1. Finance and Fiscal Policy
Chapter 13

2. Learning Objectives
13.1 Assess the fairness of Texas’s budgeting and taxing policies Describe the sources of Texas’s state revenue Describe the procedure for developing and approving a state budget Evaluate the effectiveness of the state’s financing of public services.
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3. Fiscal Policies Taxing Policy Prefer regressive taxes
Relies heavily on sales tax (among nation’s highest)
Unfair?
Land- and product-based tax system
fiscal policy: Public policy that concerns taxing, government spending, public debt, and management of government money.
tax: A mandatory assessment exacted by a government for a public purpose.
regressive tax: A tax in which the effective tax rate falls as the tax base (such as individual income or corporate profits) increases.
Regressive taxes favor the rich and put the burden on the poor
progressive tax
A tax in which the effective tax rate increases as the tax base (such as individual income or corporate profits) increases.
Service sector
Businesses that provide services, such as finance, health care, food service, data processing, or consulting
Fee
A charge imposed by an agency upon those subject to its regulation
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4. Percent of Average Annual Family Income Paid in Local and State Taxes in Texas (2011)
Figure 13.1
Source: Chandra King Villanueva, ‘‘Who Pays Texas Taxes?’’ (Austin: Center for Public Policy Priorities, September 25, 2012),
Critical Thinking Question: What are the benefits and problems of a regressive tax system?
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5. Fiscal Policies Budget Policy Spending Policy Balanced budget
Texas Constitution prohibits debt
General Revenue Fund
Spending Policy
Ranks 48th - 50th in state spending
Little support for social services
Learning Check 13.1
What are three characteristics of Texas’s fiscal policy?
The state of Texas has one of the highest sales tax rates in the nation. It does not have a state income tax. Is Texas’s tax structure an example of a regressive or a progressive tax system?
balanced budget: A budget in which total revenues and expenditures are equal, producing no deficit.
General Revenue Fund: An unrestricted state fund that is available for general appropriations.
dedicated fund: A restricted state fund that can only be appropriated for its designated purpose. If the fund is consolidated within the general revenue fund, it usually must be spent for its intended purpose. Any unappropriated amounts can be included in the calculations to balance the state budget.
Learning Check
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6. Revenue Sources The Politics of Taxation
Most conflict over financing schools
Business franchise tax expanded 2006
But reductions reflect political strength of business owners
In 2006, despite resistance from several large law firms, the 79th Legislature modified and expanded the business franchise tax. It also imposed an additional $1 tax on cigarettes, increased taxes on other tobacco products (except cigars), and required buyers to pay a tax on used cars at their presumptive value as determined by publications such as Kelley Blue Book. Since 2006, legislators have yielded to the demands of small business owners by reducing the number of businesses subject to the franchise tax and lowering the tax rate.
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7. Revenue Sources The Politics of Taxation Sales Tax
Most important single source of revenue
General sales tax
6.25% statewide
8.25% combined state and local
Some items exempt
Many services untaxed
Selective sales tax
Sin taxes, highway taxes, miscellaneous
general sales tax: Texas’s largest source of tax revenue, applied at the rate of 6.25 percent to the sale price of tangible personal property and ‘‘the storage, use, or other consumption of tangible personal property purchased, leased, or rented.’’
Selective sales tax: A tax charged on specific products and services
Sin tax: A selective sales tax on items such as cigarettes, other forms of tobacco, alcoholic beverages, and admission to sex-oriented businesses
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8. Projected Sources of State Revenue, Fiscal Years 2014-2015
Amounts are in billions of dollars
Figure 13.2
Legislative Budget Board, Fiscal Size-up, 2014–15 Biennium (Austin: Legislative Budget Board,
February 2014), 29,
Critical Thinking Question: What other sources of revenue do you believe are available in the state of Texas?
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9. Revenue Sources The Politics of Taxation Business Taxes - General
Sales tax
Franchise tax
Unemployment compensation payroll tax
Business Taxes - Select
Oil and gas production
Insurance company gross premiums
Public utilities gross receipts
Severance tax
franchise tax: A tax levied on the annual receipts of businesses that are organized to limit the personal liability of owners for the privilege of conducting business in the state.
payroll tax: An employer-paid tax levied against a portion of the wages and salaries of workers to provide funds for payment of unemployment insurance benefits in the event employees lose their jobs.
severance tax: An excise tax levied on a natural resource (such as oil or natural gas) when it is severed (removed) from the earth.
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10. Revenue Sources The Politics of Taxation
Inheritance tax stopped in 2005
Tax burden is low
Tax collection
Comptroller
Department of Motor Vehicles
State Board of Insurance
Department of Public Safety
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11. Revenue Sources Revenue from Gambling Racing Lottery Bingo
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12. Revenue Sources Other Nontax Revenues Federal Grants-in-Aid
Health and human services
Business and economic development
Education
Land Revenues
Includes oil and natural gas leases
grant-in-aid: Money, goods, or services given by one government to another (for example, federal grants-in-aid to states for financing public assistance programs).
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13. Federal Grants to Texas by Biennium (FY2002–2015) (in billions)
Figure 13.3
Developed from information available from State Comptroller, ‘‘Texas Net Revenue by Source, 1973–2010’’ and ‘‘Texas Net Revenue by Source, 2011,’’ and Legislative Budget Board, Fiscal Size-up 2014–2015.
Critical Thinking Question:
Is Texas too reliant on federal grants to balance its budget?
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14. Revenue Sources Other Nontax Revenues The Tobacco Suit Windfall
Lawsuit pays Texas $18 billion in damages from American tobacco industry
Miscellaneous sources
Fees, permits, income from investments
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15. Revenue Sources The Public Debt Bonded indebtedness Bond review
General obligation bond
Revenue bond
Bond review
Economic stabilization fund
Rainy Day Fund
Learning Check 13.2
What is the largest source of tax revenue for the state of Texas?
What is the stated purpose of the Rainy Day Fund?
general obligation bond: Amount borrowed by the state that is repaid from the General Revenue Fund.
revenue bond: Amount borrowed by the state that is repaid from a specific revenue source.
Rainy Day Fund: A fund used like a savings account for stabilizing state finance and helping the state meet economic emergencies when revenue is insufficient to cover state-supported programs.
Learning Check
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16. Budgeting and Fiscal Management
Budgeting Procedure
Budget: a plan of financial operation
Covers two fiscal years
Biennial legislature
budget: A plan of financial operation indicating how much revenue a government expects to collect during a period (usually one or two fiscal years) and how much spending is authorized for agencies and programs.
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17. Budgeting and Fiscal Management
Budgeting Procedure
Legislative Budget Board
Ten members from House and Senate
Governor’s Office of Budget, Planning and Policy
Prepares and presents budget to legislature
Legislative Budget Board (LBB): A 10-member body co-chaired by the lieutenant governor and the Speaker of the House. This board and its staff prepare a biennial current services budget. In addition, they assist with the preparation of a general appropriation bill at the beginning of a regular legislative session. If requested, staff members prepare fiscal notes that assess the economic impact of a proposed bill or resolution.
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18. Budgeting and Fiscal Management
Budget Preparation
Begins with governor’s mission statement
Dual budgeting system
Legislative chambers review
Committees “markup” appropriations bill and submit for vote
dual budgeting system: The compilation of separate budgets by the legislative branch and the executive branch.
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19. Texas Biennial Budget Cycle
Figure 13.4
Senate Research Center, Budget 101: A Guide to the Budget Process in Texas (Austin: Senate Research Center, January 2013), p. 5,
Critical Thinking Question:
Is Texas’s budgeting process efficient?
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20. Budgeting and Fiscal Management
Budget Expenditures
Functional
Services purchased by government
Objective
How money was spent
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21. All Texas State Funds Appropriations by Function for FY 2014-2015 (in millions)
Numbers are in millions
Figure 13.5
House Research Organization, Texas Budget Highlights: Fiscal 2014–15, State Finance Report No.
83-4 (Austin: House Research Organization, May 2, 2014), 3,
Critical Thinking Question: On what services do you believe the state should spend more or less money?
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22. Budgeting and Fiscal Management
Budget Execution
Purchasing
Texas Procurement and Support Services
Facilities
Accounting
Comptroller uses double-entry system
Auditing
Learning Check 13.3
What is a fiscal year?
Texas has a dual budgeting system. What does this mean?
Budget execution: The process whereby the governor and the Legislative Budget Board oversee and in some instances, modify, implementation of the spending plan authorized by the Texas legislature.
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23. Future Demands Public Education Sources of public school funding
Foundation School Fund
Available School Fund
Texas Lottery
Property Tax Relief Fund
General Revenue Fund
Critical Thinking Question: What amount of financial support should the state provide for funding public schools?
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24. Future Demands Public Education Funding equalization “Robin Hood” plan
Are all students entitled?
“Robin Hood” plan: A plan for equalizing financial support for school districts by transferring tax money from rich districts to poor districts
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25. Future Demands Public Higher Education Closing the Gaps initiative
State aid insufficient
Income through formula funding
Outcomes-based funding
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26. Future Demands Public Higher Education Community college funding
Minimum of $500,000 each
University funding
General Revenue Fund
Student fees
University of Texas and Texas A&M share Permanent University Fund
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27. Future Demands Public Higher Education Tuition deregulation
Forced institutions to raise tuition
Texas Tomorrow Funds
Texas Guaranteed Tuition Plan
Tomorrow’s College Investment Plan
State Grant and Loan Programs
TEXAS Grants Program
TEXAS Grants Program: “Toward Excellence, Access, and Success” is a college financial assistance program that provides funding for qualifying students
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28. Average Tuition and Fees Academic Year 2013-2014
Source: The College Board, Tuition and Fees by Sector and State over Time
Tuition and rates are for in-state students at public universities and community colleges.
Critical Thinking Question: Who should pay the costs of a college education: students or taxpayers?
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29. Future Demands Public Assistance Children’s Health Insurance Program
ChildLINK
Medicaid
Children’s Health Insurance Program (CHIP): A program that provides medical insurance for minimal premiums to children from low-income families.
ChildLINK: A program administered by the Texas Attorney General’s Child Support Division in which medical support payments from noncustodial parents are used to provide insurance for their children.
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30. Future Demands Infrastructure Needs Transportation Water
Toll roads increasing
Oil and gas taxes now diverted to State Highway Fund
Water
State Water Plan
“Conservation is not enough”
Learning Check 13.4
True or False: Tuition deregulation results in lower tuition at the state’s public colleges and universities.
What three programs provide health insurance for Texas children?
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31. Texas Farmers Are Suffering Through The Second Worst Drought in the States' History, Forcing Ranchers to Sell Off Cattle
Click picture to view video
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32. Video Discussion Questions
Why does prolonged drought affect the overall Texas economy?
What other Texas industries have a statewide economic impact?
Should the legislature oversee infrastructure issues? Why or why not?
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