On October 24th the Texas Supreme Court heard arguments that the state margins (also known as the franchise) tax violates the Texas Constitution.  An insurance adjustment firm claims that the margins tax is unconstitutional because the Legislature is required to get voter approval before imposing an income tax.

Because the partners' net income was reduced due to the margins tax, the insurance adjustment firm says it is an income tax. The Texas Constitution prohibits the Legislature from imposing "a tax on the net incomes of natural persons, including a person's share of partnership ... income," unless voters approve the tax. The Texas Supreme Court will have to resolve several issues to determine if the margins tax violates that constitutional provision.

The margins tax is a major source of funding for public education.  For this reason, the Texas Legislature wrote into the 2006 law that any legal challenge to the margins tax would go straight to the Supreme Court so that it could be resolved quickly.

Texas' margins tax was revamped when the Supreme Court ruled the state's school finance system unconstitutional in 2005.  In response, local property tax rates were reduced by one-third and the state franchise (margins) tax was revamped to make up the difference.