February26,1971

Mr. R. L. Coffman Administrator Opinion No. M-797

to Texas Bployment Commission Re: Whether amendments Austin, Texas the Texas Unemployment CompensationAct which would permit two classes of newly covered employers to pay taxes at a lower rate than other newly covered employers,would violate Article VIII, Section 1 of the Texas ConetiDear Mr. Coffman: tution.

In your request for the opinion of this office on the above question$you state that Public L&w 91-373, Employment SecurityAmendments of 1970, passed by Congress on August 10, 1970, requires that coverage under the terms of the Texas Unemployment CompensationAct (Article5221b, Vernon's Civil Statutes)be extendedby January 1, 1972, to include certain classes of employerswhich were previously exempt from coverage. Two of the classes of employers to which coveragemust be extended are employers of one to three employees and nonprofit organizations. The federal act also will permit, but not require, the Texas Act to be amended to allow these two classes of employers a reduced tax rate of not less than l$ rather than the tax rate of 2.7% which will be required of other new employers. The questionhas therefore arisen whether amendments to the Texas Act allowing these two classes of employers a lower tax rate than other new employerswould violate Article VIII, Section 1, of the Texas Constitutionwhich provides& in relevant part, "Taxationahallbe equal and uniform.

. . . Since the adoption of this constitutionalprovision, it has been recognized that a literal interpretationand application of the requirement for equal and uniform taxation would not be equitable, since all taxpayers are not in equal

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circumstances. Texas courts therefore formulateda doctrine of 'reasonableclassification'which provides that, notwithstandingthis constitutionalmandate, the Legislaturemay classify subjectsof tax and regulatory legislation on the basis of real and substantialdifferences, and thus discriminate in the burdens placed on these various classes. 12 Tex.Jur.2d 457-462, Constitutional Law, Sets. 110-114. Accordingly,-.this section of the Constitutionwould not prohibit the Legislature from enacting a tax that is unequal on its face, provided that the legislation creates :reasonable classificationsof : subjectmatter and provided that the tax is applied uniformiy to each particular class.

The Texas Supreme Court previouslyhad occasion to rule on the constitutionalvalidity of the classifications establishedby the originalTexas Unemployment Compensation Act. In the original Act, which became effective in 1936, coveragewas extended to employerswith eight or more employees. Nonprofit organizationswere exempt. In 1955? the number of employees required for coveragewas lowered to four or more. In Friedman vs. American Surety Co. of New York, 137 T.149, 151 S.W.2d 570 (1941),the Supreme Court, in answering certified questions from the Court of Civil Appeals, held that the Act did not violate any provision of the Texas Constitution. Although the Courtwas not specificallyconsidering Section 1 of ArticleVIII of the Constitution, it did briefly advert to the doctrine of reasonable classification in its opinionwhen it stated:

"Our Constitutiondoes not forbid legislative classificationof subjects and persons for the purpose of regulatory legislation,but it does require that the classificationbe not arbitrary or unreasonable. Classificationmust be based on a real and substantialdifference, having relation to the subject of particular enactment. If there is a reasonable ground for the classification, and the law operates equally on all within the same class, it will be held valid. 9 Tex.Jur.p* 

### 558, Sec. 120. We will not extend this opinionby attempting to analyze or discuss the

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Mr. R. L. Coffman,page 

### 3, (M-797) ~

above exceptions. It is sufficient to say that,measured by the above rules, the classificationsand exceptionsmade by this, ACt are not unreasonable or arbitrary, Stated in anotherway, we think that such classifications are based upon real and substantialdifferenceshaving relation to the subjectmatter of the legislation." 

### (151S.W.2d577)
Since, at that time, the Act taxed employers of eight
or more employees and did not te.xemployers of seven or lees employeesor nonprofit organizations, the Court, in effect, held that these classificationsby the:Legislaturewere reasonable and not in violation of Section 1 of Article VIII of the Constitution. In our opinion the same reasoning would apply to the 1955 amendment extending coverage to employers of four or more employees.

Since the Legislature is constitutionallyauthorized to make this distinctionbetween classes of employers in determiningwhether a tax shouldbe imposed,we hold it may furthermake a distinction in determining that the tax shallbe assessed at varying ratesbetween such classes,, In other words, if it is constitutional to tax some classes of employers and not to tax other classes, as is presently done, it would also be constitutional to tax the former at one rate and to tax the latter at a lesser rate.

For these reasons, it is our opinion that amendments to the Texas Unemployment CompensationAct allowing these two classes of new employers a lower tax rate than other new employers,would not be in violation of Section 1 of Article VIII of the Texas Constitution.

SUMMARY -------

Amendments to the Texas Unemployment CompensationAct, Article 522lb,V.C.S., which would permit employers of one to

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Mr. R. L. Coffman, Page 4, (M-797)

three employees and nonprofit organizationa to pay taxes at a lower rate than other newly covered employers,would not violate ArticleVIII, Section 1, of the Texas Constitution.

neral of Texas
Preparedby Stephen W. Hollahan AssistantAttorney General

APPROVED: OPINION COMMITTEE

Kerns Taylor; Chairman W. E. Allen, Co-Chairman

Harriet Burke Scott Garrison Wm. J. Craig Malcolm Smith

MEADE F. GRIFFIN Staff Legal Assistant

ALFRED WALKER ExecutiveAssistant

NOLA WHITE First Assistant

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