St. Mary's Law Journal


Taxation has long been a point of contention for both individuals and businesses. Primarily, taxation serves as a convenient and calculated method of allocating precious resources to areas in need. Although many states use property and income taxes as the preferred methods for funding these programs, Texas has a constitutional restriction on state taxation of individuals’ incomes. This means Texas has largely relied on property and business taxes to fund these programs. In 1991, while trying to avoid unconstitutional taxes on individuals’ incomes, the Texas Legislature adopted a franchise tax which taxed Texas businesses according to their capital. In 2006, the Texas Legislature adopted the new margin tax, which expanded the outdated franchise tax. The margin tax increased the number and kind of entities taxed by taxing a business’s margin, or revenue, instead of capital. But, distinguishing “revenue” from “income” is a fine line, and many experts feel the margin tax is an unconstitutional means by which the state can assess an income tax without calling it so. The margin tax, however, is widely considered more equitable than the franchise tax because it places nearly all Texas businesses up for taxation. Any business which substantially benefits from the reduced property taxes will likely see a reduction in overall tax liability. The margin tax is intended to encourage more businesses to hire full-time employees instead of relying on independent contractors. It is also more equitable than the franchise tax, since it prevents any businesses from continuing to circumvent the franchise tax while enjoying limited liability. Nevertheless, there are inevitable legal challenges to the margin tax. Many Texans believe the margin tax taxes individual income in violation of the Texas Constitution. Regardless, the margin tax is the new reality, and Texas businesses need to be able to accurately forecast their tax liability.


St. Mary's University School of Law