The Texas Tax & Budget Primer Dick Lavine, Eva DeLuna,

U.S. Average, 2006 Texas, 2006 Texas 50- state rank Adults without a high school degree (% of 25+) nd Birth rate (live births per 1,000 population) nd Share of population under age 18 (%) rd Limited English Proficient/English Language Learners in public schools (% of all students) th Poverty rate (%) th Child poverty rate (%) th Elderly poverty rate (% of 65+) th Family income ratio: top 20% to bottom 20% th Who is Texas?

Above-Average Public Needs Below-Average Effort United StatesTexas Expenditure need$6,007$6,4566 th Actual expenditure$6,007$5,12747 th Revenue capacity$4,659$4,27133 rd Actual revenue$4,659$4,01737 th Fiscal capacity th 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

Sources: Comptroller of Public Accounts, Annual Property Tax Report; Cash Report. The Background: Texas State Government Revenue, 2006 Total $72 billion

Source: Comptroller of Public Accounts, Annual Cash Report State Tax Collections, 2006 Total $33.5 billion

The Background Texas Was Low-Tax Overall But Had High Property Taxes Tax as % of Personal Income TexasNational average Texas’ rank Total taxes9.5%11.0%45 th Property taxes4.1%3.4%10 th General and selective sales taxes 3.9%3.8%22 nd Source: State Fiscal Analysis Initiative: State and Local Government Revenue for Fiscal 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

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 School Tax Levy Total Property Tax Levy

Who Pays School Property Taxes?

The Background State Share of Public Education Funding In Rapid Decline Source: Legislative Budget Board, Fiscal Size-Up, Biennium

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, 3 rd Called Session) In billion $ New business tax Increased tobacco tax Used car sales0.1 TOTAL REVENUE$8.3$9.1 Lost property tax revenue-$13.5-$14.9 SHORTFALL-$5.2 B-$5.8 B

Sources: Comptroller of Public Accounts, Biennial Revenue Estimate , January 2007; Annual Property Tax Report. Forecast by CPPP. The Consequences: Major State & Local Taxes in Texas, 2009

Source: Comptroller of Public Accounts, Annual Cash Report The Consequences: Texas State Government Revenue, 2009 Total $79 billion

Source: Comptroller of Public Accounts, Biennial Revenue Estimate , January The Consequences: Increased Importance of the Franchise Tax State Tax Collections, 2009: Total $41 billion

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. Net change resulting from property tax reductions funded by franchise and cigarette tax increases and General Revenue

The Consequences: School Spending Same As In Inflation-Adjusted Per-Student Source: Legislative Budget Board, Texas Education Agency, U.S. Bureau of Economic Analysis. Calculations by CPPP.

The Consequences Pressure for More Revenue 900 school districts (of 1,000+ total) immediately raised rates by 4 cents available in 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 tax cuts

How About the “Surplus”? Rainy Day Fund$5.7 billion for emergency spending only Property Tax Relief Fund 3.0 billion to replace lost tax revenue Cash Balance 2.0 billion 2.5% of current budget “Surplus” $10.7 billion

How About Other Sources of Revenue? 2007 RevenueExpected Growth in 2008 Year-Over- Year thru 7/08 Sales Tax$20.3 billion3.1%6.5% Franchise$3.1 billion86.8%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 billion8.9%12.4%

Budget Outlook for

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 $45 billion in state aid

Little or No Growth from Past Spending

2009 Expected Ending Balance, Minus $1.2 b supplemental for 2009 Plus New Revenue for (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 Budget Needs

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