The Texas Tax & Budget Primer

Dick Lavine, [email protected] Eva DeLuna, [email protected]

www.cppp.org

Who is Texas?

Adults without a high school degree (% of 25+) Birth rate (live births per 1,000 population) Share of population under age 18 (%) Limited English Proficient/English Language Learners in public schools (% of all students) Poverty rate (%) Child poverty rate (%) Elderly poverty rate (% of 65+) Family income ratio: top 20% to bottom 20%

U.S. Average, 2006

15.9

14.2

24.6

9.1

13.3

18.3

9.9

7.3

Texas, 2006

21.4

17.0

27.7

15.7

Texas 50 state rank

2 nd 2 nd 3 rd 4 th 16.9

23.9

12.3

7.9

7 7 9 9 th th th th

Above-Average Public Needs Below-Average Effort

United States Texas

Expenditure need Actual expenditure $6,007 $6,007 $6,456 $5,127

6 th 47 th

Revenue capacity Actual revenue $4,659 $4,659 $4,271 $4,017

33 rd 37 th

Fiscal capacity 100 86

39 th

Source:

Measuring Fiscal Disparities across the U.S. States

. Urban Institute Tax Policy Center, Federal Reserve Bank of Boston

The Background:

Major State & Local Taxes in Texas, 2005 School District 28% Other State Taxes 21% Property Tax 47% Sales Tax 32% City 7% State 25% County 7% Local 7% Special District 5%

Sources: Comptroller of Public Accounts, Annual Property Tax Report; Cash Report.

The Background:

Texas State Government Revenue, 2006 Total $72 billion Other 6% Interest & Investments 3% Licenses, Fees, Permits, Fines, Penalties 8% Lottery 2% Taxes 46% Federal Funds 34%

Sources: Comptroller of Public Accounts, Annual Property Tax Report; Cash Report.

State Tax Collections, 2006 Total $33.5 billion Motor Vehicle Sales and Rental 9% Motor Fuels 9% Sin (Cigarette & Tobacco, Alcohol) 4% Franchise 8% Sales 54% Insurance 4% Gas/Oil Production 10% Other 3%

Source: Comptroller of Public Accounts, Annual Cash Report

The Background

Texas Was Low-Tax Overall But Had High Property Taxes

Tax as % of Personal Income Total taxes Property taxes Texas 9.5% 4.1% National average 11.0% 3.4% Texas’ rank 45 th 10 th General and selective sales taxes 3.9% 3.8% 22 nd Source: State Fiscal Analysis Initiative:

State and Local Government Revenue for Fiscal 2004-05.

Data from U.S. Census Bureau and U.S. Bureau of Economic Analysis

60% Texas Has High Sales and Property Taxes Because It Has No Income Tax 51% 49% 40% 40% 35% 25% 20% 0% 0% Income tax Texas Sales tax U.S. Average Property tax

The Background

Property Tax Rates Climbed Steadily

$3.00

$2.50

$2.00

Total Property Tax Rate $1.50

$1.00

$0.50

School Property Tax Rate $0.00

1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: Comptroller of Public Accounts, Annual Property Tax Reports

The Background

Recent Jump in Property Tax Levy As a Percentage of Personal Income 4.5% Total Property Tax Levy 4.0% 3.5% 3.0% School Tax Levy 2.5% 2.0% 1.5% 1984 1988 1992 1996 2000 2004

Source: Comptroller of Public Accounts, Annual Property Tax Reports, Spring ’06 State Economic Forecast

Who Pays School Property Taxes?

Taxable property by category, 2006 Total: $1.36 trillion taxable for schools Rural, 5% Other, 7% Oil and Gas, 7% Single-family residential, 43% Industrial, 9% Commercial (including multi-family), 29%

Who Pays School Property Taxes?

School Property Tax Exemptions, 2006 Total: $192 billion Other Deductions, 14% Value Lost to Tax Freeze, 17% Value Lost to 10% Homestead Cap, 7% Local Optional Age 65+ and Disabled, 3% Local Optional Percent Homestead, 15% Required Homestead Exemptions, 44%

The Background

State Share of Public Education Funding In Rapid Decline

50% 45% 40% 35% 30% 1991 1994 1997 2000 2003

Source: Legislative Budget Board,

Fiscal Size-Up, 2006-07 Biennium

2006

The Trigger

Texas Supreme Court Ruling

• Most school districts were at or near the statutory maximum property tax rate of $1.50 per $100 of property value • Court found situation to be equivalent to a state property tax, prohibited by the Texas Constitution • Required Legislature to give districts “meaningful discretion” over local tax rates • Did not directly order reduction in tax rates

The Response:

The Legislative Response

• Require school districts to reduce maintenance-and-operations rate by one-third over two years (from $1.50 to $1.00) • Replace lost property tax revenue with: – Radically reformed franchise tax – Increased cigarette tax • (from 41 cents per pack to $1.41) – Minor change in tax on sales of used cars – Cash on hand

The Response New Revenue Replaces Only 60% of Lost Property Taxes In billion $ 2008-09 2010-11

New business tax Increased tobacco tax Used car sales

TOTAL REVENUE

6.8

1.4

0.1

$8.3

7.7

1.3

0.1

$9.1

Lost property tax revenue SHORTFALL -$13.5

-$5.2 B -$14.9

-$5.8 B

Source: Legislative Budget Board, Fiscal Notes for HB 1, HB 3, HB 4, HB 5 (79 th Legislature, 3 rd Called Session)

The Consequences:

Major State & Local Taxes in Texas, 2009 School District 20% Other State Taxes 25% Property Tax 40% City 8% Sales Tax 35% County 8% Special District 6% State 27% Local 8%

Sources: Comptroller of Public Accounts, Biennial Revenue Estimate 2008-09, January 2007; Annual Property Tax Report. Forecast by CPPP.

The Consequences:

Texas State Government Revenue, 2009 Total $79 billion Other 4% Taxes 51% Interest/ Investment Income 3% Licenses, Fees, Fines, Penalties 8% Lottery 2% Federal Funds 31%

Source: Comptroller of Public Accounts, Annual Cash Report

The Consequences:

Increased Importance of the Franchise Tax

State Tax Collections, 2009: Total $41 billion

Motor Vehicle Sales and Rental 9% Motor Fuels 8% Sin (Cigarette, Tobacco, Alcohol) 5% Franchise 15% Sales 52% Gas/Oil Production 6% Insurance 3% Other 2%

Source: Comptroller of Public Accounts, Biennial Revenue Estimate 2008-09, January 2007.

0.5% 0.4% 0.3% 0.2% 0.1% 0.0% -0.1% -0.2%

The Consequences:

Incidence by Household Income

Net change resulting from property tax reductions funded by franchise and cigarette tax increases and General Revenue

<$24.900

$24,900 - $45,300 $45,300 - $69,600 $69,600 - $109,200 <$109,200

Source: Legislative Budget Board, Tax Equity Notes for HB 1, HB 3, HB 4, HB 5 (79th Legislature, 3rd Called Session); Calculations by CPPP.

The Consequences:

School Spending Same As In 2000-01 Inflation-Adjusted Per-Student

$9,000 $6,000 $3,000 $ 19 96 -9 7 19 98 -9 9 20 00 -0 1 20 02 -0 3 20 04 -0 5 20 06 -0 7 20 08 -0 9 Source: Legislative Budget Board, Texas Education Agency, U.S. Bureau of Economic Analysis. Calculations by CPPP. Federal Local State

The Consequences

Pressure for More Revenue

• 900 school districts (of 1,000+ total) immediately raised rates by 4 cents available in 2006 • 118 school districts asked for voter approval of further increase in tax rates in 2007, with 78% success rate • 104 school districts holding rate elections in 2008 • $9.75 billion in state general obligation bonds (including first use of these for highways) • Bond $3 billion for cancer research, while reserving $3 billion for 2010-11 tax cuts

How About the “Surplus”?

• Rainy Day Fund for emergency spending only • Property Tax Relief Fund to replace lost tax revenue • Cash Balance 2.5% of current budget • “Surplus” $5.7 billion 3.0 billion 2.0 billion $10.7 billion

How About Other Sources of Revenue?

Sales Tax Franchise Natural Gas Cigarette Oil TOTAL TAXES 2007 Revenue $20.3 billion $3.1 billion $1.9 billion $1.3 billion $0.8 billion Expected Growth in 2008 3.1% Year-Over Year thru 7/08 6.5% 86.8% - 4.7% -8.8% -5.0% 53.9% 38.4% 19.3% 69.9% $37.0 billion 8.9% 12.4%

Budget Outlook for 2010-11

The Texas State Budget for 2008-09

$45 billion in state aid

Property tax cut, 8% K-12 Ed.

18% Biennial Total: $168 billion Federally funded = shown in white; other budget areas are General Revenue + GR Dedicated + “Other” State Funds.

Higher Ed.

12% Highways 6% Prisons 4% Other 8% Federal HHS 13% 30% HHS 19% K-12 Ed. 5% Highway 4% Other Federal 3%

Little or No Growth from Past Spending

8%

State Government Spending as a Share of the Economy 7.6% 7.3% 6.6%

6% All Funds

4.2%

4%

3.4% 3.2%

2%

General Revenue

0% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

2010-11 Budget Needs

$0 $5 $10 $15

2009 Expected Ending Balance, Minus $1.2 b supplemental for 2009

Plus

New Revenue for 2010-11 (11% growth?) and rest of 2009

Minus

$3.9 billion for

K-12

($1.5 billion is for enrollment growth)

Minus

$800 million for

higher ed Minus

$5.7 billion for

HHS

(caseload and cost increases)

Minus

$1 billion for

prisons Minus

$735 million for state worker and teacher

health costs Minus

$7.7 billion for

Rainy Day or Property Tax Relief

set-aside

$20

Only $1.2 billion left, with nothing spent on highways, courts, agriculture, state parks, state employee pay raises, or anything else

$25

Use of This Presentation

The Center for Public Policy Priorities encourages you to reproduce and distribute these slides. If you reproduce these slides, please give appropriate credit to CPPP.

The data presented here may become outdated.

For the most recent information or to sign up for our free E-Mail Updates, visit www.cppp.org

© CPPP

Center for Public Policy Priorities 900 Lydia Street Austin, TX 78702 P 512/320-0222 F 512/320-0227