This November election, Texans will be asked if they want to ban a personal income tax — in a state that doesn’t have one.
Under the law, voters already have the final say on adopting a personal income tax.
If a majority of lawmakers pass a resolution to put a personal income tax on the ballot, the specific rate has to be approved by voters in a statewide election. And if enacted, Texas law requires that a portion of the revenue go toward reducing school property taxes and funding education.
If passed, Proposition 4 would repeal those stipulations and prohibit an individual income tax.
That means if lawmakers ever decided to establish an income tax, they would have to pass a constitutional amendment, which would require approval by two-thirds of the House and Senate in order to put it before voters.
“It makes it harder for the legislature to pass an authorization for a referendum for the voters,” said John Kennedy, a senior analyst with the Texas Taxpayers and Research Association, which represents business interests and does not have a position on the proposition. “In the end, one way or the other, voters will still have the final say on whether there is or is not an income tax on individuals.”
While seemingly simple on its face, the measure barely made it onto the ballot after mostly Democratic state lawmakers raised concerns that the tweak from “natural persons” to “individuals” in the amendment’s language may have unintended consequences.
In a fundraising email from Gov. Greg Abbott’s campaign last month, he used it as a jumping off point to urge voters to keep Texas red, and noted how the measure made it out of the House by a single vote of 100-42 in May.
“They only needed one more to block the income tax ban. With the national rise of socialism, you can only imagine what else a Democrat majority in the Texas House would try to drop on Texas taxpayers,” the email read. “In short, we could be headed straight towards economic ruin like California.”
But the Center for Public Policy Priorities which opposes the proposition, warns that imposing a ban now, might put future generations in a tough spot.
“Twenty or 30 years from now, I’m afraid that Texas is going to be sorry that it doesn’t have the extra option available to it so there’s not so much pressure on property and sales taxes,” said Dick Lavine, a senior fiscal analyst with CPPP, which is based in Austin. “There are adequate provisions now to ensure voter approval, and all this does is just make it harder for future generations to make a choice as to how they want to raise revenue to replace property taxes and support schools.”
The issue, along with nine other constitutional amendments, will ultimately be up to voters to decide this Nov. 5. Early voting begins Oct. 21 and lasts through Nov. 1.
Natural Persons vs. Individual
For some, their support for the measure hinged on a single word.
Proposition 4 also amends the Texas Constitution to prohibit lawmakers from imposing “a tax on the net incomes of individuals, including an individual’s share of partnership and unincorporated association income,” while striking the designation “natural persons” from the language.
But at the time the resolution was being debated in the Capitol, an “individual” wasn’t clearly defined. The nonpartisan Legislative Budget Board, which analyzes legislation and its fiscal impact, warned that the gray area could result in a potentially “significant loss” to franchise tax revenue if businesses and corporations argued they were exempt under the scope of “individual.”
“The term ‘individuals’ is not defined and could be interpreted to include entities that are currently subject to the state’s franchise tax,” a fiscal note for the resolution read. “To the extent the joint resolution might exempt some entities from the franchise tax, there could be a loss to state revenue. Because such a determination would depend on potential future legal decisions, the effect of the joint resolution on state revenue cannot be estimated.”
Sen. Pat Fallon, R-Prosper, who sponsored the legislation in the Senate, was vocal against an amendment by Sen. Royce West, D-Dallas, that would have substituted “individual” for “natural persons,” arguing there wasn’t time in the final days of the legislative session.
“Let me be very clear here for the members of the body. The legislative intent of HJR 38 is that an individual is just like what it sounds: a single human being,” Fallon said on the Senate floor May 20. “That’s the common meaning of the word that most people understand, and it means the exact same thing as a natural person.”
To be sure, a definition of “individual” was added in a separate bill on the regulation of brewpubs a few days after the resolution’s passage. House Bill 4542, which went into effect last month, amends the state’s Tax Code to clearly stipulate that “‘individual’ means a natural person,” and not various business entities, such as corporations, LLCs and more.
Sen. Beverly Powell, D-Burleson, was one of only three Democratic senators who joined their Republican counterparts to vote for the resolution. Powell had come under fire from Empower Texans CEO Michael Quinn Sullivan who claimed she was blocking the legislation, and shared her office phone number on Twitter.
“Our state economy is strong, in part because Texans don’t pay an income tax. I have always opposed implementing a burdensome income tax on Texas families,” Powell said in a statement. “There were legitimate concerns raised as we debated this constitutional amendment, but I am satisfied that both parties came together to pass HB 4542 which clarifies that an individual is a natural person.”
Lavine said it remains to be seen if the definition will be enough.
“Somebody’s bound to take it to court, and nobody knows for sure whether this is adequate to solve the potential problem that Prop 4 might completely wipe out the franchise tax,” Lavine said.
History of the tax
Texas is one of seven states that doesn’t collect a personal income tax, and in 1993 Texans approved a constitutional amendment, known as the Bullock Amendment, which requires voter approval for an income tax to be enacted, and future rate increases must go before voters as well.
It also imposed additional stipulations, including that two-thirds of the tax’s net revenue go toward lowering school property taxes, with the rest dedicated to supporting education.
“I had always thought that once Texas ran out of options with the current tax system — which is so heavily dependent on sales and property — we would turn to consideration of an income tax,” Lavine said.
Back in the late 1980s, some state lawmakers — who were income tax opponents themselves — thought so too, telling the New York Times in 1987 that they believed discussion of one was on the horizon amid declines in oil and gas revenue.
And while a personal income tax may be a means for future property tax relief or funding education, Texans aren’t big fans of the idea.
In a February poll by the University of Texas/Texas Tribune, 71% of Texans surveyed said lawmakers shouldn’t create a statewide income tax in order to increase the amount Texas spends on public education.
“It’s a little difficult for me to see the residents of Texas voting for a personal income tax, regardless of what form it comes in — a referendum passed by majority, or a proposed amendment passed by two thirds,” Kennedy said. “I think they’re both toast.”