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Below is the HillCo client report from the September 16 House Ways & Means Committee hearing.

John Heleman, Chief Revenue Estimator for Comptroller

  • Texas Economy growing 2x as fast as U.S. economy – same as it has been for last 6 mo to 1 year
  • Employment has now exceeded 11 million – all time record
  • Texas unemployment 5.1% – getting close to 4% which is historically a low range
  • Rep. Hilderbran asked for details on unemployment calculations
    • Some older individuals simply exited workforce permanently  
    • Has heard this phenomena makes job growth look better – but we have aging population and this is not necessarily new phenomena
  • Rep. Bohac asked about “workforce participation rate”
    • More with concept of how many are working now and that are eligible to work
    • At low point right now – 2 decades
    • Complex reasons for this low point which includes aging population
  • Top ten most populous states – only top three are back to employment level of 6 ½ yrs ago
  • If Texas were a nation – we would have 12 largest economy in the world, bigger than Australia
  • Housing sector is doing better but in no way at level of activity ten years ago
    • Sales of existing homes are brisk, not building many new homes and starting to see markets tighten up and prices rise
    • 3.8 months’ worth of residential inventory on the market and prices have spiked sharply
  • Rep. Gonzalez curious of geographic trend
    • Some are hotter than others – one of hottest is Houston/Meteroplex, Austin/San Antonio corridor
  • Bohac concerned about inflation – ludicrous saying there is no inflation – it will get worse when interest rates start coming up
    • Do not have a statewide number
    • Do have one for Houston and Dallas
    • (aside fast food increase of prices discussion among members)
  • Construction of brand new homes nowhere near 2000 but was unstainable at that level
  • Real Estate other than residential – class A office space
    • Following same pattern seeing with residential
    • Houston and Austin robustly rebounding
  • Oil production in Eagle Ford Shale/Texas Permian Basin graph shown to members
    • Permian Basin accounts for 50% of oil production in the state
  • Rep. Otto said at West Texas Legislative Summit heard from Pioneer Resources and inquired on projections
    • See natural gas staying at its low price for years to come
    • We have more gas than we know what to do with
    • Otto ask if international demand could impact – could but how to deliver and if there are ships for it
  • Almost all wells have been vertical until about one year ago and now horizontal wells are starting to take hold
  • In response to  Gonzalez question on safety measures – for most of life of rainy day fund (RDF) not much was held in it and will be transferring almost $3.5 billion to RDF or another location this fall
    • If Prop 1 is passed and full 50% accessed – $8.4 billion in RDF and $1.7 b just moved into fund 6 and just took $2 billion out for water purposes
    • The cap is a computation but currently $15 billion
    • How do we diversify funds outside of oil and gas ponders Gonzalez
  • Growth we are seeing in oil and gas sector is not expected to be sustainable over long periods and as look forward, be careful and conservative
    • Hilderbran cautioned about putting all eggs in one basket but it might last longer than some are predicting
  • Otto noted RDF has been fully depleted before and if the fund was not available then all the funds would have gone into the budget and would have built in unstainable spending
  • Rep. Ritter asked about growth of general revenue
    • Sales tax approach – grew by 5.5% and still growing but not necessarily as fast
    • Our sales tax grows about as fast as personal income
    • Motor vehicle tax grew by 8.5% and shrank by 22% in one year but better economy and have had several years of growth in the tax
    • Franchise tax is slightly less than $5 billion a year and because of HB 500 natural growth of fund was a wash  
  • Hilderbran asked if in good shape to continue tax breaks from HB 500
    • Yes
  • Otto asked about how to plan for ACA going in effect and how does it impact revenue projections and employment
  • Bohac asked about modeling when federal reserve moves up interest rates
    • Not really seeing much inflation according to empirical evidence

 
John Diamond, Baker Institute for Public Policy at Rice University 

  • Hilderbran gave foundation for testimony by discussing fiscal note on HB 500 and how they had to do much analysis to address fiscal note on mixed beverage but have actually seen an increase
  • Dynamic estimates in the scoring process not panacea but give another picture  
  • Currently we do direct impact and may look some at micro but not on aggregate which would give bigger picture
  • Hilderbran pointed out fiscal note is also done in consultation with comptroller
  • Baseline budget is starting with actual number and add pop growth and inflation – budget increase every year
  • Federal budgeting/estimate process reviewed 
  • In regards to bubbles to be concerned about
    • Federal debt
    • 2% consumer price inflation not as much as asset price inflation that is going on
    • State and local pension crisis that cannot be ignored
      • Houston is in really bad shape in regards to underfunded pension
  • Dynamic analysis – cutting spending may have an impact on job growth but raising taxes would have also had impact so those questions can be filled out with dynamic analysis
  • Sales tax vs income tax discussion
    • Income tax more distortionary
    • Higher taxes related to lower growth overall
    • But empirical literature is all over the map when discussing specific taxes
    • Consideration in review of type of taxes: Efficiency (just base on the type of tax), fairness/equity there are differences, distributional issues and economic growth issues
    • Gonzalez asked if sales tax is regressive
      • By definition it is regressive
      • Annually it will be regressive but over lifetime it will become proportional (middle to lower income) 
    • Hilderbran countered about food and medicine not being taxed
      • Yes that does shrink the gap 
  • Policy guidelines provided at high level
    • Want to focus more on long term impacts than short term impacts
  • Bohac noted cynicism for Federal Reserve
    • Don’t believe greatest minds can really be surprised by bubbles
  • Discussion on tax – federal (corporate) vs margins tax
    • Resource waste on trying to avoid margin tax so maybe would lean towards consumption tax
    • Bohac said we would have a booming economy without franchise tax and asked about buying the tax down to zero (not replace it with anything)
      • It would produce a positive impact on gross state product but would need to know more about what buying it down with – maybe transfer payments
      • Gets into issue of efficiency vs equity
    • Reducing transfer payments would be what – asked Bohac?
      • Medicaid
      • Non-education, non-infrastructure
      • Would really need to get down an analysis
      • Not arguing to do this because there would be equity concern
  • Investments and Infrastructure discussion
    • Medical care – is it infrastructure or is building a new school needed infrastructure
    • Crisis how many kids not graduating so when talking about public school expenditures talking about investing in human capital
  • Dynamic analysis has been rather successful
    • But it can be misused

 
Teresa Bostick, Tax Policy Division at Texas Comptroller

  • Implementation on HB 500 review
  • Most revisions were applicable to 2014 franchise reports
  • Impacted almost every part of the computation
  • Impacts generally washed out the increase asked Hilderbran
    • Will defer to next witness
  • Most provisions self-implementing and there were few form changes
  • Historic credit still in progress but expect rule to be proposed by end of year
  • Hilderbran asked if more people took advantage of this $1m exception this time rather than previously
    • Will defer to next witness

 
Ed Warren, Comptroller Revenue Estimating Group

  • Franchise tax is due in May but can get extensions until November
  • Will need more forms in, in order to be better able to answer questions
  • Expect to see $4.7 billion accounted for – only collected $1.7 billion to date
  • Expects 1.2 million filers – so expects some growth in filers from last year
  • Currently on track to meet expectations/assumptions

 
Only have one more committee meeting planned for the interim – if members have desire to add more discussion or if they cancel the one for next week and they want to see certain invited witnesses then please let chair know.