February 26, 1971 

Mr. R. L. Coffman 

Administrator 

Opinion No. M-797 

Texas Bployment Commission Re: Whether amendments to 

Austin, Texas the Texas Unemployment 

Compensation Act 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 

Security Amendments of 1970, passed by Congress on August 10, 

1970, requires that coverage under the terms of the Texas 

Unemployment Compensation Act (Article 5221b, Vernon's 

Civil Statutes) be extended by January 1, 1972, to include 

certain classes of employers which were previously exempt 

from coverage. Two of the classes of employers to which 

coverage must 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 

question has therefore arisen whether amendments to the Texas 

Act allowing these two classes of employers a lower tax rate 

than other new employers would violate Article VIII, Section 

1, of the Texas Constitution which provides& in relevant part, 

"Taxation ahall be equal and uniform. . . . 

Since the adoption of this constitutional provision, 

it has been recognized that a literal interpretation and 

application of the requirement for equal and uniform taxation 

would not be equitable, since all taxpayers are not in equal 

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Mr. R. L. Coffman, page 2, (M-797) 

circumstances. Texas courts therefore formulated a 

doctrine of 'reasonable classification' which provides 

that, notwithstanding this constitutional mandate, the 

Legislature may classify subjects of tax and regulatory 

legislation on the basis of real and substantial differences, 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 Constitution would not prohibit the Legislature from 

enacting a tax that is unequal on its face, provided that 

the legislation creates : reasonable classifications of : 

subject matter and provided that the tax is applied uniformiy 

to each particular class. 

The Texas Supreme Court previously had occasion to 

rule on the constitutional validity of the classifications 

established by the original Texas Unemployment Compensation 

Act. In the original Act, which became effective in 1936, 

coverage was extended to employers with eight or more 

employees. Nonprofit organizations were exempt. In 1955? 

the number of employees required for coverage was 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 Court was not 

specifically considering Section 1 of Article VIII of the 

Constitution, it did briefly advert to the doctrine of 

reasonable classification in its opinion when it stated: 

"Our Constitution does not forbid 

legislative classification of subjects 

and persons for the purpose of regulatory 

legislation, but it does require that 

the classification be not arbitrary or 

unreasonable. Classification must be 

based on a real and substantial difference, 

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 opinion by 

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 classifications and exceptions made by this, ACt are not unreasonable or arbitrary, Stated in 

another way, we think that such classifications are based upon real and 

substantial differences having relation 

to the subject matter of the legislation." 

(151 S.W.2d 577) 

Since, at that time, the Act taxed employers of eight 

or more employees and did not te.x employers of seven or lees 

employeesor nonprofit organizations, the Court, in effect, 

held that these classifications by the: Legislature were 

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 constitutionally authorized 

to make this distinction between classes of employers in 

determining whether a tax should be imposed, we hold it 

may further make a distinction in determining that the tax 

shall be assessed at varying rates between 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 Compensation Act 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 

Compensation Act, Article 522lb, V.C.S., 

which would permit employers of one to 

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c . 

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 Article VIII, Section 1, 

of the Texas Constitution. 

neral of Texas 

Prepared by Stephen W. Hollahan 

Assistant Attorney 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 

Executive Assistant 

NOLA WHITE 

First Assistant 

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