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Free Enterprise & Government Regulation: Constitutionally Prohibit Local Income Tax

TCCRI's recently published Free Enterprise and Government Regulation Task Force Report explored ways to combat overreach by local governments in Texas, such as the governing bodies of cities and counties. What follows is an excerpt from the Report on that topic.


Texas cities continue to expand, as do the powers of their local governing bodies. Three of the top five fastest growing large cities in the United States are in Texas and it comes as no shock that local governments are passing laws and ordinances that increasingly exceed the scope of their intended authority.i Austin has been a repeat offender over the years, passing bans on plastic bags, implementing burdensome regulations on ridesharing companies, and passing the CROWN Act which bans “hair discrimination,” which is likely already covered by federal and or state anti-discrimination laws.ii Other examples include requirements on construction materials used for private property and the infamous Denton hydraulic fracturing ordinance, all of which negatively impact the Texas economy, exceed the scope of power given to those local governments, and infringe on the liberty of its citizens. Defenders of such policies often decry state-level remedies as government overreach and defend their position under the banner of “local control”. However, these policies represent considerable overreach on the part of the local governments and the State maintains a legitimate and compelling interest in stepping in to remedy these issues.

Policy Recommendation: Constitutionally Prohibit the Enactment of a City-Level Income Tax

In 2019, the Texas Legislature passed, and voters approved, a constitutional amendment that strengthened an existing limitation on the creation of a state-level income tax. That amendment (HJR 38, Leach | et al.) replaced a narrow allowance for an income tax with a permanent ban that in order to repeal would require another constitutional amendment. Doing so would be a difficult task, as 74% of voters voted in favor of the permanent ban. However, the specific language of the Texas Constitution now states that “[t]he legislature may not impose a tax on the net incomes of individuals,” which leaves the door open to the local imposition of an individual income tax.

Local income taxes are increasingly common. In 1932, Philadelphia became the first city to adopt a local income tax. Now, there are 4,964 jurisdictions across 17 states that impose an income tax at the local level. For example, every county in Indiana and Maryland imposes a local income tax. In Ohio, nearly 750 municipalities and school districts impose an income tax. In fact, municipalities are the vast majority of jurisdictions with local income taxes, and include such high-profile examples as New York City, Newark, Philadelphia, San Francisco, and Denver.

[I]t is not entirely clear that local governments are prohibited from creating a local income tax. Under Article 11, Sections 4 and 5 of the Texas Constitution, cities may impose taxes “authorized by law,” but are restricted in taxing more than 1.5% (cities with fewer than 5,000 population) or 2.5% (cities with more than 5,000 population) in one year the taxable property in the city.iii Counties, detailed in Article 9, have similar limits on the amount of taxation, based on taxable property value, but no discernable restriction on the type of tax that may be imposed.

You can read this and the rest of the report here.


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