Schools and Taxes: The Next Big Thing

The primary elections come in less than five months. The general election is about a year away.

When that's all out of the way, we'll all be talking about lawsuits — some that have been filed, some that will be filed later — on school finance and franchise taxes.

The first of the school finance suits was filed earlier this month and another is expected to follow. And the first of two challenges to the state's primary business tax went to the Texas Supreme Court this week.

The two issues are entwined. They were last revised in a special session in 2006 when legislators cut local school property taxes and promised to make up the difference with state funds — funds that would be raised, in part, with a revised franchise tax.

Lawyers for the state told the Texas Supreme Court — under questioning from the chief justice — that a successful challenge to the tax would throw lawmakers into special session to try to find enough money to pay for public schools. 

Allcat Claims Service and John Weakly, a former partner there, are suing the state over the franchise tax, saying it violates a constitutional ban on personal income taxes in Texas because it taxes the business income of business partners as well as corporations.

The state's argument is that the tax doesn't tax the partners themselves — individuals who are protected from state income taxes — but the partnerships to which they belong. The state also says the tax isn't based on net income, but on a company or partnership's gross receipts.

The tax has been problematic, raising less money than estimated and leaving the state short of what it needed to make the 2006 package balance. And now, because lawmakers didn't ask voters for approval, this lawsuit says the tax violates a constitutional provision that permits personal income taxes only if voters allow it.

The justices are also deciding whether the case should have come directly to the state's highest civil court or should have been filed in district court.

A ruling is expected within about a month.

A second lawsuit, based on the different tax rates for different businesses, was filed last week.

The question for the 2013 Legislature is whether any of those cases will cost money, and whether they'll cost money before, during or after that legislative session. It's hard to find a legislator who thinks the state will win the school finance fights. And the franchise tax is troublesome even if it survives the challenges. It doesn't bring in the money they hoped and planned for.