The Texas Tax & Budget Primer

Dick Lavine, lavine@cppp.org Eva DeLuna, deluna.castro@cppp.org

www.cppp.org

U.S. Average,

2006Texas, 2006

Texas 50-state rank

Adults without a high school degree (% of 25+) 15.9 21.4 2nd

Birth rate (live births per 1,000 population) 14.2 17.0 2nd

Share of population under age 18 (%) 24.6 27.7 3rd

Limited English Proficient/English Language Learners in public schools (% of all students)

9.1 15.7 4th

Poverty rate (%) 13.3 16.9 7th

Child poverty rate (%) 18.3 23.9 7th

Elderly poverty rate (% of 65+) 9.9 12.3 9th

Family income ratio: top 20% to bottom 20% 7.3 7.9 9th

Who is Texas?

Above-Average Public Needs Below-Average Effort

United States Texas

Expenditure need $6,007 $6,456 6th

Actual expenditure $6,007 $5,127 47th

Revenue capacity $4,659 $4,271 33rd

Actual revenue $4,659 $4,017 37th

Fiscal capacity 100 86 39th

Source: Measuring Fiscal Disparities across the U.S. States. Urban Institute Tax Policy Center, Federal Reserve Bank of Boston

Sources: Comptroller of Public Accounts, Annual Property Tax Report; Cash Report.

The Background:

Major State & Local Taxes in Texas, 2005

Other State Taxes21%

City 7%

School District28%

County 7%

Special District

5%

State 25%

Local 7%

Sales Tax32%

Property Tax47%

Sources: Comptroller of Public Accounts, Annual Property Tax Report; Cash Report.

The Background:

Texas State Government Revenue, 2006Total $72 billion

Interest & Investments

3%

Other6%

Federal Funds34%

Licenses, Fees, Permits, Fines,

Penalties8%

Lottery2%

Taxes46%

Motor Fuels9%

Motor Vehicle Sales and

Rental9%

Sales54%

Sin (Cigarette &

Tobacco, Alcohol)

4%

Franchise8%

Insurance4%

Other3%

Gas/Oil Production

10%

Source: Comptroller of Public Accounts, Annual Cash Report

State Tax Collections, 2006Total $33.5 billion

The Background

Texas Was Low-Tax Overall But Had High Property Taxes

Tax as % of Personal Income

Texas National average

Texas’ rank

Total taxes 9.5% 11.0% 45th

Property taxes 4.1% 3.4% 10th

General and selective sales taxes

3.9% 3.8% 22nd

Source: State Fiscal Analysis Initiative: State and Local Government Revenue for Fiscal 2004-05. Data from U.S. Census Bureau and U.S. Bureau of Economic Analysis

Texas Has High Sales and Property Taxes Because It Has No Income Tax

0%

51% 49%

25%

40%35%

0%

20%

40%

60%

Income tax Sales tax Property tax

Texas U.S. Average

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

1990 1992 1994 1996 1998 2000 2002 2004 2006

Pe

r $

10

0 o

f ta

xa

ble

pro

pe

rty

va

lue

The Background Property Tax Rates Climbed Steadily

Source: Comptroller of Public Accounts, Annual Property Tax Reports

School Property Tax Rate

Total Property Tax Rate

The Background

Recent Jump in Property Tax Levy As a Percentage of Personal Income

Source: Comptroller of Public Accounts, Annual Property Tax Reports, Spring ’06 State Economic Forecast

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1984 1988 1992 1996 2000 2004

% o

f s

tate

pe

rso

na

l in

co

me

School Tax Levy

Total Property Tax Levy

Taxable property by category, 2006Total: $1.36 trillion taxable for schools

Rural, 5%

Oil and Gas, 7%

Industrial, 9%

Single-family residential,

43%

Other, 7%

Commercial (including

multi-family), 29%

Who Pays School Property Taxes?

School Property Tax Exemptions, 2006Total: $192 billion

Value Lost to Tax Freeze,

17%

Other Deductions,

14%

Local Optional Age

65+ and Disabled, 3%

Required Homestead

Exemptions, 44%

Value Lost to 10%

Homestead Cap, 7%

Local Optional Percent

Homestead, 15%

Who Pays School Property Taxes?

The Background

State Share of Public Education Funding In Rapid Decline

Source: Legislative Budget Board, Fiscal Size-Up, 2006-07 Biennium

30%

35%

40%

45%

50%

1991 1994 1997 2000 2003 2006

% o

f to

tal s

tate

-lo

ca

l fu

nd

ing

The Trigger Texas Supreme Court Ruling

• Most school districts were at or near the statutory maximum property tax rate of $1.50 per $100 of property value

• Court found situation to be equivalent to a state property tax, prohibited by the Texas Constitution

• Required Legislature to give districts “meaningful discretion” over local tax rates

• Did not directly order reduction in tax rates

The Response:

The Legislative Response

• Require school districts to reduce maintenance-and-operations rate by one-third over two years (from $1.50 to $1.00)

• Replace lost property tax revenue with:– Radically reformed franchise tax– Increased cigarette tax

• (from 41 cents per pack to $1.41)

– Minor change in tax on sales of used cars– Cash on hand

The Response

New Revenue Replaces Only 60% of Lost Property Taxes

Source: Legislative Budget Board, Fiscal Notes for HB 1, HB 3, HB 4, HB 5 (79 th Legislature, 3rd Called Session)

In billion $ 2008-09 2010-11

New business tax 6.8 7.7

Increased tobacco tax 1.4 1.3

Used car sales 0.1 0.1

TOTAL REVENUE $8.3 $9.1

Lost property tax revenue -$13.5 -$14.9

SHORTFALL -$5.2 B -$5.8 B

Local 8%

State 27%

Special District6%

County 8%

School District20%

City 8%

Other State Taxes25%

Sales Tax35%

Property Tax40%

Sources: Comptroller of Public Accounts, Biennial Revenue Estimate 2008-09, January 2007; Annual Property Tax Report. Forecast by CPPP.

The Consequences:

Major State & Local Taxes in Texas, 2009

Licenses, Fees, Fines,

Penalties8%

Interest/Investment

Income3%

Taxes51%

Lottery2%

Other4%

Federal Funds31%

Source: Comptroller of Public Accounts, Annual Cash Report

The Consequences:

Texas State Government Revenue, 2009Total $79 billion

Source: Comptroller of Public Accounts, Biennial Revenue Estimate 2008-09, January 2007.

The Consequences:

Increased Importance of the Franchise TaxState Tax Collections, 2009: Total $41 billion

Other2%

Insurance3%

Gas/Oil Production 6%

Franchise15%

Sin (Cigarette,

Tobacco, Alcohol)

5%

Motor Fuels8%Motor Vehicle

Sales and Rental

9%

Sales52%

The Consequences:

Incidence by Household Income

Source: Legislative Budget Board, Tax Equity Notes for HB 1, HB 3, HB 4, HB 5 (79th Legislature, 3rd Called Session); Calculations by CPPP.

-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

<$24.900 $24,900 - $45,300 $45,300 - $69,600 $69,600 - $109,200 <$109,200

% o

f h

ou

seh

old

in

com

e

Net change resulting from property tax reductions funded by franchise and cigarette tax

increases and General Revenue

The Consequences:

School Spending Same As In 2000-01 Inflation-Adjusted Per-Student

Source: Legislative Budget Board, Texas Education Agency, U.S. Bureau of Economic Analysis. Calculations by CPPP.

$3,4

90

$3,7

90

$3,7

26

$3,9

17

$3,9

69

$3,6

61

$3,5

84

$3,2

67

$3,0

93

$3,0

48

$3,5

07

$4,3

28

$4,4

72

$3,5

91

$3,6

20

$3,8

26

$3,7

27

$4,0

54

$4,1

87

$4,3

02

$4,2

76

$4,1

80

$4,1

16

$4,0

62

$3,4

92

$3,5

08

$-

$3,000

$6,000

$9,000

Federal

Local

State

The Consequences

Pressure for More Revenue• 900 school districts (of 1,000+ total) immediately

raised rates by 4 cents available in 2006• 118 school districts asked for voter approval of

further increase in tax rates in 2007, with 78% success rate

• 104 school districts holding rate elections in 2008• $9.75 billion in state general obligation bonds

(including first use of these for highways)• Bond $3 billion for cancer research, while reserving

$3 billion for 2010-11 tax cuts

How About the “Surplus”?

• Rainy Day Fund $5.7 billionfor emergency spending only

• Property Tax Relief Fund 3.0 billionto replace lost tax revenue

• Cash Balance 2.0 billion2.5% of current budget

• “Surplus” $10.7 billion

How About Other Sources of Revenue?

2007 Revenue Expected Growth in

2008

Year-Over-Year thru 7/08

Sales Tax $20.3 billion 3.1% 6.5%

Franchise $3.1 billion 86.8% 53.9%

Natural Gas $1.9 billion - 4.7% 38.4%

Cigarette $1.3 billion -8.8% 19.3%

Oil $0.8 billion -5.0% 69.9%

TOTAL TAXES $37.0 billion 8.9% 12.4%

Budget Outlook for 2010-11

HHS13%

Higher Ed.12%

K-12 Ed.18%

Other8%

Prisons4%

Highways6%

Federal30%

HHS 19%

K-12 Ed. 5%

Highway 4%Other Federal

3%

Property tax cut, 8%

Biennial Total: $168 billion

Federally funded = shown in white; other budget areas are General Revenue + GR-Dedicated + “Other” State Funds.

The Texas State Budget for 2008-09

$45 billion in state aid

Little or No Growth from Past Spending

4.2%

3.4%

3.2%

7.6% 7.3%

6.6%

0%

2%

4%

6%

8%

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Per

cen

t o

f G

ross

Sta

te P

rod

uct

All Funds

General Revenue

State Government Spending as a Share of the Economy

$0 $5 $10 $15 $20 $25

2009 Expected Ending Balance, Minus $1.2 b supplemental for 2009

Plus New Revenue for 2010-11 (11% growth?) and rest of 2009

Minus $3.9 billion for K-12 ($1.5 billion is for enrollment growth)

Minus $800 million for higher ed

Minus $5.7 billion for HHS (caseload and cost increases)

Minus $1 billion for prisons

Minus $735 million for state worker and teacher health costs

Minus $7.7 billion for Rainy Day or Property Tax Relief set-aside

Only $1.2 billion left, with nothing spent on highways,

courts, agriculture, state parks, state employee pay

raises, or anything else

2010-11 Budget Needs

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