Members: Chairman Hilderbran, Murphy, Gonzalez, Lyne, Martinez Fischer.
John Heleman, Chief Revenue Estimator, Comptroller’s Office
On employment:
- US has entered into a period where 1 out of 16 payroll workers were let go; about 9,000,000 people lost jobs
- Today, the US has added back a little over 20% of jobs lost
- Current unemployment rate is 9.1%
- Heleman was questioned about media reports: there is a change in way unemployment measures are made; they under-represents statistics
o Over the succeeding decades, methods have changed; there are 6 different levels of unemployment calculated
o Head count of people that work for business, and then a count where people ask themselves if they are employed
o Texas was in recession for shorter period of time than U.S
o Lost slightly smaller amount of workforce, but added jobs back much faster than the U.S.
o By end of year, should get close to pre-recession job peak
- Heleman was questioned on benefits being paid for unemployed:
o Receiver takes benefit and puts it back into economy
o Benefit is slightly better pay than working
On Consumer Confidence:
- Texas is up over 60 in consumer confidence
- Certainly have not gotten back to average and are in need of consumption by consumers
On Housing:
- Were building and selling large numbers of homes every year, but recession caused decline
o Building 160,000 in the 2000’s, now down to 60,000
- Currently at existing home sales level of a decade ago
- Have not experienced a drop in housing values, which is good (stayed steady for most part)
- There is 7 months of existing home inventory on the market to sale, compared to 4 months in the past
o At least another year or two years until we see significant growth in new home construction
On Oil and Gas:
- Price of natural gas has not recovered
- Price of oil is around $80 a barrel
- Natural gas costs $3.80 per Mcf
- There is significant amount in drilling expansion related to horizontal drilling/fracking technology; this is unique to our state, which began in the Barnett Shale
- Eagle Ford Shale field was discovered and has started being developed
- Rotary Rig count was about 900 before recession, dropped to 300 during recession, but is now back to around 900; many of which are south of San Antonio
- Price of oil is a global price; if it comes down significantly a lot of the inducements for drilling wells will be taken away and they will sit on their leases and wait for the price of oil to increase
Q&A
- Rep. Trey Martinez Fischer inquired about the oil pricing benchmark and how the pricing of the oil is an international commodity
o Heleman said anything that happens in our state that might be unusual probably will not affect the global price of oil very much
o Fischer asked about the future of West Texas Crude; Heleman answered about $83
§ The revenue estimate was modified to $90 during the session
o Fischer inquired about the West Texas Crude no longer being the benchmark with as much oil there is in the shale in Ohio
§ Heleman: there are various grades of crude. Another one looked at internationally is the grant which always trades above the west Texas, but if you look at it as an index number and it is either going up or down and should not matter very much
o Fischer: in terms of the world commodity, it was indicated people would just sit on their wells and not produce; it seems there is an increasing demand for natural gas in the international market
§ Heleman: It looks like there is an increase, however oil still rules; looks that at the current time the global demand for oil is about 90 billion barrels/day and the supply is about the same so there is a balance. Would not expect price of oil to decrease too much in the longer term.
o Fischer: the swing in the market was led by oil companies this past week alone with the amount of aggressive growth; the industry appears optimistic about the future of oil
§ Heleman confirmed there is a lot of activity with the shale plays around the company and companies are aggressively moving to take advantage of that; they are in acquisition mode
§ Discussed a new shale clay in Ohio that extends up into Canada where companies are moving in preparing to drill
- Fischer asked if that shale clay would make West Texas crude irrelevant, which has been the discussion, but Heleman indicated he did not have detail about the Ohio clay
o Fischer: had questions on thoughts on the TCEQ application for reimbursement for environmental technology that Valero has been seeking
§ Heleman was not aware of it; Fischer said Valero was seeking to be reimbursed for equipment modifications they were making that are deemed environmentally sensitive. The push back seems to be that the money Valero is seeking to receive in terms of their abatement is money that has already been utilized and spent by schools. Valero has argued this is no different from protesting your homeowner’s appraisal; it is in the hands of the TCEQ and they have been seeking reimbursement since 2007
§ Rep. Gonzalez added that certain school districts would be affected by and she thinks there is 16 refund requests that could add up to $135 million in the Houston/Baytown areas
§ Fischer: If TCEQ grants this abatement the impact would be significant to the schools and the revenue in the school finance system as a whole, affecting everyone because the money is already spent; requested Heleman should relay information to the Comptroller’s office to inquire
- Member asked Heleman to comment on the state of the Rainy Day Fund revenues; had heard over the summer there would be a more robust sales tax recovery, but it sounds like it will be a little softer over the next year—the average over last two years would be about the same
o Heleman agreed and reminded the committee that percentage changes can be misleading; the state will be coming down from a very high 9% number to a much lower number
o Heleman told members to keep in mind that in 4 of the last 10 full State Fiscal Years the sales tax went down and there were 2 recessions
- Heleman will present information on consumer growth from the demand side in his presentation to the committee next week
o Will discuss revenue streams and the different levels of growth, and compare the growth in revenues to the growth in population
Bryant Lomax, Comptroller’s Tax Policy Division
- Provided an overview of tax exemptions across Texas’ tax structure
o Exemptions are when an item would normally be taxed but an exemption has been granted from the tax; either an entity or use of item is exempt
o Exclusions is something that is carved out and not taxed; excluded from general tax base
§ Most tangible property is subject to tax; an exclusion would be items such as food or water
o Discounts are provided in all taxes across the structure for those who collect and remit the taxes to the Comptroller
- Total sales tax exemptions for 2011 will equal $30.8 billion (includes all exemptions, exclusions, deductions, discounts, etc.)
o $24+ billion for exemptions
o $5.8 billion for exclusions
o $177 million in discounts
- Discounts, exemptions and exclusions take various forms: can be exemptions taken at the time of purchase, can be rebates or credits, etc.
- Statute clearly identifies how to qualify for exemptions; can be claimed at the time of purchase, after upon applying for a rebate, or by qualifying for a reduced rate on reports when taxes are filed to remit to the state
- Various sales tax exemption examples:
o Occasional sale: many are off the radar and characterized by a sale by a non-permitted entity; the entity is not permitted for the collection of the tax
§ An item would normally taxed, such as an airplane, but if seller is not engaged in business and not permitted, then sale can be exempt from the sales tax
o Items taxed by other law: excluded from sales tax because the items go on to be taxed under another section of the law; this avoids double taxation
§ Examples: oil production, motor vehicle taxes, boat tax, alcoholic wholesale beverage taxes
o Manufacturers tax (touches on wrapping and packaging): is one of the biggest areas of tax exemption under the sales tax
§ Involves raw materials and items consumed in the manufacturing process that will result in the sale of a taxable item; also includes portion for the machinery/equipment used in the process
- Franchise tax exemption examples:
o Insurance companies, insurance organizations, title insurance companies, insurance agents who are authorized in insurance business are exempt because their premiums on policies written are subject to the insurance taxes
o Open investment companies exemption in form of mutual fund; granted based upon federal investment act
o Non-profit corporations: one of the biggest exemptions
Q&A
- Member was unsure why packaging supplies and wrapping are not taxed, as well as coin operated machine sales
o Lomax indicated coin operated machines are subject to an amusement tax and license holders pay fees to have the machines in their possession
o Wrapping and packaging was given exemption in the sense that it becomes a part of the package on the shelves—it is how something is sold and provided
§ Dry cleaners argued their hangers, etc. were passed on and resold to customers and therefore should be characterized the same
- Member asked what common interest exemption was
o Lomax explained it is where there is control or an interest in something such as a partnership; someone buys a partner out but already has control of the item
- Member asked about the exemption for installation of certain equipment for export
o Lomax explained most states do this as a credit because taxes have already been paid
- Member asked about Homeowners Associations
o Lomax explained once a development is totally under control, 51% or more, it is a mechanism for them to upkeep property and do things to ensure it is maintained; more connected to the cost of home ownership and maintaining homes rather than a business interest
- Sales Tax: How much does the state benefit with a prepayment discount for retailers?
o Lomax: Texas gets more revenue in earlier by doing this early payment
o Member argued the value of various open-ended discounts/exemptions is unknown and should be addressed
o Lomax indicated the benefits to the state could be discussed next week because they have been looked at each session as possibility for legislative repeal
§ Start with presumption that there are zero discounts/exclusions, and then decide on the ones to keep; suggested starting from scratch
- Limited Sales and Use Tax-we always forget the Use part: Any remarks on the Use Tax? How do you enforce the Use Tax? Is it enforced?
o Lomax: the Use Tax is supposed to catch those that do not pay Sales Tax
§ An audit group goes after taxable transactions on bigger items that fly under the normal radar
- Use tax base is huge with internet selling; to enforce it would have to have a mechanism for collecting and identifying who it was
§ There is a form where Texans can voluntarily submit their Use Tax statements
- Member discussed the resources put into obtaining information on the cost/benefit scenario of exemptions, etc.; if it cost more to put into a resource but there was more in return would it be worth it for the extra resources?
o Lomax: Would look at whether or not a project will be fruitful and do a pilot
- Member asked about occasional sales exemptions: such as airplanes
o Lomax: Can qualify for the exemption if you are an airplane broker selling used planes for people, etc.
§ In comparison to the Motor vehicle tax: The aircraft is subject to sales tax and not its own chapter like motor vehicles and boats are
§ In most cases if one buys from an individual, one would have to submit the title and that transfers taxes due; for airplanes they go through a different FAA process
§ Member pointed out that the FAA information is available so they could easily be caught, which might be reason Texas does not do it because the business would just move out of state
- Rep. Trey Martinez Fischer inquired about the gasoline tax
o Lomax explained the exemptions are relative to federal government, school districts, volunteer fire fighter depts., etc.
§ Aviation is more of an exclusion than exemption; motor fuels taxes were based on highways, so off-road uses were excluded from tax base
§ Boats and aircraft could pay tax on time of purchase but apply for refunds
§ Jet fuel is not taxed
§ Fischer asked: What’s that loss to the state? How do you measure that?
§ Lomax: $4.5 million/year is lost; there is no jet fuel that is taxed
§ There are occasions where people purchase fuel for private craft that can be taxed, but it is an issue of who they purchase it from
- Member asked if the $213 million is only from bottled water?
o Lomax indicated he would need to confirm
- Member inquired about the basic fee for internet access
o Lomax: first $25 is exempt from tax; there are a lot of service providers that are higher, but there is also quite a few that go cheaper
- Fischer requested Lomax provide methodology on the jet fuel arriving at $4.5 million and the bottled water numbers in writing
- Member inquired about data processing services
o Lomax: Texas was a big data warehousing state, and now it is not the leader; other states attracted the business
o Texas is losing that revenue and it could serve as an economic development tool because the state could get more economic activity as a result of it; more money would be put into Texas’ economy because of the economic activity and employment based of the businesses