Below is the HillCo client report from the October 29 Senate Finance Committee hearing.

The committee met to hear invited testimony from the Office of the Comptroller related to the state's major sources of revenue and tax structure.
 
Major Sources of Revenue Panel
Texas Comptroller of Public Accounts – John Heleman, Chief Revenue Estimator; Teresa Bostick, Tax Policy Division, Johnny Bolin, and Nancy Prosser Assistant Director of Tax Administration
 
Overview

  • $34 billion in federal funds last year
  • Two taxes account for ¼ of all revenue received
    • $27 billion in general state sales tax last year
    • $4 billion Motor vehicle sales taxes
  • Sen. Nelson asked how Texas compares to other states in regards to tax burden per capita
    • Roughly mid-packed
    • Local property taxes are much higher but don’t have income tax
    • Top 10 of highest sales tax rates
    • Information will be given to committee on per capita tax burden in Texas
  • Sen. Zaffirini – is it common for business tax to be 10% of all taxes
    • Varies widely
    • Massachusetts has low business tax but high income tax
  • Sen. Whitmire confirmed Texas is in high 40’s in per capita tax burden
    • If looking at state only – we are in the high 40

 
Sales Tax

  • Sales tax is not necessarily retail sales tax
    • Many things are also consumed by business so has never been purely retail
    • Tax restaurant meals ($1 out of every $10 comes from people eating out)
    • Consumers responsible for 55%
    • Business responsible for other 45%
  • Sen. Whitmire isn’t it really arbitrary when selecting items that will have sales tax (ie advertising?)
    • List will be provided at some point with list of items that have a sales tax
    • Nancy Prosser, Asst Tax Director – will put information together
      • If item is tangible personal property it will be taxable but there can be exemptions offered by the legislature
      • Will explain exemptions and exclusions as they go throughout the hearing
  • There is a long list of services that are taxes
  • Also “fairly lengthy list of those exemptions”
    • For example don’t tax food at grocery store
  • Nancy Prosser – reviews taxability of item over the internet
    • Items are looked at individually when determining if it will be taxed
    • Fruit basket on internet would not be taxed
  • Sen. Seliger inquired if Texas was losing billions of dollars in this fashion
    • Correct
    • Prosser – briefly highlights Federal law that would allow the ability to collect out of state sales tax
    • Approx. $800 million annually
    • It is a federal issue
  • Sen. Zaffirini how do you identify item being assed complimentary use tax?
    • They have a form that can be filled out and submitted – up to individual
    • Prosser – Complimentary use tax is intended to counter loss of sales tax
  • Sen. Whitmire said largest and broadest exemption is agricultural exemption – needs to be a priority but rural members need a place at the table during discussions therefore he highlights again the protections of the 2/3 rule
    • Sen. Nichols noted there were abuses and that was tightened up last session
    • Sen. Seliger points out there are exemptions for certain urban businesses (plumber supplies that are going to be resold)
  • Sales tax rate started at 2% in 1961 – it is now 6.25%
  • Taxes remain same and base remains generally the same
  • Sen. Schwertner inquired about one penny increase in sales tax generating $4.4 billion and the regressivity of sales tax
    • Adding a one penny increase could also result in consumer purchasing fewer items
    • Sales tax increase would impact lower socio-economic groups the most
  • Sen. Whitmire inquired about jet fuels tax, most states charge
    • Believes the issue has come up before – will review and research

 
Franchise Tax

  • Overview of the franchise tax was provided – $4.8 billion in 2013
  • Sen. Nelson brought up that maybe some taxes could be given back
    • Sen. Whitmire mentions there has been some discussion about swapping a tax 
    • Sen. Nelson and Sen. Whitmire agree on need to reduce property taxes
  • Sen. West said given the discussion on swapping taxes there needs to be an intelligent discussion on the issue
    • West continued by saying that all want property taxes to go down but don’t want unintended consequences; therefore he wants best information available
    • Wants a subcommittee looking at this process
  • Sen. Nelson asked if office has looked at simplifying burden in reporting franchise tax in Comptroller rules
    • Noted if taxpayer has multiple options, they will try each method to see which one offers the lowest rate
  • Sen. Nichols said this is probably the worst tax – it’s gotten worse
    • Some reductions offered were temporary
    • $1 million exemption will be permanent
  • Sen. Estes would like to know more about the underperformance of the tax
    • Tax generates $4.7-$4.8 billion annually and has become stable and increasing slightly each year
    • The tax was originally estimated to bring in $6 billion annually
    • In 2006 there was a housing boom and shale boom but then Texas went into a recession
    • Franchise tax has now recovered like other taxes
  • Sen. Birdwell inquired about recent revenue estimate – delta in growth
    • Maybe we don’t swap the tax but get rid of it said Birdwell
    • Sen. Nelson said cap would have to be busted to do that
  • Sen. Seliger said we are talking about a business tax and question is – is this a better business tax  – graph would indicate it has increased
    • Also what they are not seeing is that property tax rates going down
  • Sen. Hinojosa noted we are taxing companies who are not making a profit whatsoever – is there a way to only tax a company that is making a profit
  • Sen. Nelson reminded witness that if they have any suggestions for simplifying rules – the committee would welcome them
  • There are 3 primary ways to calculate franchise taxes and a fourth one added by legislature
    • Cost of Goods Sold – take overall revenues and subtract COG – $2.8 billion generated in revenue and half of taxpayers use this method
    • Compensation route – $800 million generated and 25k taxpayers used this method
    • A 30% deduction – $900 million and 6,700 tax payers use this method    
  • Cost of Goods sold calculation discussed
    • Federal definition in place so why not kept asked Sen. Hancock and why is calculation being computed two different ways
  • Do not have % of companies paying taxes and not making a profit
    • Profit not an element that is reported so it is not known

 
Oil Tax

  • Approximately same age as franchise tax and not every state has one of these
  • 4.6 % of the market value of production – it’s a consumption tax
  • 178 taxpayers
  • Estimates market price of $85 – there were days when it went up to $100 but downturn currently
  • Maximum oil production tax – peak production in barrels in 1970
  • Went from 1.2 billion barrels to about 350 million barrels in 2006ish
  • In a space of 5 years Texas doubled production
  • Was seeing ever strengthening prices with production soaring
  • Sen. Whitmire said in regards to swapping possibilities – how many $’s per barrel of oil
    • Just a few extra dollars per barrel could generate hundreds of millions for the state
    • Will produce 800 million barrels this year
  • Natural gas – abundance of gas in storage and did draw down some storage but gas production in shales are strong
  • Sen. Seliger there is no tax for coal, water, etc – if going to talk about mining then there should be a discussion on full range of products mined in Texas
    • We do have a coal tax, it is very small
  • Sen. Campbell asked if that income should be looked at as supplemental and not primary dollars for the budget
    • Most of that tax funding went to rainy day fund
    • Up to half of these dollars will flow to highway fund if voters pass the November ballot proposition
  • Sen. Zaffirini wanted to know how Eagle Ford Shale impacted number of taxpayers

 
Natural Gas Tax

  • Very similar structure – tax on value of product 
  • Never has really recovered whereas oil did recover
  • Natural gas well has other things than just the gas
    • The so called liquids (propane, butane, ethane)
    • That has more value than dry gas
  • There used to be a 2 year inactive program with Railroad Commission but that program has expired

 
Gasoline Tax and Diesel Fuel Tax

  • Not a consumption tax –an excise tax  
  • In Texas 20 cents per gallon
  • Sen. Nichols calculated that with adjustments including fuel efficiency another to calculate would be to say 20 cents today was worth 90 cents when the tax started  
  • Sen. Estes calculated a different way and said he has heard it done the other way that the 20 cents would be worth 10 cents today
  • There are approximately 1000 payers
  • There is also a federal component to this tax
  • Not as volatile as other taxes – incredibly stable
  • It is altered in changes to fuel economy or consumer preferences in vehicles
  • Diesel fuel tax works the same way
  • 75% of these taxes go the state highway fund (gasoline tax being the larger contributor)

 
Motor Vehicle Sales and Use Tax

  • Tax when you buy a car or rent a car
  • 6.25% just like main tax
  • No local component to the tax
  • State is remitted the money from county governments
  • This tax went down by 24% in one year – very sensitive to the economy
  • Grew by 9% last year and on pace to do that again this year
  • Virtually all of this tax will be available in undedicated GR
  • Cars get more expensive every year and financing for cars is easy to get

 
Insurance Premium Taxes

  • Health, life, property and casualty
  • Paid twice a year
  • 10k taxpayers
  • 25% of revenue from this tax is for schools and 75% goes to GR
  • Steady tax  
  • As Texas has moved to managed care model in Medicaid it turns out those insurance coverages are subject to this tax
    • Texas gets a bit more insurance premium tax because of that

 
Cigarette Tax

  • Excise tax
  • $1 per pack increase which lowered the number of packs sold
  • Over 900 million packs per year are being sold
    • $1.1 -1.2 billion packs sold previously
  • Goes to property tax relief fund

 
Property Tax Panel
Texas Comptroller of Public Accounts – Mike Esparza, Director of Property Tax Assistance Division; and Connie Rose

  • Appraisal process explained including methods as set out statute
  • Homestead Exemptions discussed
  • They are all available but up to local to decide if they want to offer
  • May are local option exemptions but there are some that are across the board
  • Exemption from certain county property taxes of $3k
  • Exemption from school district taxation $15k – state mandated
  • 65 or older $10k exemption – state mandated
  • Different veteran exemptions will be across the board – not just school or county
  • Negative rating impacts county  appraisers – they must be referred to TDLR who attempt to get some type of compliance  
  • Discussion on penalty authority and participation in property value study
    • District can qualify for grace period
    • The Comptroller does not have any “penalty” authority
    • A entity would have consequences (Schools used as an example) if they don’t meet standards or meet grace period then they don’t get to skip a year of the property value study
  • Sen. Nichols voiced several concerns:
    • Concerned about rates being raised by some of the taxing entities
    • Appraisal of business – appraisal of personal property is done but do appraisers need to be let inside?
      • Yes – supposed to inspect during regular business hours
  • Sen. Campbell asked what oversight is provided on appointed appraisers to make sure they are applying proper methods
    • Samples are conducted to check
    • Will get Campbell information on the Property Value Study
  • Sen. Hinojosa asked if more than standards are looked at in Property Value Study – if they are not raising the amount they should be raising, what is recourse?
    • Cannot address the amount of money they raise
  • Sen. Nelson said it may be necessary to look at addition changes to offer protections on property appraised values
  • Other Exemptions were highlighted in handouts: charitable organizations, religious organizations, private schools
  • Tax Freeze or ceilings were also highlighted as listed in handouts
    • Sen. Birdwell asked if they are state mandated
    • Legislature created a local option for a county, city or junior college where they can offer a tax ceiling and once it is offered it cannot be rescinded
  • Agricultural Valuations highlighted from handouts
    • Sen. Nichols asked about raising chickens – his county appraiser doesn’t think eggs are agricultural
    • Comptroller’s office will review the issue  
  • Sen. Zaffirini asked about controls in place for this exemption
    • Generally the land has to be used for 5 of the last 7 years so it needs to be sustained use and generally does not apply to urban areas
  • Since 1979 the Ag rollback has been in effect
    • Sen. Campbell asked about this rollback
    • If use of property is changed then ag rollback will be triggered
    • Code says whoever changes the use will be the one responsible and has to pay the difference – it will be a lien that is attached to the land
  • Protest before the ARB is also highlighted quickly from handouts
    • Nothing in law that says cannot adopt anything higher than the rollback rate
    • If last year’s rate is higher than rollback and want to adopt it – that is fine and then need to wait to see if anyone will file a petition
      • Still does not mean it changes – would need election and if passes then would need to adopt rollback and offer refunds
      • Local governing authority has option
  • For school districts to adopt a rate over rollback amount they need to have an election
  • Sen. Zaffirini ask about certain controls (ie. what about cash if $100 bills come in)
    • They take cash, checks or credit cards

 
Final hearing before session.