Texas Government 2306 Unit 9 Taxing and Budgeting

Texas Fiscal Policy: Guiding Principles 1. Opposition to deficit spending 2. Strong support of low tax rates 3. Strong support for very limited spending for most public services = Fiscal Conservatism

Texas Constitution & Budgeting  Requires a balanced budget (no deficit spending)  Biennial legislative sessions requires a two-year budget  Role of Comptroller: revenue forecaster –Sets limits on what state can spend

Major Revenue Producers  Federal Government –Personal income tax  Texas State Government –Sales tax  Local Governments –Ad valorem (property tax)

TAX TERMS/CONCEPTS   TAX CAPACITY o Measure of a state’s wealth/per capita income   TAX EFFORT o Measure of how close a state comes to its tax capacity   PER CAPITA TAXES o Average tax paid per person   PROGRESSIVITY/REGRESSIVITY o To what extent are taxes paid according to the ability to pay

Regressive vs. Progressive Taxes  Regressive  All taxpayers pay the same rate, regardless of income  Shifts the tax burden to the middle class & poor  Ex.: sales & property tax  Progressive  Tax rate increases as income increases  Shifts the tax burden to the upper class & wealthy  Ex.: income tax

TEXAS TAX POLICIES 1  1. Tax Capacity  Measure of state’s wealth/per capita income Texas Ranking = 97 National Average = 100  2. Tax Effort  Measure of how close a state comes to its tax capacity Texas Ranking = 87 National Average = 100

TEXAS TAX POLICIES 2  3. Per Capita Taxes  Average tax paid per person Texas: $1, % of income U.S. ave.:$1, % of income 4. Progressivity/Regressivity  Progressive = as income increases, tax rate increases  Regressive = tax rate same regardless of income  Texas = 2 nd most regressive tax structure in U.S.

Revenues  In the fiscal year Texas revenues came from the following sources:  45.7% from state taxes;  35.5% from federal funding; (Is this good or bad?)  2.5% from the state lottery;  16.3% from investments, revenues from public lands, licenses, fees, and other collections

State Rank & Percentage of Income Collected as Taxes

State Comparison: Tax Burdens as Percent of Income (Nat. ave.: 6 %; Tx: 4.5%)

Megastates: Tax Burden

Texas State Revenues

Texas Tax Collections-Type of Tax--2005

TEXAS TAXES --% OF STATE TAX REVENUE 1. Sales Tax 2. Motor Fuels Tax 3. Motor Vehicle Sales/ Rental Taxes 4. Corporate Franchise Tax 5. Oil/Gas Production Tax 6. “Sin” Taxes 7. Insurance Co. Taxes 8. All Other Taxes  57%  11%  7%  4.4%  4%  3%

Tax Rates—Two Types  Progressive tax rates - increase as the base increases like the federal income tax:  Those at the bottom have no taxable income and pay nothing  Persons with higher incomes can better afford to pay higher tax rates  Regressive taxation – the rate declines as the base increases

Problems with Texas Tax System  It is regressive - falls more heavily on the poor  It is elastic – relies on sales & excise taxes that rise or fall quickly in response to economic upturns and downturns = not a stable source of revenue for the state

Types of Sales Taxes 1  General sales tax – collected on the retail price of most items (26.3% of ’06-’07 revenues)  Selective sales tax – levied on particular items such as liquor, cigarettes, gasoline, or luxury items (sometimes called hidden or excise taxes)

Federal Income Tax Rates: 2004

Texas Sales Tax: Who Pays? As a Percentage of Income-2005

Texas Tax Burden By Income-1995

Texas Tax Burden-By Income-1999

Percentage of Income Paid in Sales & Excise Taxes

Taxation 2  Regulatory taxes – taxes that do more than pay for services, these also attempt to control social and economic behavior:  Sin taxes (on tobacco & alcohol);  “use/benefits received” taxes (motor vehicle rental tax, tolls on toll roads);  Excise taxes (gasoline tax)

Taxation 3  Benefits-received taxes – taxing those who benefit from a public service  Ability-to-pay taxes – levied on property, sales, and income:  The more valuable people’s property is, the wealthier they are and able to pay taxes;  Income or expenditure are inadequate measures of true wealth

Federal Funds to Texas:

Borrowing  The Texas constitution limits state borrowing and requires a balanced budget thereby limiting the state debt.  Texas does issue bonds:  General obligation bonds;  Revenue bonds

Megastate: Sales, Gasoline, & Tobacco Tax Comparison-2001

Megastates: Source of Tax Revenue

Taxation: Property Taxes  Many services in Texas are financed by local, instead of state, taxes  Property taxes are the main source of revenue for most local governments. Two types of “ad valorem” (according to value) taxes:  Real property;  Personal property

Megastates: Property Tax Comparison

TEXAS BUDGET 1   Dedicated/earmarked funds” - about 46% of the state budget    Federal funds - about 36% of budget; must be spent according to fed. govt. regulations   Court orders – have also forced the Legislature to direct funds to specific programs or uses   To reduce prison overcrowding (Estelle v. Ruiz)   To reduce the funding disparity between wealthy and poor school districts—(Edgewood v. Kirby)   To upgrade MHMR facilities—a federal court order 

Dedicated/Earmarked Funds  Gasoline (motor fuel) tax-3/4 is earmarked for the State Highway Fund and ¼ for the Available School Fund  Earnings from state lands (oil revenues, etc.)—go directly to the Permanent University Fund (for the UT and A & M university systems) and the Permanent School Fund (for public schools)

Other Budgetary Funds “Locked In”  Federal funds (about 36% of the state revenues and state budget) are earmarked by block and categorical grants to basically three areas: –  Health & Human Services –  Highways –  Education  Court orders have also forced the Legislature to direct funds to specific programs or uses: –  To reduce prison overcrowding (Estelle v. Ruiz—a federal court) –  To reduce the funding disparity between wealthy and poor school districts (Edgewood v. Kirby—a decision by the Texas Supreme Court) –  To upgrade MHMR facilities—a federal court order

TEXAS BUDGET 2   RESULT : Only 16% of the state budget is composed of “discretionary funding” (funding the Legislature has control over)—funding unaffected by federal or state statutory requirements, Texas Constitution’s requirements, or court orders

FINANCIAL CRISIS OF 1980s  1. Collapse of oil prices— from $40/barrel to <$10/barrel  2. Exploding State Population  3. National Recession-Mid-1980s  4. Court Orders  Ruiz v. Estelle—reduce prison overcrowding (federal court order)  Edgewood v. Kirby—reduce funding disparity between wealthy & poor school districts (Texas Supreme Court decision)  Upgrade State MHMR Facilities (federal court order)

Financial Crisis in  Texas was $11 billion short to maintain existing levels of funding  Effects of 9-11 on economy—minor recession  Growing state population—strained many services  State Response: –Minor fee and tax increases –Major cuts in state spending—including higher ed. –Local governments forced to pay for increased cost of public schools = higher local property taxes

State Lottery Produced only 2.5% of budget in 2005 (down from 5% +)  Pros  1. A Voluntary tax  2. Texans gamble anyway, might as well keep $ in the state  3. Delays more painful options: i.e. an income tax  Cons  1. Immoral way to raise money  2. The poor most likely to play it  3. Feeds on gambling addicts  4. Brings in crime

TAX REFORM OPTIONS  1. Raise sales tax rate  2. Broaden sales tax base  Tax food and drugs  Tax services (legal, financial, etc.)  3. Raise “Sin Taxes”  4. Legalize gambling (casinos, slot machines)  5. Increase Gasoline/Motor Fuel Tax  6. Personal Income Tax (Tx: one of 6 states w/o it)  1992 constitutional amendment prohibits a state income tax without voter approval

The Budgetary Process  Through the appropriations process the legislature legally authorizes the state to spend money  Agencies make budget requests on past spending and provisions for increases  Dedicated or earmarked funds prevent the legislature from systematically reviewing state spending

The Budgeting Process in Texas

TEXAS BUDGETARY PROCESS—THE ROLE OF:  PRESIDING OFFICERS Serve as LBB chair and vice-chair & appoint 4 members  LEGISLATIVE BUDGET BOARD Writes “rough draft” Legislature uses for state budget  LEGISLATURE Drafts & approves 2-year budget  GOVERNOR Use of item veto on budget bill Threat to use general veto & item veto  COMPTROLLER Issues “revenue estimate”