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House Ways & Means met on February 27th to hear from agencies under the committee’s jurisdiction and from stakeholders on state tax systems. An archive of the hearing can be found here.

 

This report is intended to give you an overview and highlight the various topics taken up. It is not a verbatim transcript of the discussions 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.

 

Tom Currah, Comptroller’s Office

  • Speaking on the 2024-25 Biennial Revenue Estimate
  • Expecting $188.23b to be available for general purpose spending in 2024-25, total GR related collection estimated at $165.9b
  • Then add in $32.69b beginning balance, offset by Texas Tomorrow Fund transfer, transfers to SHF & ESF
  • Contributing factors incl. increased tax collections, lower than expected expenditures (e.g. public education due to faster property value growth)
  • Does not include things like unspent ARPA money
  • Federal reserve is likely to continue tightening monetary policy
  • Expecting consumer spending to slow in coming months as employment drops and savings are depleted
  • Also subject to things outside US borders, global recession could lower O&G price, resurgent Chinese economy could increase O&G price, etc.
  • Shine – Exact balance for ARPA?
    • Think it is $5.4b
  • Shine – Restrictions?
    • Would defer to LBB
  • Shine – Does Comptroller’s Office track GDP for state and whether recession has impact in TX?
    • Right now no data to indicate recession, but GDP data lags
    • BRE assumes a slight recession in TX for the coming year
  • Shine – Do you track subsequent quarters of negative GDP?
    • That is federal data, 2022 had 2 quarters of slightly negative growth
  • Shine – If we anticipate recessionary environment, greatest impact would be sales tax?
    • Because sales tax is a large portion of GR, will always have the biggest impact there
  • Turner – School districts have collected more revenue at the local level due to rising property values and this causes a decrease in state funding?
    • Correct
  • Turner – Do you have the amount saved?
    • Don’t have that exactly, roughly $4.3b
  • Chair Meyer – Sales tax returns from remote sellers and marketplace providers?
    • Continue to increase, saw surge during pandemic; if we hadn’t passed bills in 2019 would’ve forgone a lot of revenue
  • Chair Meyer – Any other issues in that space we need to address?
    • Would defer to tax expert
  • Chair Meyer – If we did away with franchise tax, how much revenue would we forgo?
    • In excess of $10b

 

Phillip Ashley, Comptroller’s Office

  • Speaking on state tax system
  • Comptroller’s Office administers over 60 separate taxes and fees
  • Highlights Comptroller publications: A Field Guide to the Taxes of Texas, Tax Exemptions and Tax Incidence Report, and Sources of Revenue
  • Provides overview of franchise tax, tax on doing business, calculated on margins
  • Provides overview of state sales & use tax, single largest source of revenue for the state, transaction based tax imposed on final sales on tangible personal property
  • Variety of different sales tax exemptions available to taxpayers, major ones incl. tangible personal property taxed under other law, sale for resale, manufacturing, etc.
  • Also have info on remote seller info, wasn’t planning to cover as it has been well-covered, current number is 13.8k registered remote sellers, 1k marketplace
  • Highlights other tax rates, incl. O&G production taxes, insurance maintenance tax, mixed beverage sales tax, etc.
  • Raymond – Anyone who thinks we don’t tax enough in this state?
  • Shine – Portion of sales tax is rebated back to local governments? Fixed percent?
    • Depends on local tax rate, e.g. if it is 2% that goes back
  • Shine – If they don’t have anything, does a portion of the 6.25% go back?
    • No
  • Shine – Is there any graduated percentage?
    • No, based on percentage above that 6.25%
  • Gervin-Hawkins – Would sports betting fit under sales tax?
    • Depends on how state enacts tax, certain services are subject to sales tax
    • Could be subject depending on how it is structured
  • Noble – What is a marketplace provider registration?
    • Amazon or Etsy, provide platform on which sales take place
    • Remote seller is an out of state seller selling on a platform
  • Chair Meyer – Trends for collections in 2023 and beyond?
    • Currah – BRE assumes 7% growth for FY23, has been running a little bit ahead, possibly a couple percent

 

Korry Castillo, Comptroller’s Office

  • Speaking on property tax administration & update on Chapter 313
  • Appraisal District Ratio Study is a study on accuracy of appraised values, determines degree of uniformity
  • Appraisal District Operations Survey collects benchmark data to compare appraisal district data
  • Appraisal Review Board Survey & Report reports on input
  • Methods & Assistance Program (MAP) is a study on operational effectiveness of appraisal districts; also have targeted MAP reviews for certain districts
  • Other areas of assistance include arbitration program, TDLR tax professional licensing, etc.
  • Button – ISDs with 3 consecutive years of invalid findings receive targeted MAP review, what happens if they fail?
    • Process outlined in law is complete review, make recommendations, and if they do not follow board can choose to not continue employment of appraiser
  • Raymond – What percentage of appraisals are protested?
    • Can get this to you from the operations survey
  • Raymond – Asks after ARB orders
    • Data is self-reported by the appraisal district, no other recording of ARB orders and outcome
  • Shine – If you have multiple failures for the property value study?
    • If they are invalid and not in range, immediate effect is potentially a reduction in state aid; have a grace period of 2 years
  • Shine – If there is a repeated event, what is the course of action or consequences? Sent to ARB?
    • Two pieces, school finance piece is if they run out of grace period they are funded on state values which typically come in than higher than local values
    • Up to ARB to ensure they are in compliance with state law
    • Repot values to TEA
  • Shine – So ISDs in the ARB would suffer for this?
    • Potentially
  • Shine – If you have an ARB
    • When there is an ARB adjustment, will take that into account when we do a study
    • If there is a reduction by 10%, ARB will give us a copy of the order & would make a 10% reduction to keep it apples to apples
    • ARB result shouldn’t disproportionately affect one over another because we adjust
  • Shine – If 75% of protests an ARB receives get average 30% reductions, does this send a message as to what is happening in the district?
    • From a state level, as long as values are within market value, percentage of reduction wouldn’t matter
    • Would need to be an investigation of why
    • Property value just checks if they are in line with market value
  • Shine – This should send a pretty significant message about how property was valued
    • Possible, could also be a training issue for the ARB; depends on facts behind it
  • Shine – So if it is not a training issue, where would you next look?
    • You’d want to look at if notice values are in line with what is statistically in line with market value
    • Need to have a full review to evaluate
  • Shine – What methodology do you use to review this?
    • We don’t have oversight over ARB, do assist with training to members as requested
    • ARB survey review also determines general feelings about the ARB
    • Notice value studies on uniformity of appraisals also look at this
  • Shine – Any way to look at ARB action?
    • Should come out in ISD property value study
  • Noble – Methods and assistance basically an audit?
    • Majority of questions based on compliance with state law and best practices
  • Noble – Do you dig down onto individual property?
    • We do, but it is on a sample basis
  • Chair Meyer – How did appraisal districts score on most recent MAP review?
    • Has been one of the better MAP reviews, percentages are pretty good
  • Chair Meyer – What areas are you seeing biggest compliance issues in?
    • Reporting deadlines, adopting budgets on timeframe
  • Chair Meyer – Can you summarize most recent ratio studies?
    • At the state level, looking for level appraisal, can provide info on which districts are outside
  • Chair Meyer – How many responses do you receive on the ARB survey?
    • Saw a dip in reporting during COVID, can provide most recent results
  • Chair Meyer – In most recent survey, overall poor impression more than doubled, any reason why?
    • Satisfaction with ARBs runs very much in line with if values were reduced, values have not dipped as dramatically as in the past, likely driven by increases in property value appraisal
  • Chair Meyer – Are you seeing local districts substantially increasing values after PBS review?
    • Don’t have any data on this specifically, if an ISD is invalid there is pressure to reappraise and move to market value
  • Castillo gives overview of Chapter 313 program, expired in December 2022
  • Last year of program, received 416 applications by the end of year, typically would receive 100-150 in a normal year
  • $150b total reported investment through 2021, total reported tax benefit @$12.5b
  • Raymond – Reasons why you didn’t certify or approve applications?
    • Some withdrew, had some duplicates, majority not certified were due to resources issues
    • Had more applications to review than we had bandwidth to review
  • Raymond – What about the ones you did review and not certify?
    • Seeking interjection by Supreme Court on some and Supreme Court didn’t want to intervene; can provide list to your office
    • Also have a list published to website of applications that did not make it during life of program
  • Raymond – Ones that didn’t make it due to staff grandfathered?
    • No, determination was program ended on December 2022
  • Button – Asks for breakdown of manufacturing types
  • Thierry – breakdown on $150b investment?
    • Investment numbers are reported by companies
  • Turner – Breakdown of geographically where projects are located?
    • Do have them by ISD, can get this
  • Turner – Estimated gross tax benefit is amount of tax dollars abated?
    • Correct, would also be inclusive of the prior program’s tax credit
  • Turner – So the $12.5b would be the sum the state backfilled?
    • Correct
  • Turner – Rush of applications occurred since June 1?
    • Gave until the end of January for applicants to provide all executed agreements
    • Includes 296 agreements added since June 1
    • Breakdown in last six months shifted significantly towards solar projects
    • 1/3rds of projects over life of program were renewable
    • Looking at preliminary numbers that agreements added since June 1 will add $19b gross tax benefit on top of $12b existing
  • Chair Meyer – What issues did you see from an admin perspective on Chapter 313s?
    • Heard issues on reporting and frequency of reporting; balance because transparency is important
    • Working over next 18 months to automate a lot of the reporting
    • Also hearing complaints that applications are measured in “inches” and not pages, related to complicated requirements of the program
    • More tiers and levels you have, more variety in agreements, etc. makes the program more complex
  • Thierry – Is the process first in, first out?
    • Has been, but also has to do with quality of application, complexity of project, responsiveness of applicant and ISD, etc.
  • Thierry – So could’ve submitted earlier or later
    • Majority were determined to be completed and eligible, every applicant was contacted for information, but possible that timeliness put one applicant in front of another
    • Also wanted to prioritize project creating most investment and jobs
  • Shine – Time spent?
    • Roughly 30k staff hours
  • Shine – If legislature is successful in coming up with a replacement, how long would it take to get spun up to provide oversight?
    • Did staff up and repurposed staff to help with temporary volume, but staff has been returned
    • Core 313 staff is still there to keep up with reporting, etc., but without replacement would start repurposing these staff

 

Nora Velasco, LBB

  • Providing overview of proposed budget
  • $288.7b overall in proposed budget, federal funds decreased by approx. $31b, GR increased by $11.9b
  • FSP fully funds requirements set forth in law, including enrollment growth, $15b set aside for property tax relief
  • All Funds decrease of $5.5b for behavioral health funding due to end of COVID funding, also decrease for Medicaid/CHIP
  • $35b for highways and ship channel improvements
  • Budget incl. statewide salary increase & amounts to provide these increase for 3 months of the current biennium
  • Raymond – On HHS with projected increases in client services due to less favorable FMAP?
    • Don’t have the details but can get you this info
  • Chair Meyer – $15b set aside for additional property tax relief? $3b for homestead exemption? I believe this is in the Senate version, not the House
    • Will check on this
  • Gervin-Hawkins – Is that $3b over and beyond the $15b
  • Chair Meyer – No, included in the $15b

 

Kevin Kavanaugh, LBB

  • Less favorable FMAP based on two things, formula set by federal government and based on personal income growth versus national average, also had an enhanced FMAP that is ending with end of PHE
  • House rider on property tax relief has homestead exemption as an option
  • Provides overview of spending limits on appropriations bills, 2 longstanding, new one passed under SB 1336
  • Pay as you go is $188b, estimate able to appropriate an additional $43.6b before you hit this
  • Tax spending limit is 12.33%, has the least amount of remaining capacity @$4b
  • Consolidated GR limit is new, remaining capacity estimated @$17.1b, appropriations to pay for tax relief are exempt from this limit
  • HB 3 from 2019 introduced a new mechanism to automatically reduce ISD property taxes, total $5.3b
  • Property tax relief rider appropriates $9.7b beyond current amounts, contingent on legislature passing bill to specify how that can be implemented; rider contains a non-exhaustive list of recommendations
  • Chair Meyer – What are the two costs to the state on tax rate compression?
    • Both associated with HB 3, $3.1b associated with statute formulas that compress when rates go beyond 2.5%
    • Second $2.2b associated with 90% limit
  • Chair Meyer – So state needs to backfill?
    • Yes

 

Dale Craymer, Texas Taxpayers and Research Association

  • Have essentially $40b that has not been committed, that legislature will decide what to do with
  • $32.7b surplus is only part of the picture, add projected revenues and get $188b
  • HB 1 has $130b in GR spending and an additional $9.7b in property tax relief above HB 3 $5.3b
  • Supplemental needs will be about $6b
  • Unallocated excess would be $42b by TTARA estimation, does not include unspent pandemic funds, does not include ESF funds, etc.
  • Will be a lot of discussions on decisions made and how sustainable they are into the future
  • Roughly $20b will likely be sustainable for the future given growth, etc.; TX essentially has a structural surplus as revenue base exceeds spending
  • TX relies on mostly property and sales taxes, both are higher than the typical state; lack of personal income tax shifts responsibility of how government is financed in Texas
  • Texas is a low tax state in terms of taxes on individuals; not a low tax state for business and high tax state for property taxes
  • HB 3 changed school finance system, led to very dramatic drop in property tax rates
  • Roughly a third of average value for homesteads are exempt, Ag exemption allows farms etc. to operate
  • Appraisal cap was first passed in 1997, traditionally has been more of a circuit breaker
  • In 2022 homestead value went up substantially, but 10% appraisal limit exempted much of the increased value for some properties; provided substantial benefit to homeowners
  • Homeowners saved about $4b last year as a result of appraisal caps, but if actual value was put on the roles would’ve compressed rate; ended up with higher rates than we would’ve had
  • $4b was shifted onto business property who didn’t benefit from cap and saw higher rates
  • 10% appraisal cap has been in place for 20 years, but there is a price associated
  • Button – Suggestions for use of funds in the budget?
    • Suggestion would be to take $188b and put it into two pots
    • One-time funding for infrastructure, shoring up pension systems or 13th check
    • $155b left over would be recurring revenue
    • Will likely need to put more money into public education than is in the base bill, adjusting for inflation will take more funding, will need more money for Medicaid, etc.
    • But above that, you have fair level of confidence that this money will continue past 2 years, could perhaps look at additional property tax relief
    • Sales tax cut is also a consideration
    • Worst thing to do is nothing
  • Raymond – Homeowners saved $4b?
    • Yes, because of 10% appraisal cap
  • Raymond – Increase, but less of an increase?
    • Accurate, average homeowner probably saw their bill go up some
  • Raymond – Difficult to discuss property tax reductions when actual bills go up; need to work on this so it isn’t just a savings on the increase
    • Appraisal cap does not cut taxes overall, just shifts who pays the bill
    • If you lowered the cap to 5% or something else, just means the tax base will be smaller and city will need to adopt a higher rate to generate the necessary funds
    • Some will benefit from cap, but for properties that aren’t eligible for the cap, all they will see are the higher tax rates
    • Takes about $15b just to hold property taxes flat where they are
    • Has been some property tax relief overselling, rates have lowered, but overall tax bills are still rising
  • Raymond – Reiterate what we could do or should do?
    • HB 1 and SB 1 provide $5.3b via HB 3 mechanism and $9.7b beyond HB 3
  • Raymond – How will that be offset by increases that will occur?
    • You’ll see increase in city and county taxes, cannot control this; though these can’t increase 8% like they have before
  • Raymond – What does the $15b mean?
    • Will roughly hold bills flat for next 2 years, bringing them down will take more than $15b
  • Gervin-Hawkins – If we increase homestead exemption to $100k?
    • You see tax bills go down as a homeowner, appraisal cap, homestead exemption, etc. worked in concert
  • Gervin-Hawkins – $100k would hit more households
    • Would take more of that value of the tax rolls
  • Gervin-Hawkins – So people would be able to feel that difference
  • Gervin-Hawkins – Suggest estimating state employee salary increase over 10 years
  • Gervin-Hawkins – Asks about federal funds tracking
    • I think most agencies are, whether that is compiled and shared with finance committees, not sure
  • Gervin-Hawkins – With large amounts of money, should be able to do more for people
    • Agrees
  • Gervin-Hawkins – you don’t have a playbook?
    • Institutional knowledge may do more harm with this large of a surplus
  • Gervin-Hawkins Could stabilize pensions
  • Hefner – Would it be wise to lower the taxes we have control over, hear from constituents concerns more about property taxes than sales taxes
    • Fair, in 2015 House passed a cut but Senate analysis was that no one was complaining about sales tax
    • Cutting sales tax could be an effective tool to spread a cut in the population, tourists may also benefit
    • Generally, the most economically harmful tax is the property tax
  • Muñoz – Have you looked at taxpayer having a choice where a taxpayer pays taxes, e.g. paying taxes on residence and business in different districts
    • For sales tax, rate is stable and set in law, property tax is not and fluctuates based on budget need
    • Property taxes don’t go up due to values, go up because a district wants to spend more money
    • Everyone has a stake in a strong public education system and this creates benefits that reverberate through the economy
  • Muñoz – Even if they don’t increase rates, do local govs bring in more money?
    • Yes, if values go up, if local govs are raising more money they have to acknowledge they’re raising taxes in the motion
  • Chair Meyer – Position on caps is clear that it shifts burden, couldn’t the same argument be made on homestead exemptions?
    • Yes, but with homestead state can directly pay for that; without this it is shifting taxes to others

 

Dick Lavine, Every Texan

  • TX is a two tax state as it lacks income tax
  • Businesses paying taxes gets passed on into lower wages, higher prices, lowered profits, etc.
  • Households with lowest income pay highest percentage of that income in state & local taxes
  • Would like to see equality in share of income and taxes paid being equal, but for those below $100k share of taxes is larger, largest 20% pay the least compared to personal income
  • Each category also pays taxes via sales or property differently, lowest income sector pays more in sales tax
  • Flat rate exemptions apply to all groups equally, appraisal cap compression is much more disparate
  • Option for cities to give flat dollar exemption could increase equity of tax system
  • Local rental assistance was set up by many local govs with COVID dollars, could look at supporting these programs already set up; Austin has one, others may have this in your districts
  • On Chapter 313, many reasons companies come to Texas, esp. wind, solar, NG, petrochem, etc., probably giving more & larger incentives than are necessary
  • Cost of agreements are $2.3b, Houston Chronicle estimated cost of agreements signed between June 1 and end of program at $31b; some of this may not materialize
  • There wasn’t much reporting and auditing of agreements, other programs like Texas Enterprise Fund do audit and enforce claw backs
  • Raymond – On flat dollar exemption, what number are you advocating?
    • Position is not to support any tax breaks until we deal with unpaid bills
  • Raymond – Don’t want to throw out a number?
    • Not at this time
  • Raymond – If we increase homestead exemption?
    • HB 3 takes care of ISD rates
  • Raymond – If you only want to address schools, don’t want to ask the question
    • SB 2 puts a limit on city and county property taxes
  • Turner – If you’re in the lower income bracket, you’re paying 4x in sales tax, as percentage of income, than someone in the highest bracket; great material on how to makes taxes less regressive and punitive
    • People struggling to move up and we’re making it harder for them

 

Daniel Sanchez-Piñol, Texas Public Policy Foundation

  • Speaking on proposal to buy down and eliminate ISD M&O taxes
  • TPPF proposes allocating 90% of surplus to property taxes every biennium, would eliminate M&O taxes over the next decade, 50% of property taxes