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The Committee on Ways and Means met on March 1, 2021 to hold an organization hearing and hear from several state agencies. A video of the hearing can be found here.

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 of Public Accounts

  • Projecting $112.53 billion available for the 22-23 biennium, a slight decrease from the current biennium; notes that drop in GRR is not caused by a drop in revenue collections.
  • Expect revenue collections to grow over the next biennium, with GR-related tax collections increasing by $6.5 billion and total GRR collections $7.1 billion.
  • Started 20-21 biennium with $4.84 billion beginning balance, with an estimated $946 million deficit beginning at next biennium.
  • After subtracting the projected ending shortfall from the estimated revenue collections, must also deduct $5.83 billion in severance tax collections that must be reserved and transferred to the Economic Stabilization Fund and Highway Fund.
  • Must also set aside GR to cover the projected $271 million shortfall in Texas Tomorrow Fund, the state’s original pre-paid college tuition plan.
  • Estimate does not include savings from 5% cuts asked of agencies last session; those spending reductions, if realized, could reduce the projected ending shortfall.
  • Any new GR appropriations needed in a supplemental bill in this biennium could increase the projected deficit.
  • A revenue estimate published in July of 2020 projected an ending deficit of $4.6 billion.
  • Current estimate at $946 million shortfall: two reasons for revisions.
    • Some projected GR expenditures, particularly those in the foundation school program, are lower than estimated last summer.
    • Revenue collections, especially sales tax. Account for 60% of all state tax collections.
  • Sellers outside of Texas that have sales of at least $500 million in annual sales to our state are required to collect and remit those sales taxes.
  • Wayfair decision and HB1525, which requires marketplace providers to collect and remit sales taxes made through the platform, starting October 2019.
  • In the first 15 months, more than $1.7 billion in state revenue and $480 million in state sales revenue in local jurisdictions.
  • The forecast is based on projected economic growth, though uncertain.
  • COVID and winter storm have damaged the economy; only time will tell how much.
  • Personal savings increased in 2020, as people spent less income; consumer debt has decreased as well.
  • Martinez Fischer – From a revenue perspective, are there trends nationally that other states are doing (Maryland making data a commodity that will be taxed), that would bolster the TX economy?
    • There is nothing that can garner the revenue that the Wayfair case brought Texas; all states saw revenue stronger than predicted. The pandemic drove those sales.
    • Any way to modernize the tax system and bring fairness into the system.
  • Martinez Fischer – Spot market, does the agency track volume and volatility? Is it an interest of the comptroller, the transactions of petroleum, gas? Keep a ledger?
    • We don’t track day-to-day, though overall data is important.
  • Martinez Fischer – Is there something we need to be doing on your behalf, best practices from other states, to supply the comptroller with that data?
    • There are no data points that we would not be able to get, though Texas needs to make conscientious decisions to gain our footing after the winter storm.
  • Rodriguez – How and what are you measuring to understand the economic impact of the winter storm?
    • Texas will see an uptick in sales tax as citizens rebuild.
  • Rodriguez – Is it in your purview to look at local governments and see their local expenditures? Can we give you that authority?
    • Though not our purview, it is something of significant interest.
    • Not asking for another responsibility.
  • Rodriguez – Are you looking at federal economic estimates?
    • Watching closely; there’s a large amount of money that may be coming to Texas that we didn’t add into our estimates.
    • Federal funds don’t necessarily impact GRR dollars unless the funds are moved into GRR strategies.
    • A significant amount of federal money we’ve received already can be utilized to replace the GRR spending.
  • Meyer – As it relates to federal money, do we have a timeline?
    • Guess in the next couple of weeks, though uncertain.
    • If Congress passes any stimulus funding, whether to individual or state governments, it will pass through the state economy.
  • Cole – Do you have an estimate for possible federal funding?
    • Hesitant to give an estimate.

Karey Barton, Associate Deputy Comptroller

  • Texas Franchise Tax rates were adjusted and reduced in 2016.
  • Approximately two million franchise taxpayers, 1.4 million of those file “no tax due” returns because they are below the $1,000 liability threshold. 1.2 million file electronically.
  • Of the 600,000 that report “taxes due”, about 144,000 returns come in. Notes that the number of entities might be higher because we file on a combined reporting basis.
  • The limit Sales and Use Tax rate is 6.25%; Texas has over 1,600 local taxing jurisdictions which may impose additional sales tax, up to a combined rate of 2%, bringing total possible tax up to 8.25%.
  • Texas taxes data processing, debt collection, information services, insurance services, which many other states leave tax-free.
  • July 2020, Texas no longer taxes internet access under the Federal ruling.
  • The largest amount of sales tax revenue comes from monthly filers, permit holders that have more than $1500 in sales tax per quarter to report; 229,000 monthly filers.
  • Quarterly filers permit holders that have less than $1500 in sales tax to report on a quarterly basis, but more than $1000: 331,000 quarterly filers.
  • Annual filers have less than $1000 in sales tax, file yearly; 162,000 annual filers.
  • Total 722,000 sales tax filers, approximately 457,000 files electronically.
  • The economic threshold for sales tax, $500,000, is set by rule from Comptroller in October 2019; amended Jan 2019, to add in notification requirements for remote sellers as it relates to the marketplace.
  • Modified Safe Harbor to include all mediums and platforms that facilitate sales.
  • Modified 3.286 rule for marketplace regulations.
  • Created waiver procedure for taxpayers or marketplaces to waive treatment of marketplace; has only waived food delivery entities.
  • Bill in the leg to clean rules related to the marketplace; refining and clarifying language.
  • HB2153 adopted last session, provides an optional single local sales tax rate for remote sellers, an average rate of 1.75%. Only remote sellers with no physical location can opt to use this to address the undue burden of Wayfair’s decision to remote sellers.
  • Local sales tax rule, 3.334, amended during interim: clarified definition of “business” to more closely follow the statute, effective October 1, 2021.
  • Overview of state taxes.
  • Chapter 313, Texas Economic Development Act, appraised value limitation agreements which taxpayer agrees to make capital investments and create jobs in exchange for ten-year limitation on the taxable property value of school district maintenance and operation rates.
    • Set to expire December 31, 2022.
  • Rodriguez – How are capital investments and jobs quantified in chapter 313?
    • Unsure
  • Martinez Fischer – Any professional chatter in the comptroller world to help Texas economy?
    • You mentioned Maryland, the first to implement Digital Advertising Tax; I expect it to face legal challenges since they’re only after digital media advertising, which may run afoul of the Internet Tax Freedom Act on the federal level.
    • Would be difficult to track.
    • Texas already taxes digital goods and data processing.
  • Martinez Fischer – Natural Gas Tax is taxed at 7.5% at the first sale? Is that unique to Texas tax law?
    • Can vary; sold at various stages of production and distribution.
    • Not unique to Texas but may be unique to severance tax law.
  • Martinez Fischer – Curious about the escalation of price and tax fairness.
  • Martinez Fischer – There was a discussion last session about raising the sales tax, was there any internal conversation or analysis that suggests increasing the sales tax would have an effect on consumption?
    • The higher you raise the rates, you get diminishing returns.

Tom Currah, Chief Revenue Manager

  • Martinez-Fischer – Households with income under $100K would see an increase in taxes relative to whatever reductions they would receive in property taxes. At some point there is a diminishing return, the higher you go.
  • I defer to LBB on that.
  • Barton back on stand.
  • Meyer – Franchise tax and PPP loan forgiveness?
    • TX franchise tax code is static in tying to a specific federal code that was referenced in Jan 2006.
    • Under that code, a forgive loan is treated as income or revenue; under the updated internal revenue code, federal income taxes will not treat those loans as revenue.
    • Would take a statutory change to solidify that those forgiven PPP loans are not revenue, could be undertaken this session.
  • Meyer – is there a time frame in which we would need to accomplish that?
    • Before the returns are filed, this session as it relates to any PPP loans that were forgiven before Jan 1, 2020. Would impact next year’s tax returns.
    • Must use at least 85% of the loan as it relates to compensation to qualify for forgiveness; would be able to deduct compensation.
    • Revenue would not be sourced to Texas in most cases if no leg changes.
  • Meyer – Would you agree that electronic filing is one of the most efficient ways to file? What are the barriers to moving taxpayers online?
    • Definitely; barriers vary. Looking to advocate on social media.
    • Recently simplified online filing process.
  • Meyer – Are the fees the same whether filing online or in-person?
    • No fees to file electronically unless you pay with a credit card, which will charge a typical surcharge; if you use EFT, electronic file transfer, it’s free.
  • Meyer – ARB training, how is that being handled during a pandemic?
    • Assuming virtually, unsure.
  • Thierry – Can people file on their smartphone?
    • No app for that but the new online layout makes it easier to fill out on a handheld device.

Wayne Polder, LBB

  • All funds reduction of $13.3 billion reduction, a decrease of 5%. GR increase $4.8 billion.
  • Federal funds decrease $13.9 billion.
  • The federal base includes only $8 billion so far of the COVID relief funds, which changes daily, is $25 billion now (haven’t received yet) another $6 billion that hasn’t come in that we don’t expect to come.
  • Expect a decline in federal transportation funds of $2 billion.
  • Other funds decrease $4 billion, due to one-time spending, mostly out of the Economic Stabilization Fund.
  • GR increase of $4.8 billion, most from public education.
  • Contribution increases to Teacher Retirement System.
  • All funds decrease in Health and Human Services due to federal matching funds and Covid-19 related expenses not expected to continue.
  • $2.4 billion decrease in Transportation funding at the federal level.
  • Higher education maintained at the base level.
  • $7.3 billion deficit for the upcoming biennium.
  • $7.3 billion does not anticipate any savings captured in the 5% exercise and will be included in HB-2. It does not include $3.5 billion granted to general revenue authority by Covid-19 funding, still in a deficit situation of approximately $3 billion.
  • Estimates that $11.6 billion is available for the economic stabilization fund and this does not anticipate any authority granted by the legislature.
  • Debt service as a percent of the total is nowhere near the state debt limit.
  • Murphy – You reference a second handout for the breakdown of federal funding, is that included here?
    • No, it is not, it will be included once finalized.
  • Murphy – Out of the $24.8 billion, have we programmed how this will be dispersed.
    • Much of it has been distributed in the first four bills, but a good chunk of the last bill is still in play.
  • Murphy – How much of these funds have been used to address funds related to the pandemic and how much of those were offsetting costs the state was already using such as public education?
    • ESSER-1 supplanted about $1.2 billion in public education funding included in the $24.8 billion and some went to TEA to distribute to local school districts on a programmatic basis. We can get you a report on what went where and how much.
  • Murphy – The gap in the deficit may not be as much as anticipated once we sift through all of this.
    • I would say that is a fair statement.
  • Shine – You indicate that there are two calculated debt ratios that you monitor in relation to the constitutional debt limit. Which of these are used by the credit agencies to monitor the credit quality of debt issued by Texas?
    • My understanding is both.
  • Shine – What is the importance the credit agencies place on these ratios?
    • I’m not sure.
  • Shine – I’m curious as to the relevance of these due to public interest.
    • I’ll get back to you.
  • Cole – Do you have any amounts that you expect to be reimbursed by the federal government for vaccine distribution?
    • We will get back to you and have a specific amount.
  • Meyer – There appears to be a substantial drop in regulatory funding of 22%, why is that?
    • It isn’t a drop in funding, it is a technical classification of revenue streams to revenue dedicated. Most of it was due to this.
  • Meyer – Could you give some practical examples of debt use?
    • Construction, transportation, and the state has decided to use some for tuition revenue bonds.
  • Meyer – Could you give insight as to local debt and how it’s trending?
    • I don’t have the numbers in front of me but it is mostly local school district debt.
  • Meyer – What are you seeing from the passage of SB-2 last session?
    • I will get back to you.
  • Meyer – How much has Texas borrowed through Title 12 unemployment?
    • I think the answer is a little north of $7 billion.
  • Meyer – When do we have to begin to pay it back and when does it start accruing?
    • I believe it sometime before the end of the year but I will check.
  • Murphy – When you mentioned the state taking on a portion of the revenue bonds, is it not 100%.
    • I’m not familiar with the recent decision of the legislature but I think it’s pretty close.

Dale Craymer, President of the Texas Taxpayer’s and Research Association

  • Membership association of businesses mostly in Texas, but also outside of Texas.
  • Texas is viewed as business-friendly but there are concerns about the recent storm, transportation, and water.
  • On the tax front, we are generally low tax for income, but it is passed on to businesses for property and sales tax.
  • The tax burden per capita is approximately $4,800 and $5,800 in the average state.
  • Other state businesses pay 44% of their tax burden and Texas pays 60%.
  • Skeptical of replacing property tax with sales tax.
  • Texas individual and local tax burden compared to other states rank Texas 45th and 35% lower than the national average.
  • Lack of personal income tax saves the average family of 3 about $3,600.
  • The tradeoff is that state-local tax on business put Texas 14th and 11% higher than the national average.
  • Capital-intensive industries are subject to the heaviest burden of property taxes.
  • This reduces home ownership and capital investments, which could be addressed with incentives to alleviate distortions.
  • Even with incentives, Texas will not be the lowest tax state.
  • Taxes should be competitive enough to where our central location and other factors can take over to create investment.
  • Tesla generates $1 million in school district property tax every year.
  • Tesla’s value will be capped at $80 million for ten years and then they are on the rolls at full value.
  • Tesla is essentially receiving a $50 million discount, but the $50 million wouldn’t have been there in the first place if they didn’t come to Texas.
  • We do get roughly $220 million in taxes over the next 25 years that essentially replaced a vacant lot.
  • The net gain overcomes the discount.
  • Rodriguez – The school district was happy to do the 313 agreement. Will we have access to Tesla’s job reports?
    • Yes, the comptroller will provide transparent access to the estimates of 10,000 new jobs and other analyses.
  • Rodriguez – Will the analysis be from a state perspective, local perspective, or both?
    • It will be all-encompassing and include where people spend their money as a result.
  • Rodriguez – In regards to 313, is the state responsible for the district hole?
    • Even with a 313 allotment, Del Valle is now $80 million richer. They will lose state protection due to this gain.
  • Button – Can you give us an update as to what states have a similar program and similar incentives that are working in other states?
    • Most other states do have some type of property tax incentive or discount in a traditional abatement program. We fall behind other states in the red tape of having to go through different local districts to get the incentives versus a centralized one-stop-shop. Once the incentives expire, property tax in Texas is relatively high.
    • Due to recent tariffs from a federal level, companies are onshoring and we could see a manufacturing renaissance.
    • Tax incentives are a necessary evil so long as property taxes in Texas remain high.
  • In Texas, I am refunded at a rate of interest equal to the Treasury rate, but if I owe the state money, In addition to a 10% penalty, I have to pay a rate of prime plus one. Most states have equalized interest rates.
  • Under current law, remedies at the administrative hearings office have to be exhausted.
  • The hearing results give the state a win 85% of the time, split decision 10% of the time, and a taxpayer win 5% of the time.
  • There may be some advantages to give taxpayers the option to skip the hearing process and go straight to court as done in Arizona.
  • In the most recent report, there are $42 billion in sales tax exemptions, which is more than collected.
  • Not surprisingly, 60% of tax legislation referred to Ways and Means is related to property taxes, 16% related to sales tax, local motel and hotel taxes fall in third, and franchise taxes are in fourth.

Dr. Vance Ginn, Chief Economist at the Texas Public Policy Foundation

  • The business margins tax brings in $8 billion over the biennium.
  • The margins tax is passed onto lower wages, higher prices, and fewer jobs.
  • The Economic Freedom on North America Index put out by the Frazier institute ranks Texas 4th out of all fifty states and Florida ranks 2nd. California ranks 47th and New York ranks last.
  • There are balanced budget amendments in 49 of 50 states.
  • Texas ranks 31st in spending at the state and local level while California ranks 4th.
  • Texas ranks 32nd in the state and local tax burden with New York ranked 1st.
  • In February of last year, Texas unemployment was 3.5% and unemployment as of December was 7.2%, and this doesn’t include those who have dropped out of the labor market.
  • In the private sector alone, we are down 300,000 jobs.
  • The Texas economy saw negative GDP growth of historic proportions. We are still down 4% of GDP growth relatively compared to pre-pandemic levels.
  • Conservative budget metrics should adjust for population growth plus inflation which allowed us to be in a good position in order to face the pandemic head-on.
  • Property tax relief is something to look into.
  • If an emergency order affects businesses, why would taxes go up to 8% from 3% if they couldn’t utilize the property for intended purposes?
  • Picking winners and losers is not an ideal tax system.
  • How can we level the playing field for all energy producers considering federal incentives?
  • Cole – In regards to wind and solar, what were you referring to?
    • We should look into whether chapter 313 applications to wind and solar should be continued.
  • Meyer – What does the 30-day notice for wind and solar entail and have you spoken with Rep. Murphy?
  • Murphy – We don’t want to pick winners and losers in our energy industry.
    • We should look into leveling the playing field for natural gas, coal, and nuclear compared to wind and solar.

Dick Lavine, Senior Fiscal Analyst for Every Texan

  • Gets 80% of funding from foundations and the rest is individual contributions.
  • Property taxes are half of the taxes we pay, sales tax is 1/3, and the rest is a conglomerate.
  • More than half of the property taxes go to schools and the rest go to local and special districts.
  • Sales tax is about 60% of state revenue funding services. The potential for taxing everything is $163 billion for the upcoming biennium, and $37 billion in other items exempted.
  • A good tax system doesn’t pyramid manufacturing inputs.
  • There is no tax on groceries, medicine, utilities, and agricultural inputs.
  • Texas does tax a lot of services, but if you look at the comptroller’s study, exclusions go back to the creation of the sales tax in a manufacturing economy, but we are now a service economy.
  • Only receiving $66 billion in school property taxes with a potential for $96 billion. The disparity is due to things like the homestead exemption, ten percent caps, and over 65 freeze.
  • Says open space agricultural exemption to base tax off of production value plays a role for those on the urban fringe.
  • Between 75%-85% of companies receiving 313’s would have come anyway according to a study.
  • Accounting for tax incidences, the bottom half pays a greater share than the top half, meaning it is regressive.