News and Insights

Texas Budget Rider on Tax Refunds Jeopardizes Taxpayer Refunds

Tax Development Jun 11, 2003

In the last hours of the 78th Texas Legislature, the conference committee on the appropriations bill (H.B. 1) launched its own version of "shock and awe" on Texas taxpayers. In an unprecedented action taken without notice and without opportunity for public comment, the conference committee added Rider 11, Appropriation on Tax Refunds, which sharply limits the ability of taxpayers to obtain tax refunds from the State. Under this provision, taxpayers are limited to a maximum refund of $250,000 for all tax claims for the next biennium (2004-2005). Any amount in excess of the $250,000 limitation cannot be paid without a specific appropriation by the Legislature.

Although it is unclear how the rider will be administered by the Comptroller, it appears that Texas taxpayers will no longer be able to count on receiving tax refunds over $250,000 for the foreseeable future, if ever. This provision will create an enormous disincentive for large corporations either expanding existing operations or moving into Texas, resulting in an unstable economic climate that discourages capital investment. The message to the business community is that if you make a mistake and overpay your taxes, the State of Texas will keep your money.

Additionally, the rider will likely result in protracted litigation as Texas businesses attempt to recover their money. The Texas Supreme Court has held that including a general law within an appropriations act violates the Unity-in-Subject clause of the Texas Constitution. "A rider which attempts to alter existing substantive law is a general law which may not be included in an appropriations act." George W. Strake, Jr., Chairman of the State Republican Executive Committee v. The Court of Appeals for the First Supreme Judicial District of Texas, 703 S.W.2d 746 (Tex. 1986). This rider drastically alters Texas Tax Code Chapter 112(D), which governs a taxpayer's right to receive refunds.

A tax collected without statutory authority is not the property of the State of Texas under Texas law. An illegally collected tax never becomes property of the State. The person paying the tax has a claim for repayment of that tax even if the money has already gone into the state treasury and expended for public purposes. Austin National Bank v. Shepard, 71 S.W.2d 242 (Tex. 1934); Camacho v. Samaniego, 964 S.W.2d 811 (Tex. App.—El Paso 1997, writ denied). Once a court determines that a tax was collected illegally, the Comptroller must refund the tax. To bar the Comptroller from paying refund claims without legislative authorization violates the Texas Constitution's guarantee of uniform and equal taxation and creates an unconstitutional taking of property.

This provision will negatively impact every major business in Texas and the perception of Texas in the financial markets. With the 2000 legislation providing interest on refunds, the State will be left with an ever-increasing liability on its books as overpayments and the associated interest continue to mount. Finally, with important business to conduct, the Texas Legislature will have to spend a substantial portion of its time reviewing thousands of tax refunds.

If you have any questions regarding this development, please call Mr. G. Brint Ryan, Managing Principal of Ryan & Company at 972.934.0022. Mr. Ryan can also be reached by e-mail.

The legal analysis above was reprinted with permission of Mr. Mark Eidman, Scott Douglass & McConnico LLP. Mr. Eidman can be reached at 512.495.6300.