Lawsuit Could Be Key To Limiting Govt Growth New Tax

Texans’ looking for last-ditch relief from the new gross margins tax might find it in a lawsuit await trail in Austin. With small business (and therefore the state’s economy) bracing for the onset of the new business tax even this hope is welcome.

More importantly this lawsuit could hold the key to strengthening the state’s impotent spending limitation.

Operating below the political radar the lawsuit in question Hendee v Dewhurst alleges the Legislature erred in setting too-generously the constitutionally-required spending limit. The state initially tried to toss the case out arguing citizens didn’t have the right to enforce 1978s voter-approved Texas Tax Relief Act. The court frowned on that claim given the amendment serves as the state’s nominal taxpayer protection. If nothing else Hendee v Dewhurst has established the legal precedent of taxpayers suing state government for exceeding the spending limit.

As a spending limit the constitutional amendment has been mostly meaningless. Tied to growth in the state’s economy lawmakers have inappropriately established projected personal income as the measure of the state’s economy – but never bother to see if those projections ever mesh with reality. No clear-thinking person would agree to such a scheme but such is the case when you let those being limited set the limit.

By the way state spending has grown 500 percent since 1978 when the amendment was passed but personal income has grown just 400 percent. The sum of population and inflation growth? About 280 percent.

The case doesn’t look promising for the state. Retiring State Rep. Fred Hill (R-Richardson) told the court that despite being a long-serving member of the committee charged with establishing the limit he did “not have any involvement in its development or calculation.”

The legislative staffer in charge of the committee John O’Brien testified to the obvious: that the Legislature doesn’t take the limit seriously. He described the constitutional spending limit instead as a "starting point a guide - not a limitation" to growing government. A far cry from what the amendment was intended to accomplish.

Just 18 months ago lawmakers gave themselves a new way to siphon your wallet by implementing the gross margins tax. The tax is on the activity conducted by a business rather than its profitability which at best this creates a disincentive to starting a business in Texas. At worst it could be a hobbling blow for some. The new tax was created to “buy-down” local property tax rates. (Unfortunately property tax burdens continue to sky-rocket especially on non-residential properties.)

Here’s where the lawsuit and business tax collide.

The spending limit applies to expenditures from non-dedicated general revenues. The business tax revenues were not constitutionally dedicated for property tax relief despite the rhetoric and therefore will flow into the general fund.

If the court agrees with plaintiff Edd Hendee (a Houston restaurateur and radio host) that the spending limit has been set improperly high the state will have a lot more revenues from the massive business tax than can be legally spent. That would raise questions about the viability of every expenditure including the tax-rate buy-down.

Two bad options could exist at that point both requiring a special session at the height of a contentious election cycle.

One lawmakers could vote for an “emergency” that allows more spending. What emergency? Too much of your cash in their pockets. Or they could try to authorize the unpopular business tax for constitutional dedication. Remember the business tax scheme wasn’t any conservative’s first choice when it was created.

Things get dicey with that second option because 100 votes are needed in the House to pass an amendment; the Republican leadership has only 80 GOP members – some of whom opposed the tax originally. The Democrats don’t have anything to gain by helping and its doubtful Republicans in tight races would again want to explain voting to tax the life out of mom-and-pop businesses back home.

On the other hand the Republican leadership could instruct the Attorney General to workout a settlement.

While I’m not a plaintiff I suspect Mr. Hendee would be happy with legislators’ admission of past wrong-doing and a binding agreement forcing a stricter spending limit. That would save time energy and money. The case has gone on for 18 months and involved two costly trips to the Texas Supreme Court – with Hendee winning both times.

Politically such an agreement would have the side-benefit of exciting conservative voters frustrated by a lack of movement on substantive budget reforms.

The Hendee v Dewhurst case could go to trial in February. While the impact of the case on politics and the economy may be substantial it centers on Texans’ simple expectation that our tax dollars will be fairly collected and well-spent with the growth of government strictly limited.

Michael Quinn Sullivan is the president of Texans for Fiscal Responsibility (www.EmpowerTexans.com) a non-profit advocacy organization based in Austin.