                        February 26, 1971


Mr. R. L. Coffman              Opinion No. M-797
Administrator
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 Coneti-
Dear 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 dif-
ferences, and thus discriminate in the burdens placed on
these various classes. 12 Tex.Jur.2d 457-462, Constitu-
tional Law, Sets. 110-114. Accordingly,-.thissection 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 provi-
sion 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 par-
         ticular enactment. If there is a rea-
         sonable 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 excep-
           tions made by this,ACt are not unrea-
           sonable or arbitrary, Stated in
           another way, we think that such class-
           ifications 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.xemployers 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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