into school finance reform?”

Disclosure: The Center for Public Policy Priorities has been a financial supporter of The Texas Tribune. A complete list of Tribune donors and sponsors is available here.