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The House Committee on Ways & Means met on February 13 to hear invited testimony from the Texas Comptroller Glenn Hegar, Comptroller Staff, and the Legislative Budget Board on the state budget and tax collections.

This report is intended to give you an overview and highlight of the discussions on the various topics the committee took up. It is not a verbatim transcript of the hearing, but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

 

Glenn Hegar, Comptroller

  • Sales tax growth rates have averaged 6%, expecting continued growth, but more moderate
  • Recent revenue conditions warrant cautious economic outlook: oil prices have declined, interest rates have grown, trade policy remains unsettled, global economy has shown signs of slowing
  • Projected $119b in revenue for next biennium, increase of 8.1% from the updated estimate, $107.32b in GR related tax collections, projecting beginning balance of $4.18b
  • Any GR appropriated for supplemental will reduce beginning balance, currently ~$126b in beginning revenue & balances, minus set asides like $211m in shortfall for Texas Tomorrow Fund, we have $119.12b available for general purpose spending
  • Projecting $266b in All Funds for 20-21, SHF received maximum allocation
  • Going forward we expect sales tax collections to be sufficient to have yearly required $2.5b SHF transfer to be made that year
  • More uncertainty surrounding this estimate than previous estimates, but cautiously optimistic; Texas is well positioned compared to other states
  • Wray – The Texas Tomorrow Fund shortfall, do we catch up with this?
    • A lot of this is due to actuary tables when the fund was created & fund was closed; we have a cost next biennium & then it starts sliding down; $600m between now and 2038 with the bulk in this & next biennium
    • Could be some credits unutilized continuing to go on after, but will be insignificant amounts
  • Wray – Asks about the ESF
    • If you don’t take anything out of the ESF, it would have a little over $15b, which is below cap
  • Wray – You’re projecting sufficient revenue to transfer to the SHF? I believe we deferred a payment
    • This is correct, started as $1.8b deferral, but economy has grown so strong it has essentially wiped it out
  • Wray – We have enough sales tax revenue to catch up on the deferral and make the current payment?
    • Correct
  • Martinez Fischer – I’ve noticed in the BRE and other Comptroller publications that you have been consistent on cautious guidance & have highlighted international events that could impact the state’s economy; are there any local guidance issues we should be concerned about?
    • Trying to provide that caution that our economy is very healthy, but it is important to note we are the longest economic recovery we’ve had in the US and at some point this will not continue
    • Severance tax collections continue to be high, for instance, but they are lower than they have been for some time
    • Most sectors of the economy are doing well, would caution that you should put a budget together you will continue to fund
  • Martinez Fischer – This is my concern, interest rates, bond ratings, etc. will continue to be a concern, would you agree?
    • Would agree, don’t know that we’ve seen large interest rate increase, but every basis point has some effect
  • Martinez Fischer – Cities and counties are receiving large sales tax revenues, would imagine that local governments would like to continue to encourage business participation
    • Have heard from many sides that they want to encourage this
  • Martinez Fischer – In the same way, local utility/transportation
    • Pretty much all industries have grown in jobs, construction, professional services, manufacturing, etc.
  • Martinez Fischer – Highlights the biotech and IT industries in San Antonio, has taken a lot of investment from the city to bring in these industries; incentive packages for local governments to bring these industries in is probably something we should encourage
  • Martinez Fischer – Would like to hear guidance on how we can be in the best position to fund the state and support local governments
    • Happy to continue to have these discussions
  • Cole – Regarding the SHF and projections based on sales tax revenue, I know we are discussing property tax caps; to what extent are we really helping our local government entities through MPOs or otherwise?
    • $2.5b that was dedicated for sales tax collections is going towards transportation & there has been efforts by the legislature to put more money into infrastructure through bonding, etc.
    • Have seen more congestion with the rapid expansion in urban areas and oil production areas, assume the transportation discussion will continue this session as well
  • Rodriguez – We’ve had a long recovery period & your concern is that tis can’t go on forever; if it is a slowdown and not a crash, will local governments feel this more on the property tax, sales tax side?
    • Historically, sales tax has decreased 5 times in the past and property tax once, severance tax has averaged 8% increase and it typically much more volatile
  • Rodriguez – So we should have this in mind when considering HB 2
    • Correct, extremely important to look at volatility in revenue streams in all budgeting areas; Texas doesn’t tend to budget off of the most volatile stream of severance taxes
  • Rodriguez – Cannot yet calculate effect on school districts from HB 2, is it important to work on school finance and taxes simultaneously
    • My assumption is that members are working on these issues in tandem
  • Martinez Fischer – I think there is some coordination, on the fiscal piece is your agency working in conjunction with LBB?
    • We try to work the best guesses we can come to, we do work in conjunction with the LBB through the legislative process on any piece of legislation we may be putting fiscal notes on
  • Martinez Fischer – In the past, bills haven’t gotten priced until some stage in the committee process; with bills this large, would hope that there are financial algorithms being run ahead of time & that your office is afforded the info it needs to make decisions
    • On those pieces of legislation and others, we have very good working relationships to be able to provide the data you are asking for
  • Martinez Fischer – I think we are all aware you have to certify, earlier the better
  • Burrows – Would you tell us a little about the Legacy Fund and why this would be a good idea?
    • TX has pension issues & other long-term liabilities, currently all of the $12b in the ESF have essentially lowered purchasing power
    • Asking for authority to keep up with inflation and make further investments to make a higher rate of return that can be distributed to the state to pay down long-term liabilities
    • If TX doesn’t find a solution to TRS, ERS, and other pensions, then we are not immune to issues faced by other states
  • Burrows – The House passed the Legacy Fund/ESF investment bill last session
  • Burrows – Tell us about the price of oil
    • Oil price is important, but equally important is the volume produced
    • Average price for upcoming year is $29 to $79 with 95% certainty, even industry economists don’t have a good idea
  • Sanford – Is the development of a resident, educated workforce a risk factor that you consider? Or is there an assumption it is a wash due to people moving here?
    • We have a high rate of skilled people moving here & assumption is this will continue
  • Murphy – Regarding the Legacy Fund, is this a bill we will see? Pensions is looking at various fixes
    • Rep. Capriglione carried it in the House last session, it is HB 20 with an HJR this session
    • Have been working on this in recent sessions, both on the inflation portion and the Legacy Fund
  • Murphy – Will that bill come here?
    • I think last session it went to Appropriations, but not sure where it would go this session

 

Karey Barton, Comptroller’s Office

  • Presenting on taxes in the state, provides history and overview of franchise tax calculations (percentage of business proceeds, differing calculations based on revenue)
  • Changes to franchise tax occurred in 2013 and 2015, in 2013 the legislature modified the application of the tax, exceptions, temporary rate reductions, etc.
  • In 2015 session the legislature permanently reduced the rates, changes were made to the threshold for the E-Z computation
  • Have also seen significant franchise tax credits added, i.e. Historic Structure Rehabilitation, R&D
  • Provides overview and history of limited sales & use tax, sales tax rate at 6.25% combined with local rate of up to 2%
  • In Texas all tangible property is taxes, but only certain services are taxed
  • Texas’ ability to tax internet access will soon be preempted by federal law, starting July 1
  • Rodriguez – What is the hit to the state on that?
    • In FY2021 it is approx. $500m/year & continuing thereafter
  • Gives overview of sales tax exemptions for certain property, e.g. items motor fuels tax, etc.; also an overview of >600 state sales tax filers
  • Provides overview of motor vehicle sales tax and rental tax
  • Murphy – Regarding the motor vehicle sales tax, could you inform the committee about the prepayment discount?
    • TX has a timely filer discount which is .5% of the total tax collected & distributed to the retailer, also a prepayment discount of 1.25%
  • Murphy – In essence we’re essentially borrowing this money at 1.25%/month, kind of a high percentage; is this a correct assessment?
    • It is a correct assessment, I know the legislature has looked at this at different times and thought of changing this
  • Burrows – Did you estimate the cost to the state for this
    • FY19 timely filer is $154.5m, prepayment is $156.3m
  • Bohac – Under the major sales & use tax exemptions, it lists health care supplies, does this include prescriptions?
    • Includes prescriptions and OTC drugs, prescription drug exemption has been in the statute for a very long time, OTC was added more recently
  • Cole – Asks after sales tax use to fund highway fund; concerned about ability of local governments to fund transportation needs when legislature is discussing restricting the property tax
    • Would probably have to come back
  • Burrows – Sounds like the committee may be ready for a certain bill
  • Barton describes rates for the severance tax, the insurance premium maintenance tax, mixed beverage tax, tobacco taxes, state hotel tax, etc.

 

Korry Castillo, Comptroller’s Office

  • Presenting on property tax administration at the Office of the Comptroller
  • Comptroller conducts a Property Value Study which has an impact on funding for schools, ensure that districts are appraising at market value, values certified by TEA
  • Also review appraisal districts, districts get 1 year to resolve issues identified before being referred to TDLR for enforcement
  • Comptroller puts out model hearing procedures for ARBs & surveys for taxpayers participating in ARB hearings
  • Comptroller provides training to new & continuing ARB members, maintains registration of qualified arbitrators for property tax
  • Comptroller publishes many forms, publishes biennial property tax report, publishes info on property taxpayer remedies, Tax Law & Code book, etc.
  • Murphy Regarding the PVS, what dataset does the Comptroller use to verify appraisal values?
    • There is a submission from all the CADs including rolls, Comptroller does a sample of different categories reviewed and conducts its own appraisals
    • Compares data alongside sales info
  • Murphy – I haver the impression that in rural counties the appraisals are low & in urban counties the appraisals are perhaps a little high
  • Murphy – Also have the perception that commercial appraisals are a little low and residential are a little high; do you see any trends develop in your analysis?
    • We can look at this, ultimate product looks at the whole appraisal sector, but can break this out
  • Martinez Fischer – Sales tax collection make up about 55% of your collections, correct?
    • Barton – Correct
  • Martinez Fischer – Have you ever done any comparative study on sales tax collections relative to economic growth? What’s driving the collections?
    • We can look at what’s driving collections by looking at collections from different industries
    • In the press release, we point out which industries are showing the greatest growth at the state level, there will be some specialization at the local level
  • Martinez Fischer – I’m sensitive to doing anything that can disrupt essentially what is the cash cow for the state, would like further info
    • Can look into this, we are aware that allocations and refunds can swing things at the local level
  • Rodriguez – How much do local governments pay to the Comptroller to collect sales taxes?
    • Law requires state withhold 2% to flow into GR, Comptroller has appropriation to cover budget which is less than 2%
  • Burrows – asks after property tax collections & interplay with revenue; If we came up with a bill on cutting property taxes, you won’t come up with estimates on how that might drive other sectors
    • That’s correct
  • Wray – Asks after franchise tax collection
    • FY18 is $3.7b
  • Wray – I’m concerned there are not many entities near the $1.13m threshold and yet annually they have issues in filing reports for tax compliance, can you speak to what we do to lower the burden
    • The only thing required on the “no tax due” form is essentially a post card with total revenue
  • Wray – Have you given any thought to having these filers do a one-time filing or a more periodic filing?
    • It’s not something we have considered, but can look into this and work with you on what you are trying to address
  • Wray – Asks for a breakdown of the local sales tax allowance for local government
    • Cities, counties, certain other districts, for the counties this tax is aimed at lowering property tax
    • In more metropolitan counties the 2% sales tax is likely already eaten up
  • Cole – Do you have information about taxation timelines?
    • Castillo – Appraisal notice and when taxes are due is laid out in statute, rolls laid out in July, rates set by Sept. 29, notices in Oct., delinquent if not paid by Jan. 31
  • *Comment from Rep. Cole, microphone was off & comment inaudible
  • Burrows – We have a bill to do just that

 

Sarah Keeton, LBB

  • Link to LBB Presentation
  • Highlights certain provisions in HB 1
    • HB 1 as introduced includes $247b in AF, $115b in GR; Art II increases by $1.2b AF while Art III increases by $10b AF
    • Increase in Art II primarily due to federal funds, $7b increase in GR for public education
    • Includes $633m in appropriations from the ESF, 4% of balance
    • Fully funds FSP and increases this by $9b
    • HB 1 funds projected caseload growth in Medicaid, but assumes more favorable FMAP that is decreasing GR, but increasing AF
    • Funding for CPS includes projected caseload growth & additional funding to maintaining caseworkers
    • Includes additional $109m for school safety
    • Includes $31b for transportation, covers Prop 7 and Prop 1
    • Additional $231m for TRS to maintain current premiums and benefits
    • Transfers driver license program from DPS to DMV
    • Increase in HB 1 for graduate medical education & increase in judicial pay
  • Wray – I think the LBB has a publication on various tax and expenditure limits for state governments?
    • Can check, might be a Comptroller’s Office publications
  • Wray – Should examine state government limits while looking at local limits
  • Murphy – What occurs when we have the rare occurrence of billions in unspent funds
    • When we have unspent funds due to lack of appropriations or because of spending limit, it leaves a beginning balance in GR available for appropriation
  • Murphy – Could we appropriate this to the ESF
    • Kevin Kavanaugh, LBB – Yes, it is an option with a 2/3rds vote
  • Burrows – How much of the $9b is for funding population increases?
    • Andy MacLaurin, LBB – $2.4b for population growth in 2021
    • Aaron Henricksen, LBB – $9b is on top of enrollment growth
  • Burrows – And objectives include providing local tax relief?
    • Correct
  • Martinez Fischer – Regarding Art II and the favorable FMAP, FMAP looks backward and what are the projections moving forward
    • FMAP looks at per capita income of Texas vs. rest of the country and there is a lag
    • We have a more favorable FMAP in 2021, not enough data yet for 2023, but does tend to be cyclical
  • Martinez Fischer – Art II often needs supplemental funds to cover caseload, cost growth, etc.
    • HB 1 includes funding for caseload growth, but not cost growth, would need to be supplemental depending on how this resolves
  • Rodriguez – Regarding border security, $782.8m, is this a continuation of what was done last session?
    • Yes, eliminates some one-time expenditures
  • Rodriguez – It was a one-time deal last time, so this is another one-time continuance
    • A lot of the expense last session was Vaseline for troops, etc.
  • Wray – Do you have a comparison of SB 1 and HB 1 as introduced?
    • Can provide this to the committee, not published to the website

 

House Ways & Means adjourned