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House Ways and Means held an organizational meeting on February 17 and heard invited testimony from the: Legislative Budget Board (LBB), Comptroller of Public Accounts, Texas Public Policy Foundation, and Center for Public Policy Priorities.

After opening remarks the committee began hearing invited testimony.

Legislative Budget Board, Ursula Parks, Director

  • HB1 has significant differences from Senate version. Differences will be worked out in committees
  • In ’14-’15 the all funds appropriation was just over $200 billion, and the adjusted ’14-’15 spending base is $202 billion. For ’16-’17 it will be $202.4 billion. This is a very modest increase.
  • There is a need to put money into Medicaid for second year of biennium, and the tendency is to err on side of caution and fill it back up.
  • Constitutional spending limitations are fourfold, two limitations are critical
    • Pay as you go limit says that State cannot deficit spend, which has about $14.1 billion left in spending capacity
    • State spending limit says that the budget can only grow certain percentage over biennium. This can work in opposition to the first limitation.
    • $8.1 billion in GR before the spending limit is reached meaning there is $6 billion allowed in the pay as you go limit that cannot be used
  • Not all revenue is subject to the spending limit
  • If debt were paid down, it would go against the spending limit unless constitutionally dedicated
  • Chair Bonnen asks if tax relief goes against spending limit
    • It depends on if it effects a program that funds entitlement
    • If local revenue goes down because of a cut to property taxes, state aid has to go up, and that would be counted against the spending limit
    • Change to franchise tax would cause same issue
  • Rep. Murphy asks how franchise cut works
    • The portion that goes into regular GR is what would have been collected without the 2006 changes to the tax. New revenue coming in goes to property tax relief fund. Any changes to franchise tax address money going into the property tax relief fund.
  • Rep. Murphy asks if there is anything in writing on this
    • Not that Parks is aware of, but it is a general understanding of how this works
  • Chair Bonnen asks for examples of taxes that could be cut without going against the spending limit
    • All taxes count
    • Fees, fines, and lottery are not subject to the spending limit
  • FSP is largest state funded program and primary vehicle for funding schools and has just under $32 billion in GR and is $2.2 billion higher than what is estimated to be needed to fulfill State’s obligation of funding for school districts
  • Senate did not include additional funding for entitlement
    • Instead, they put money in that would replace lost local revenue as a result of the tax cut
  • Rep. Davis asked for more details regarding the $2.2 billion
    • Growth is covered before $2.2 billion calculation
  • Rep. Davis asked if this includes schools that claim to have a deficit
    • That is not taken into account
    • It looks at entitlements, district property values, and how much school districts will pay on their dime. The state fills in the rest. This is where the $2.2 billion calculation comes from.
    • With general guidance, this $2.2 billion can be used to reduce local recapture from school districts, increase equity, and/or increase state share of the program
  • Rep. Turner asks for a breakdown of $31.7 billion in GR
    • Includes FSP and local recapture from school districts, but not property tax relief fund
  • Chair Bonnen asks how much the lottery produces
    • Around $1 billion net benefit to FSP
    • This number has not changed much recently
  • Rep. Turner asks what percentage of school revenue is coming from local property taxes as a statewide average
    • State’s share of FSP is between 40 and 50% since ’06-‘07
  • State Medicaid program is receiving about $60 billion in all funds and right around $25 billion in GR
    • Accounts for case load growth
    • One downside of Texas’ strong economy is that federal government pays a lower rate for Medicaid
  • Rep. Davis asks if there has been any study on Medicaid expansion and how much money Texas gets back
    • Medicaid expansion came with a generous federal participation rate, but the driving factor is the economy relative to other states
  • Transportation is funded just under $24 billion in all funds including increase to $1.3 billion addition to TXDOT, Fund 6, and Mobility Fund
  • Chair Bonnen asks if $2.6 billion from Proposition 1 is still on track regarding oil prices
    • A more substantial and sustained drop would be needed to see any change
  • There are other smaller programs mentioned in report that Parks will not go over
  • Rep. Davis asks where the rest of the funds are coming from for Transportation Fund
    • Revenues from TXDOT and federal fund make up the rest of the funds
    • Fund 6 is the largest portion of the Transportation Fund
  • Chair Bonnen asks what would happen to $6 billion available in the pay as you go portion of the spending limit, but that would still go over the State spending limit
    • Money would stay in treasury which has invested conservatively
    • It would essentially be a surplus sitting in the treasury
  • Rep. Darby asks about the ERS and what kind of hole the State is facing
    • TRS has substantial state demands with $750 million to keep active care program working
    • ERS can increase by $160 million under the 10% maximum increase that is constitutionally allowed, but this would not be enough to cover the actual increase of retired state employees
  • Rep. Darby asks about the State owned property maintenance estimated at $1 billion including $300 million in immediate need
    • These numbers estimates are believed to be correct
    • Around $700 million additionally is needed for colleges and universities which are not included in the original $1 billion

Texas Public Policy Foundation, Talmadge Heflin, Director of Center for Fiscal Policy

  • Will discuss TPPF goals regarding fiscal matters
  • Wants to eliminate franchise tax
  • Wants to create sales tax relief fund
  • Chair Bonnen asks how retailers would manage this
    • Retailers Association says this is not a problem. They can change this on a daily basis.
  • Chair Bonnen says he will confirm with Retailers Association to understand challenge of management
  • Rep. Parker asks if any other states implement anything like this
    • Heflin is not sure
    • Idea came from legislators over the last few years
  • Chair Bonnen wants to make sure that any changes they make would be impactful and meaningful to tax payers
    • About half of sales tax is paid by businesses, so individuals and businesses would both benefit
  • Chair Bonnen asks if TPPF evaluated any other taxes comparative to the franchise tax that would have a similar effect – or what would happen if you eliminated it
    • TPPF ran economic model including job creation, personal income, and growth, but it was not compared to other taxes
  • TPPF wants more control by voters on growth of property tax
    • Wants lower cap on revenue, so voters decide if they want to spend more than cap
  • Wants to reform tax and expenditure limit
    • Should use population, Inflation, GSP, or income whichever is less
  • Pass conservative budget that does not exceed population growth and inflation
  • Last item is a program based budget instead of strategic budget
    • Wants zero based budget, which takes a lot more work, but will keep Texas on path to economic prosperity
  • Rep. Davis asks for a little more information on TPPF
    • Non-profit, non-partisan, free market think tank
    • Privately funded
  • Rep. Bohac asks what Heflin sees as priority between ERS, GR dedicated accounts, debt relief, and facility maintenance.
    • Dire needs in maintenance
    • Heflin says to retire debt that is outliving the program it was created for
  • Rep. Bohac has come out with idea to slowly wind down the franchise tax over 10 years and asks Heflin about his thoughts on that plan
    • Heflin says that the most benefit will come from large changes
    • TPPF wants to completely eliminate it which will make the change more noticeable

Office of Comptroller, Tom Currah, Kerry Fannington, and Mike Esparza

  • Expected that legislature will have $113 billion for general spending after $5 billion is set aside for rainy day fund and Fund 6
  • This is a 9.5% increase in general spending since last biennium due to growth of the economy, but growth is expected to slow due to oil prices.
  • Sales tax revenue is expected to be $61.5 billion dollars which is 9% increase over previous biennium
  • Franchise tax from ’14-’15 biennium is expected to be 9.5 billion
    • 5.6 billion will go to GR fund, and the rest will go to the property relief fund
  • Vehicle sales tax revenue is up in the ’14-’15 biennium
  • Severance tax revenues are expected to be down 14% due to oil prices.
  • Natural gas taxes are also down from the last biennium
  • Rep. Parker notes that natural gas drop is low compared to the drop in oil prices and asks how it is calculated
    • Comptroller estimates where oil prices will be over the next biennium
  • Chair Bonnen asks what is expected of oil prices with regards to severance tax
    • Comptroller estimates slow, but steady growth back to $70/gallon by end of ’16-’17 biennium
  • Most other tax revenues are growing except for that of tobacco
  • Rep. Murphy asks about energy tax collections
    • Did not have those numbers at hearing
  • Rep. Davis asks what is excluded in trusts for each tax
    • Did not have those numbers at hearing
  • Rep. Darby notes that dedicating half of motor vehicles sales tax to Fund 6 (about $5 billion) is in competition with efforts to avoid dedicating funds
  • Chair Bonnen expresses desire to get better return to rainy day fund and asks if revenues that go over the spending limit could be dedicated
    • Currah is not sure if this is a possibility
  • Rep. Turner asks about previous projections for franchise tax revenue
    • In 2006, it was projected that revenues would be $6 billion annually, but we have never surpassed $4.5 billion
  • Chair Bonnen notes that franchise tax is meant to be steady, large base and low rate tax
  • Chair Bonnen also asks what the revenues would have been if the franchise tax had not been changed in 2006
    • These numbers are not available at the hearing
  • There are four ways to file for franchise tax, and the tax payer can choose the option that benefits them the most.
    • 59% of taxpayers file according to profit margin taken from subtracting cost of goods sold from revenues.
    • Most tax payers do what you would expect and correctly file the way that benefits them the most
    • There are not large discrepancies in the percentage of tax payers that choose each of the four options each year
  • Committee recalls that the cost of goods sold option for filing became much more popular than expected and asks if this is why the franchise tax has brought in less revenue than originally projected
    • This is accurate. Also, IRS data was used to make these projections but is not generally very accurate
  • Since 2006 revisions to franchise tax, industries tend to pay the franchise tax more proportionately to their GSP than previously
    • Manufacturing industry pays the most
  • Chair Bonnen notes that the service industry contributes more since 2006, which is seen as an accomplishment since they previously did not pay much
  • Rep. Darby expresses his thought that conducting business is too expensive in Texas
    • Farrington says the policy decision to be made is how to deal with rates and base to achieve goals
  • Rep. Button says the committee needs to better understand the current situation in order to make reform. Reduction of the rate is the easiest route, but it may not achieve certain needs for certain businesses
  • Chair Bonnen asks if it is worth it to tax businesses with revenues under $1 million. Do the revenues outweigh the expense of the tax?
    • Revenues exceed costs associated with the tax for businesses with revenues under $1 million
  • Rep. Murphy explains that last session the committee thought they created a million dollar exemption for all businesses
  • Chair Bonnen agrees with Rep. Murphy’s concerns that this may have been misrepresented to taxpayers. While the exemption is available to all businesses, it is included in one of the four ways possible to file. It is not an across the board exemption; it is only used if it is the most profitable way for the business to file
  • It has been tricky to decide what can be qualified as a good sold as opposed to a service, and there have been fluid changes
    • Overall, services have been able to count more goods sold
  • Chair Bonnen asks what other tricky issues the committee should be aware of, so they can properly deal with the issues
    • Farrington says he will get back to the Chair with a list of issues
  • Committee requests a historical list of all changes made to the franchise tax and their effect
    • Farrington says he will provide a list
  • There has been much litigation regarding the franchise tax. About 30% of litigation concerns what can count towards cost of goods sold
  • There is litigation in Texas that tax payers have won in other states concerning if the franchise tax goes far enough to be considered an income tax
    • In Texas, there is precedent to have income tax on entities
  • Chair Bonnen asks if cost of goods sold litigation is declining as the definition gets stronger
    • The definition is stronger, but there continue to be new questions that will take some time to smooth out
  • Rep. Parker asks if there are any areas that the committee needs to clean up
    • Farrington says they will get back to him
  • Chair Bonnen calls Mike Esparza for testimony on property tax
  • Property tax is the largest tax imposed in Texas and brings in 42% of all revenues. Between 2001 and 2013, property values have increased overall in every year except 2010 due to the recession.
  • This year, the preliminary estimate for total property value is $2.5 trillion. The final property values will be submitted to TEA by August
    • Invalid findings (5% above or below) have fluctuated year to year
    • The recent increase in invalid property value findings seem to come from the overall rise in property value
  • Rep. Murphy asks if the value of each school district is estimated every year
    • Each year, half of the school districts are appraised as part of a two year process
  • Property value study is just now beginning for 2015, and it is expected that oil prices will have an impact on findings
  • Office of the Comptroller also works on Methods and Assistance program where they make sure appraisal districts comply with statue.
    • There is generally an average of three recommendations for change per school district each year
  • Rep. Murphy asks if auditing to decrease invalid findings has been effective
    • Esparza says that it has

Center for Public Policy Priorities (CPPP), Dick Lavine, Senior Fiscal Analyst

  • CPPP wants revenue system that is large enough to sustain needs of Texas, but also be equitable
  • Texas tax revenue: 44% property taxes, 33% sales tax, 23% all other taxes
  • Lavine believes that if state funding drops for programs like healthcare, libraries, community colleges, or school districts, local districts are left to pick up the slack. Since 1992, state taxes have gone down, but local taxes have become very high
  • The Tax incidence study by the Comptroller, which divides house incomes into quintiles, found that the top quintile (incomes over $136,000) pay a smaller portion of state and local taxes relative to their income
  • The bottom 4 quintiles pay higher taxes to their income, and the CPPP wants everybody to pay taxes relative to what they benefit from the state
    • Texas’ lowest quintile pays a higher percentage of state and local taxes than in other states (5th most regressive tax)
    • Suits index shows that the main source of repressiveness is the sales tax
  • Local governments should have more options to grant homestead exemptions
    • Tax payers are willing to pay for local services that they value, but they want to make sure that everybody is paying their fair share based on appraised value of property
  • CPPP would like to rewrite Notice of Appraised Value and add the exemptions that each tax payer receives, so they will appreciate the exemptions. CPPP also wants to remove “estimated value” of what is owed. This number is inherently incorrect because it uses current property value but old tax rates
  • Lavine sits on appraisal district board that asked for 20% budget increase to higher fee appraiser who can from property to property and get a better appraisal down as benchmarks to get more accurate appraisals in the future. They also want to build a legal reserve to have money to pay attorneys if necessary
    • These are ideas that Levine believes would be helpful for other appraisal districts
  • Rep. Murphy wants to be shown as agreeing with idea to change Notice of Appraised Value.
    • It may take changes to statute to get rid of estimated tax

 
Chair Bonnen will move testimony from Texas Taxpayers and Research Association to next week’s hearing and committee adjourns.