Eva deluna castro @DeLunaEva State Budget update 2020-2021 Funding & Revenue for Texas Services Eva deluna castro @DeLunaEva June 2019

TODAY’S TOPICS State budget and state/local tax developments in 2019 session Highlights of HB 1 and SB 500 budget bills; HB 3 school finance SB 2 (counties, cities, emergency services districts) What could the 2019 Legislature’s spending and revenue choices mean for 2021?

Highlights of budget bills House Bill (HB) 1, general appropriations act SB 500, supplemental funding for 2019 & for 2020-2021

general revenue – “pay-go” part Almost 90 % of GR comes from tax revenue in 2018-19 “Other” is Business and Economic Development, Natural Resources, Courts, Regulatory, and Legislative Agencies.

general revenue spending 50.2 Almost 90 % of GR comes from tax revenue in 2018-19 Comptroller said back in January that available GR would grow by $9 billion (8.1 percent) – pretty much all of it went to public ed Point out less GR for HHS – some of that is a better match for Medicaid; at least $1.5 billion is a likely “IOU” for next legislature to deal with in a supplemental. (One for this time was $2 billion GR, $2.2 billion federal) “Other” is Business and Economic Development, Natural Resources, Courts, Regulatory, and Legislative Agencies.

All funds (GR-relatED, federal, ESF, OTHER STATE $) Of the all-funds increase, not all of the new money for public ed is more resources from schools’ point of view; $3.5 B replaces recapture property tax revenue, and $5 billion replaces other property tax support for schools “Other” is Business and Economic Development, Natural Resources, Courts, Regulatory, and Legislative Agencies.

Behavioral health: House & senate proposals

HB 1 conferees: $3.3 billion in GR-Related support Behavioral health funded at $4.4 Billion All Funds, not counting Medicaid/CHIP Cross-agency amounts in House Bill 1 only Medicaid, another $3.3 billion All Funds; CHIP, $102 million – eventually Supplemental (SB 500) has $445 million for state hospital construction, $7.5 m for community mental health services (2019) HB 1 conferees: $3.3 billion in GR-Related support “eventually” because of Medicaid IOU – doesn’t cover cost most medical growth

2020-2021 All Funds budget is 1.5% lower, adjusted for population growth + inflation

HB 3 Best guess – school resources Statewide for ISDs: M&O revenue in FSP goes up about 7% a year, compared to current law Inflation: about 2.5%/year? (CPI)

How are state services paid for? Billion $ A little less than half is tax revenue; about one-third is federal Federal in 2018-19: a little higher than usual because of Hurricane Harvey (about $8 to $9 billion, mostly at DPS and GLO) Nontax: tuition, license revenue, fees, rebates, penalties, sales of land, investment income, Tax category adjusted for oil/gas severance tax deposits to ESF, and for FSP refinance with ESF (2019) “Other” includes GR-D balances: $5.1 billion by end of 2019. Up (w/TERP & reduced GR-D spending) to at least $5.7 B by 2021. HB 3: cost goes up by $1.8 B in next budget cycle, about 4% of state-revenue support for FSP

More taxes for highways & border security has meant less for education No real increase in state revenue; only a reallocation State revenue per Texan, in 2017 $ (State/Local Govt. inflation) More taxes for highways & border security has meant less for education

Revenue choices “two-legged stool” of sales & property taxes – SB 2 - HB 3

State taxes only: 48th per capita Add in local taxes: 29th per capita

Point out that values are different from collections Point out that values are different from collections. City and county property tax levies have gone up 5% a year in last decade; schools and special districts, about 6%.

SB 2: lower election “trigger” of 3 SB 2: lower election “trigger” of 3.5% for city & county property tax revenue increases Average annual growth since 2007 was about 5% for city and county property tax levies; for special districts, 6% Rate will now be 3.5%; cities will be most affected, according to fiscal note assumptions about where elections will fail. May also drive up the cost of borrowing. Police & fire are about 63% of city general budget spending. 15 biggest cities: 42% for police, 21% for fire/EMS SB 2 exempts hospital districts and community colleges; also exempts certain county costs (hospital and indigent defense)

Reliance on consumption taxes means poorer households pay more as share of income Almost half of this is the sales tax. For lowest-income HH, 7.3% is paid in sales tax; at other end, only 1.6% of income is sales tax. Source: Texas Comptroller of Public Accounts, Tax Exemptions & Tax Incidence, November 2018

Top one-fifth of Texas Households pay less of their income in state/local taxes Source: Texas Comptroller of Public Accounts, Tax Exemptions & Tax Incidence, November 2018

How to maintain new state aid to schools? School finance reforms cost the state… $11.6 billion in 2020-2021 $13.4+ billion in 2022-2023 New revenue $550 million from Wayfair (Internet sales); $600 million from additional Permanent School Fund transfers. Requires constitutional amendment Another Nov. 2019 amendment will make personal income tax even more unlikely for decades to come How to maintain new state aid to schools? HB 3 says: use ESF before cutting school aid Also says: look at consumption tax revenue that could pay for HB 3 beyond 2021. Study due by Sept. 1, 2020. TX is one of 7 states that don’t tax personal income at all; 2 others (NH and TN) tax dividend income

Sources of state tax revenue, 2018 About 80 percent of state taxes already come from consumption taxes – everything in some shade of green Gasoline: ¼ dedicated to schools, ¾ to highways Highways also get $5 b in general sales tax every two years; will begin getting 35% of MV sales “excess” oil/gas revenue goes to Highway Fund and to ESF

“big three” proposal: raise sales tax rate to 7 “big three” proposal: raise sales tax rate to 7.25% (16% more) to raise $5 Billion/year for school tax cuts HJR 3 / HB 4621. Analysis at House district level showed that in half of districts, 80% to 95% of households would end up paying more in taxes. But expect this to come back as a direct question to the voters. Depending on the poll wording, it is either as unpopular as a personal income tax, or preferable to property taxes (for schools). Kansas income tax: three rates (3%, 5%, 6%) – first $5,250 (for a single nonelderly person) isn’t taxable at all. Head of HH: $10,000 is exempt.

Alternative to raising the rate: widen the sales tax base

Other ways the 2020-21 budget was balanced Medicaid “IOU” for next Legislature $1.9 billion in General Revenue Add to “smoke & mirrors” trick of unspent but legally dedicated balances Emissions Reduction fees were continued ($380 million in net new revenue) but TERP will go “off budget” after 2021 – a $2.1 billion hit to General Revenue $6 Billion from Economic Stabilization Fund Other ways the 2020-21 budget was balanced $4 billion needed for first two

ESF would have otherwise reached $15. 6 billion. Now down to $9 ESF would have otherwise reached $15.6 billion. Now down to $9.5 billion. Sufficient balance is no longer determined by legislature; it’s 7% of GR appropriations ($8.3 billion). Going below that cuts off transfer to the Highway Fund.

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