Chapter 11 Public Finance in Texas

The Budget The state constitution requires that the legislature operate within a balanced budget. The Texas budget five broad categories: –general revenue funds budget –general revenue-dedicated funds budget –federal funds budget –other funds budget –all funds budget.

Texas Budgetary Funds Appropriated, 2012–13 (in billions of dollars)

Taxing and Spending in Texas Texas Tax Policies –No state income tax –Relatively high property and sales taxes 10th highest sales tax (6.25%) in nation Texans pay less taxes compared to people in most other states –State taxes per capita rank Texas #48 –Local taxes at #13 –Overall at #32

WHO ARE TEXANS? Top State Income Tax Rates SOURCE: The Tax Foundation, “Top Marginal State Income Tax Rates, Tax Year 2011,” (accessed 11/30/12). None 3–4.6% 4.6–6.2% 6.2–7.8% 7.8–9.4% 9.4–11% Highest tax rate 11% No income tax

WHO ARE TEXANS? Taxes as a Percentage of Income Taxes SOURCE: The Tax Foundation, “Top Marginal State Income Tax Rates, Tax Year 2011,” (accessed 11/30/12). Sales taxProperty tax Annual Income < $29,233 $29,233– $52,960 $52,960– $80,882 $80,882– $126,460 > $126, %1.6%2.9%2.4%2.2% $1,273$1,809$2,462$3,652$7,555 6%1.3%3.4%2.9%2.5% $1,473$2,177$2,989$4,089$6,507

Trends in State Government Expenditures, 1992–93 to 2012–13 Biennia

Revenue in Texas Revenue Sources –Taxes Sales and Property (NOT income or corporate) Oil and natural gas production taxes Tobacco, Alcohol, Auto, Hotel, Other taxes –Federal Matching Fund Grants –Fees and Investment Earnings Taxes were 41.2% of state revenue in 2011 –Sales tax is by far the largest source

State Revenue Biennial Comparison, by Source, 2010–11 and 2012–13 Biennia (in billions of dollars)

State Tax Revenue Source, Biennium

Income Tax Debate Some state taxes are regressive –Regressive: poor taxed at higher rate than wealthy Sales and use taxes are regressive –Flat taxes are generally categorized as regressive State income tax has been discussed –Mostly media, policy organizations –Elected officials both parties not interested Might be pragmatic idea, but few want to pay new taxes, no matter how it is presented or explained

Other State Revenue Federal funds –Matching grants for Medicaid, Temporary Aid to Needy Families, education, and roads –With matching funds, the more a state spends, the more it gets from the federal government Texas spends relatively little (in part by state law) so gets less than some other states do in federal support

Other State Revenue Texas also takes in revenue from: –Interest on bonds and other investments –Sales of goods and services it provides –Income from public lands that are rented –State lottery –Tobacco settlement

Constitution and the Budget The legislature makes a 2-year budget –Agencies project out in manner that may miss unanticipated and consequential developments –Legislature only meets 140 days every two years Not much time for long economic scenario simulations –A large portion of the budget is dedicated Obligations payments that are non-negotiable

Texas Biennial Budget Cycle

Constitution and the Budget Pay-as-You-Go limit –The state budget must always be balanced. –Any bill that is to be appropriated must be cleared by the comptroller, who must certify there are funds.

Constitution and the Budget Texas Constitution sets specific spending limits on some services –Welfare Spending Limit Article III, Section 51a Texas will not spend more than 1% on poor children and their caretakers. Non-dedicated spending cannot grow faster than estimated growth of the state’s economy Amendment to Article III –No more than 5% state budget spent on debt

Budgetary Process Developing a state budget falls to the Legislative Budget Board (LBB) –Lt. Governor, Speaker of the House, chairs of House Appropriations and Ways and Means, Senate Finance and State Affairs committees, and two additional members from both the House and Senate

Budgetary Process LBB 1.Analyzes agency programs 2.Estimates costs of new legislation 3.Creates a draft budget for the legislature

Budgetary Process First stage of creating a budget –LBB reviews 5-year projections from each department Hearings are held before legislature begins session –Comptroller determines Biennial Revenue Estimate (BRE) The BRE can be updated if dramatic unforeseen changes take place

Budgetary Process Second stage of creating a budget –House Appropriations and Senate Finance Committees are sent proposal Committees hold hearings and draft legislation –Final budget is passed –Comptroller certifies budget –Sent to governor for veto or signature

Public Opinion Quiz What is the best way for Texas to generate more revenue when sales are low? a. Income tax b. Higher taxes on tobacco and alcohol c. Corporate tax d. Higher user fees (schools, parks, courts)

Public Opinion Quiz Should taxpayers who are not enrolled (or do not have children enrolled) in public colleges and universities have their tax dollars pay for those institutions? a.Yes, the public benefits from a more educated population, and public funds make it possible for more people to earn college education. b.No, people who use the institution and services alone should cover the costs.

Public Opinion Quiz Considering the amount of money Texans pay in federal income taxes, should Texas accept more federal dollars for health and human services and other programs? a. Yes, Texas should take more federal funds. b. No, Texas should reject federal funds.

Public Opinion Quiz Would it be better if the legislature generated an annual budget instead of a 2-year budget? a. Yes, unexpected gains and losses could be managed better. b. No, it would make no difference in how the money is allocated.

Public Opinion Quiz Should Texas continue to require a balanced budget? a. Yes b. No