House Committee on Ways & Means

October 5, 2011


Chair Hilderbran stated that the hearing would be an overview of basic exemptions and Texas’ current status. He clarified there would be subsequent meetings next year about, among other topics, the disparities in the margin tax, cost of goods sold, how the margin tax works, etc. to discuss how/if changes need to be made.


Review of Current Status of Texas’ Revenue and Spending

John Heleman, Chief Revenue Estimator, Texas Comptroller’s Office

Sales Tax – Texas’ largest tax

  • Makes up 54% of all revenue that goes into the General Revenue (GR) Fund, and 2/3 of all tax revenue that goes into the GR fund
  • FYs 2006 and 2007 were two years of back to back sales tax growth at a double digit rate
    • Also during those two years there was a low level of price inflation, such as what is occurring currently
  • 2008 collections continued to grow, however in the summer of 2008 Texas employment began to decline
  • 2009 collections saw reversal of strong growth trend; collections contracted by 2.7%
  • 2010 collections declined by another 6.6%
  • Oil and gas and construction sectors showed notable strength in remittance patterns in 2006/07/08, but weakened in 2009/10
  • FY 2011 sales tax remittances were growing strong at 9.4% over the previous year
    • Do remember it is up 9.4% from a very low level of collections
    • All major sectors of the Texas economy that remit sales tax reflected increases
    • Oil and gas increased over 70% in collections
    • Retail trade improved 5.5%
      • first part that began to show downturn were associated with housing such as the home improvement centers; next segment of stores showing stress from recession were those that sell electronics and televisions, etc.; last set of stores that began to contract were general merchandise or department stores
  • Restaurants and drinking establishments held up well through the recession
  • Rep. Ritter inquired about where the state is now versus where it has been
    • Heleman: 2008 sales tax collections was the all-time largest year of collections; the state is essentially where it was in 2008 in terms of collections now
  • Motor vehicle sales tax
    • Brings in almost $3 billion/year; enjoyed robust health through the 2000s as Americans began to buy more cars per household that cost more
    • 2008 brought in $3.3 billion; dropped 22% in 2009; in FY 2011 is up 12%

Franchise Tax/Margin Tax

  • Continues to perform as it has for the past several years; collections are based on business activity of the previous year
  • FY 2010 was worst year of collections, primarily due to the recession; all major taxes were more or less affected by the recession
  • FY 2011 Texas began to slowly recover and collections went up to almost $4 billion
    • First part of collections up to what the old 2007 tax methodology would have produced goes to the GR Fund and every dollar after goes to the Property Tax Relief Fund (school districts)
    • In 2011 $2.68 billion went to GR; another $1.25 billion went to the Property Tax Relief Fund
    • Member asked how much money goes to the funds consistently across bienniums; expressed need to know figures to help define how the tax is performing
  • Collections are in May; however, certain tax reports are not submitted until November
    • Will be a period of time before details will be known on what those businesses have done with respect to costs of goods sold and other methodologies
      • Rep. Ritter inquired as to why the state allows the later submission process
      • Heleman indicated it has been exercised for many years; since it is a business tax based on business operations the businesses may require more time to completely fill out the reports and put their records together
  • When the tax was first reformed in 2008 it brought in $4.4 billion; at that point there was a small business provision that allowed businesses that had less than $300,000 in revenues to be exempt from the tax
    • Has been adjusted to $1 million in revenues now and there are appx. 40,000 businesses that no longer owe the tax
    • About $75 million is not collected from the 40,000 businesses; large number of firms, but they are small businesses

Severance Taxes

  • Texas is unique because of its large amounts of oil and natural gas
  • FY 2011 oil production revenues were up 46% over the previous year
    • West Texas Intermediate escalated rapidly and hovered over $100/barrel
  • Production of oil in Texas has been steady for approximately 20 years
    • Has been slow decline over past 20 years until 2 years ago; uptake is most likely coming from 2 regions: West Texas region centered in Midland area and the South Texas Eagle Ford Shale
    • Two years ago the state began to see more oil wells being drilled than gas wells
    • In 2011 natural gas production tax revenue was up 53% over 2010
    • During the recession although oil dropped to low levels and rebounded, natural gas dropped and did not recover very quickly because stores are full
    • Price of natural gas has been depressed for many years; while it has firmed up over the past year, it does not appear it will go much higher than the $4 level
  • Member inquired about doing away with the incentive tax for natural gas production and whether or not that would hurt the state long-term
    • Heleman indicated he did not know and the Comptroller’s office has not done a study
    • Member requested information be given regarding doing away with incentive

Rainy Day Fund

  • At the end of FY 2006 the balance of the RDF was $400 million
  • By 2007 it had grown to well over $1 billion and over $4 billion in 2008
  • By the end of 2010 the balance was $7.7 billion and at the end of FY 2011 was almost $5 billion after appropriations
  • By the end of November 2011 there will be another transfer into the RDF for the previous years’ activity of about $1.1 billion, meaning the balance will be $6.1 billion
  • There will be another transfer before the 2013 Session; assuming prices will be close to where they are currently, there will be $7 billion in the RDF
  • Rep. Christian inquired regarding the amount of Medicaid shortfall
    • Heleman was not advised
  • Threshold amount (1987 benchmark) that goes into the RDF for oil is $530 million; Âľ of each additional dollar past the $530m threshold goes into the RDF and ÂĽ goes to GR
  • Threshold amount (1987 benchmark) that goes into the RDF for natural gas is $600 million; Âľ of each additional dollar past the $600m threshold goes into the RDF and ÂĽ goes to GR
  • Rep. Martinez Fischer: soon there will be $6 billion in the RDF,  do you know if the RDF was a bank holding what size would Texas be compared to other state chartered banks?
    • Heleman did not know
  • Martinez Fischer inquired about government sponsored projects such as the Build America Program and other stimulus programs and whether or not the Comptroller’s office has determined how they have boosted the Texas economy in terms of construction and job growth
    • Heleman indicated the Comptroller’s office has not
    • Martinez Fischer told Heleman he would like to know in terms of recovery if the programs are working or not
    • Heleman indicated it would be difficult to determine but he would attempt to see what resources he could get
  • Martinez Fischer inquired about the jet fuel tax, which amounts to $4.5 million in tax exclusions
    • Heleman indicated it is an exemption for gasoline for small private aircrafts, it is not jet aircraft; jet fuel would be diesel fuel, which is an exclusion
  • Martinez Fischer asked to see the figures on how much tax revenue by way of diesel jet fuel has been excluded from the system since 1997 on a biennial basis
  • Regarding refinery pollution control equipment abatements, Martinez Fischer argued the ramifications are effects to revenue; $135 million dollars out of state collections is roughly 5% or 7% of FY 2011 collections
    • Heleman indicated it is a local property tax issue that will reside with revenues at the local level; schools, cities and counties
    • Martinez Fischer pointed out it could become a school funding issue and ultimately a state concern; there are districts where the refineries are located that are impacted, but the entire state shares its public education dollars
  • Heleman explained the figures in his chart (please see attachment) reflect the total amount of revenue that was collected before transfers were made to the RDF; the biggest difference is seen in natural gas production tax
    • FY 2008 reflects a period where gas was prices was at $6-7/Mcf at the beginning of the year and $10/Mcf the second half of the year; price levels will not return to those prices any time in the near future
    • At end of the day comparing 2008 to 2011, the state is about $2 billion behind; which a lot has to do with the natural gas production tax
  • Rep. Murphy discussed projecting trends further than just a biennium outlook and other members agreed it would be useful
    • Heleman indicated with the volatility of today, it would be difficult getting to several years in the future; suggested members give themselves an assortment of scenarios such as what would happen if revenues grew faster than spending and vice versa
  • Rep. Lyne mentioned Ray Perryman does an ongoing macro trend estimation every year that is independent of the state; there are options other than state resources to burden
  • Rep. Christian discussed the hindrance to Texas business by the EPA
    • Expressed concern with January 1, 2012 lignite mining requirements and the subsequent loss of electric power and jobs; argued that natural gas is most readily available to produce electricity and inquired as to whether or not Texas should look for a potential shift come January
    • Heleman indicated the Comptroller’s office has not looked at it but said there are a number of people that are although no firm answers have been given yet
    • Christian argued for the incentives in tapping the natural gas industry with an expected 10% increase in cost of electricity for Texans next year; electric production shift from lignite to natural gas should be reviewed 


Franchise Tax Exemptions

Teresa Bostick, Tax Policy Division, Comptroller’s Office

  • Exemptions are for entities that would be considered taxable entities and otherwise subject to the franchise tax without the exemptions
    • 35 exemptions provide full exemptions from the franchise tax
    • Are not automatic, must be applied for
    • Require that entities be engaged in specific activities or organized for a specific purpose; non-profit organized entity does not automatically qualify for exemption
  • Although the tax went through major revisions in 2008 the exemptions were not changed, except that they could apply to the new entities in the tax base
  • Exemptions are divided into 3 groups:
    • Exemptions based on federal law, or that an entity has been granted from federal tax under 501(c) provisions
      • Under federal law certain entities cannot be taxed by the state: federal chartered credit unions, financial agencies, and others with 501(c)(3) provisions for religious, educational, charitable, etc. purposes; 501(c)(4) provisions for social welfare organizations; 501(c)(6) provisions for business leagues, chambers of commerce, etc.; and 501(c)(7) provisions for social and recreational entities
      • Not only exempts them from federal law, but states cannot tax them either
    • State statute specially provided exemptions for certain non-profit entities
      • Have to be: organized for religious worship, public charity, educational purposes; entities established for conservation purposes; development corporations organized under the Development Act of 1979; or homeowners associations with control of 51% or more of the board of the association
    • For-profit entities
      • Such as: state chartered credit union, electric cooperative corporations, telephone coop corps, insurance organizations, title insurance agents, open end investment companies, mutual funds, businesses engaged in solar energy devices, and certain trade show participants 
  • Member discussed health care provider exclusions and professional services; the margins tax brought in professional service entities that were not part of the franchise tax
    • Bostick clarified they are taxable, but special provisions allows them reductions in calculating their tax base
  • Rep. Christian inquired as to whether or not it is legal for major national corporations to expand their margins tax burden to their independent franchisees across Texas
    • Bostick indicated this was the first time she had heard of this practice and that she would look into it
  • Rep. Ritter discussed his discontent with the pass through tax concept for certain entities and requested to see the rules establishing them; some can pass through and others cannot
    • Bostick indicated there are a few that began doing so in the telephone/cell phone industry and that the state is seeing other types of entities starting to use the same methodology, though she specified it is not technically a pass through
      • Nothing prohibits a company from recouping their operating cost as part of their profit margin
      • Ritter explained entities are trying to put a separate amount on their bills to their customers and requested a copy of the permitting guidance
    • Bostick replied most entities recoup through increasing their prices
    • Chair Hilderbran indicated this would be a topic for subsequent meetings
  • Chair Hilderbran asked if banks get exemptions from the margins tax
    • Bostick indicated federal and state banks are subject to it just as any other taxable entity; banks and security type entities buying and selling securities loans in apportionment are under a specific provision that allows them to include gross proceeds of the securities in apportionment, rather than net gain; when selling they are apportioned based on payor rule
    • This is carried over from the previous franchise tax
    • Hilderbran indicated apportionment and location of payors would also be a topic for subsequent meetings 

Chair Hilderbran closed with remarks about subsequent meetings. He indicated there would most likely be one more hearing in 2011 during November and asked the committee to consider agenda items and submit their ideas. He also indicated there would be at least two or three meetings before March 2012, after which the hearing frequency would increase.