House Ways & Means – February 20, 2019

The House Committee on Ways & Means met on February 20 to hear invited testimony on the tax system in Texas and on Chapter 312 and 313 tax incentives. The committee heard from the Texas Taxpayers and Research Organization, the Center for Public Policy Priorities, and the Texas Public Policy Foundation, as well as several industry stakeholders.

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.

 

State Tax System

Dale Craymer, Texas Taxpayers and Research Association

• Texas personal tax rate is $4,163/person, substantially lower than national average of >$5k
• While per person is lower, taxes paid by business is around 60% of all taxes in the state and business burden is higher than other states
• Taxes paid by individuals amount to 3.4% of personal income, substantially lower than national average of >5%
• Texas is higher than national average for tax percentage compared to business revenue, 14th in nation
• Have a high sales tax compared to other states, 13th in nation
• Texas’ sales tax applies to more services generally than other states
• Murphy – Considering our exemptions, is our base that broad?
  • Other states will have substantially more exemptions than we do, doesn’t have specific data, but can get it
• Murphy asks for data on the exemptions
• Story is the same pretty much with the property, businesses must pay property tax on items used to generate revenue
• Franchise tax is unlike any other tax, similar to income tax but not an income tax, franchise tax probably puts as around 33rd highest, but adding on property and sales taxes pushes the business burden higher
• Effective tax rates on homeowner property rank us at 15th nationally, commercial is 19th highest, industrial property at 4th highest nationally (roughly 65% higher than other states due to inventory, etc.); presents data on tax burden over lifespan of industrial projects
• Will hear a lot about Chapter 313 and 312, incentives for new investment coming to Texas and receiving temporary exemption
• Even if businesses avail themselves of all exemptions, property tax bill will still be higher than national average
• Presents written data on how exclusions apply to sales tax, $42.9 billion in total exclusions, but much of this is already taxed under a different law (e.g. motor vehicles, fuels, etc.)
• No other state taxes raw materials
• Issue with taxing services is how to do it; e.g. difficult to tax architecture services if the firm can get it designed out of state & then use the plans in state
• 227 bills filed on property tax, hotel tax is surprisingly popular as well
• Burrows – Is there anything we cou8ld work to be a little bit more attractive?
  • Single largest tax that is an issue is our property tax, lowering this will be a substantial economic benefit
  • Franchise tax is not as impactful, must locate property in Texas to be subject & can be subject to franchise tax even if out of state
• Bohac – How much does the franchise tax bring in?
  • Roughly $7 billion
• Bohac – So getting rid of the franchise tax would mean $7 billion?
  • This would be the fiscal note, but whether it would be available or you would need to make up the revenue is unanswered

 

Dick Levine, Center for Public Policy Priorities

• Lack of income tax distorts our system and puts heavier burden on other areas of the tax system
• About half of property taxes go to schools, if you want to lower property taxes, you must deal with schools
• Could bring in a total of $164 billion in sales tax, but $93 billion is not collected due to various issues like double taxation, exemptions for essentials, and exclusions of items not originally included
• Exclusions should be subject to Texas sales tax if services are received in Texas, even if the architect is in New York, for instance
• Also see discounts for collection, etc., though this is likely outmoded as it likely does not cost .5% to administer taxes
• Early filer discount is an unnecessary expense to the state, might want to look here to deal with school property taxes
• If all property were taxed, schools could bring in more; lose $10 billion to homestead exemptions, appraisal value 10% cap, $8 billion is lost to the ag exemption, $13 billion in other areas like Chapter 313 abatements
• Ag exemption could be tightened to be more uniform & ensure that only actual ag land is exempted
• With Chapter 313 abatements, this money is made up to school districts out of the state budget, $1.6 billion loss now & will grow to $2 billion next biennium; Study indicates that 85% of these projects would have come to the state regardless without the abatements
• All of this leads to $75 billion school districts actually bring in through the property tax system
• State is seeing less revenue, franchise tax was cut by ¼ and Texas saw a ~$2.6b loss, some of this came out of school revenue through the Foundation School Program
• Sales tax diversion to the State Highway Fund is also a significant revenue loss, $5 billion loss to GR out of each budget
• Sales tax is a lot more volatile and sensitive to consumer economy than property taxes, severance tax is highly volatile
• Texas has a regressive tax system, lower income groups pay a larger share compared to higher income groups (lowest 20% @16% tax, highest 20% @4% tax)
• Bohac – Asks for details on the tax system and how it is regressive
  • Regressive nature largely due to sales tax
• Murphy – Seems like that there is a flattening out of sales tax; e.g. people at the top end are paying more dollars
  • Families at the bottom spend about ¾ of their income on taxable items, in the middle at ½, and ¼ in the higher brackets
• Murphy – What would you do about this?
  • You could tax services that are typically used by middle and higher income brackets that are not taxed now, could use income tax, could also use a “circuit breaker” that provides tax relief when property tax burden becomes a significant portion of income
• Murphy – So the concept is not what things cost but your ability to pay?
  • I think this is the fairest way
• Rodriguez – How difficult is the “circuit breaker” in a state without an income tax?
  • Has been done in other states without income tax, would need an accounting & unsure how this would be done
• Bohac – Regarding apartments versus homes, do you have data that shows what an average apartment dweller pays in property taxes as a part of the rent versus what single-family homes pay? Apartment taxes could be diluted compared to how many kids are sent to schools
  • Have looked at this, in Texas we determined it is local market conditions that determine rent payments
• Up to $150k/year, portion of taxes paid is greater than portion of income received
• Comptroller provides an index (Suits Index) of how proportional taxes are, all major taxes in Texas have a less than 0 Suits Index, severance taxes are more fair than other types
• Murphy – What is the Suits Index
  • You compare income received to taxes paid
• Murphy – Will find out more
• 2/3rds of severance taxes are paid by out of state individuals as tax carries until fuel is purchased

 

Vance Ginn, Texas Public Policy Foundation

• Economic indicators and population factors are much higher in states without income tax; clear indication that we should never have income tax in Texas
• Provides data on 4 most populous states, Texas ranks low on business climate indexes due to tax burdens, property and otherwise
• Room to work on the spending side, which will affect Texas’ tax policy
• Income inequality is lower in Texas than in other states, Texas is about average for cost of living at the poverty level
• Need to keep looking at ways to eliminate franchise tax, business taxes paid can be transferred to employees, consumers, etc.
• Burrows – Can you talk about the economic perspective on tax reductions, etc. and how it would impact out economy
  • Looked at franchise tax, if you lower it you can create more jobs, create more income, etc.
  • Property taxes have increased significantly over last 12 years, roughly twice as fast as ability to pay; rollback rate reform could account for population and inflation growth, could slow growth rate by half
  • Could look at ways to decrease spending and could put this towards eliminating the M&O tax
• Martinez Fischer – If the premise is to cut taxes, level the playing field, reduce spending, etc.; how does these items allow for spending such as $800 million for border security?
  • Something for legislature to consider, more economic growth would also mean more revenue through sales tax
• Martinez Fischer – Appreciates this, but private entities aren’t going to paying for boots on the ground, etc.
  • It’s about deciding priorities
• Martinez Fischer – And how do we decide this?
  • Legislative question, keys are health care and education
• Martinez Fischer – What have we done to close the gap on uncompensated care (UC)?
  • This is not my area
• Martinez Fischer – If we care about outcomes, health care, prosperity of the state, etc., how do we resolve this with
  • Nonprofits, charities, etc. could fill this hole, lower tax base could lead to more charitable donations
• Martinez Fischer – Has it happened?
  • We haven’t lowered taxes to that level
• Martinez Fischer – We have cut taxes, session over session, but yet the issue of UC exists; we are last in insuring our children, etc.
  • Even with taxes, taxes continue to rise
  • Insurance doesn’t equal quality access to doctors, many factors to consider in the health care world
• Martinez Fischer – Appreciates that; need to consider these issues if we’re going to be consistent and have best tax environment in the US
  • Property tax is a large burden on lower income tax, very regressive system and should move away from property tax and towards a sales tax system overall; businesses often pass taxes onto consumers
• Should take good look at Chapter 312 and 313, most businesses are going to come here anyways
• Bohac – Taxes don’t get passed onto consumers; businesses see detriment from passing taxes onto consumers as they see reduced consumption

 

Chapter 312 and 313

Debbie Cartwright, Texas Taxpayers and Research Association

• Economic development incentives are very important for local governments
• Provides a history of Chapter 312 incentives, program expires in September of 2019 if not extended; Chapter 313 expires December 2022
• Chapter 312 is a local incentive program allowing cities, counties, and special districts, to provide temporary property tax exemptions up to 100% for new investments; only applies to something being built or improvements
• Lost Pines Hyatt Regency in Bastrop is an example efficacy of incentives, property value grew dramatically due to investment driven by the incentive
• Public input level for abatements is very high, 4 step process & very transparent
• Abatements mostly used by local businesses to build new property
• No fiscal impact of Chapter 312, state is not involved; Chapter 313 does have a fiscal impact & is restricted to school districts
• Rodriguez – Are the local taxing entities able to require other things like community benefits?
  • Yes, taxing units can state what they want for their communities in the guidelines
• Rodriguez – Can the local entity require a certain number of employee hires?
  • Yes
• Martinez Fischer – Chapter 312s have been very good tools in San Antonio & Bexar county, economic makes sense; concerned of one aspect, local governments must be able to afford to do these?
  • Not exactly right, only works with new investment, often can’t afford not to do this
• Martinez Fischer – Speaking to the idea that many local governments need revenue to make infrastructure, etc.; can’t offer incentives without infrastructure
  • Usually part of economic package that includes things like Chapter 311 infrastructure programs, etc.
  • Have also heard that many industries agree to create the infrastructure, can by a win-win for all parties
• Martinez Fischer – To reach optimal negotiation, seems like you’d want to be able to use all these tools
  • Agrees
• Bohac – I like Chapter 312s as economic development tools, but also like that the state doesn’t reimburse for the discounts given by local governments, I find reimbursements problematic
  • Agrees
• Cole – Bastrop hotel was problematic, came at a time when economy was in recession; will be filing a bill requiring agreements to look at public education, safety, transportation, etc., has issues with state not assisting
• Shaheen – How specifically do the agreements work?
  • It is an exemption, appraisal district shows the property as exempt for each applicable year
  • Not always 100%, can be up to 100%
• Shaheen – This is not a TIRZ, correct?
  • Correct
• Shaheen – This can only go towards business, only for private sector?
  • Yes

 

Chair Burrows asks that questions be held until the end

 

Hector Rivero, Texas Chemical Council

• Rivero discusses economic benefit of shale investment, direct correlation between shale resources and new investments & new investments have provided massive economic benefits to the state
• Need a stable supply of natural resources, favorable regulatory environment, skilled workforce, etc. to continue, Texas has these; also need a great tax policy, tax incentives have been instrumental in securing investments in the state
• Texas has the 4th highest property taxes in the country, Chapter 312 and 313 incentives can help offset these costs for new investments
• Businesses will site locations on competitiveness and local resources
• Incentives are optional, choices by local governments
• Rivero discusses the economic benefits provided from attracting new investments, provides data on benefits to communities around the state
• Tax incentives work, urges committee to continue these

 

Tony Bennett, Texas Association of Manufacturers

• Manufacturing is a very desirable business in any economy
• Personal property taxation is very important to manufacturing, trying to lure modern manufacturing to Texas (semiconductors, aerospace, etc.) & these industries worry about high property tax states like Texas
• Manufacturing is a job multiplier, Chapter 312 and 313 provide incentives to bring these businesses to the state & currently plants are frequently deciding to go elsewhere; competition is severe and global
• Frisco did a 25-year study, every dollar spent on their incentive program saw a $25 return
• Highlights keeptexasfirst.com which has info on Chapter 312 and 313
• Process for these agreements are very transparent, investment zone must be approved, guidelines, in place, agreements solidified with public hearing, etc.

 

 Jeffrey Clark, Advanced Power Alliance

• These projects are in rural Texas primarily, state should not forget rural areas when considering tax incentives
• For industrial projects, etc. property tax rate ~65% higher and this makes it difficult to compete
• Renewable energy investments have led to large environmental and economic impact, wind is reliable income for many families, but many wind projects wouldn’t exist without Chapter 312
• Wind and solar are opportunities for farmers and ranchers that did not exist 20 years ago; Oldham County tripled its tax base by bringing in wind farms, city of Sweetwater saw significant tax base growth due to wind investments
• Protects against boom & bust cycle of commodities, this is why renewable energy is very attractive to school districts & they are confident these projects will remain
• Projects also attract other industries, many companies involved in other sectors like food production and computer technology have been building wind power to offset reliance on other power markets
• Texas has plenty of workforce available and renewable energy makes use of it

 

The Committee adjourned for the House Floor