Texas Government 2306

Unit 9

Taxing and Budgeting

Texas Fiscal Policy: Guiding Principles

1. Opposition to deficit spending

2. Strong support of low tax rates

3. Strong support for very limited spending for most public services

= Fiscal Conservatism

Texas Constitution & Budgeting

Requires a balanced budget (no deficit spending)

Biennial legislative sessions requires a two-year budget

Role of Comptroller: revenue forecaster– Sets limits on what state can spend

Major Revenue Producers

Federal Government– Personal income tax

Texas State Government– Sales tax

Local Governments – Ad valorem (property tax)

TAX TERMS/CONCEPTS TAX CAPACITY

• o Measure of a state’s wealth/per capita income

  TAX EFFORT

• o Measure of how close a state comes to its tax capacity

PER CAPITA TAXES• o Average tax paid per person

PROGRESSIVITY/REGRESSIVITY o To what extent are taxes paid according to the ability

to pay

Regressive vs. Progressive Taxes

Regressive

All taxpayers pay the same rate, regardless of income

Shifts the tax burden to the middle class & poor

Ex.: sales & property tax

Progressive

Tax rate increases as income increases

Shifts the tax burden to the upper class & wealthy

Ex.: income tax

TEXAS TAX POLICIES1

1.  Tax Capacity      Measure of state’s wealth/per capita income•  Texas Ranking = 97 National Average = 100

2.   Tax Effort      Measure of how close a state comes to its tax

capacity• Texas Ranking = 87 National Average = 100

TEXAS TAX POLICIES2

3.   Per Capita Taxes     Average tax paid per person• Texas: $1,280 -- 9.5% of income• U.S. ave.: $1,819 -- 11.3% of income

4.  Progressivity/Regressivity    Progressive = as income increases, tax rate

increases    Regressive = tax rate same regardless of income Texas = 2nd most regressive tax structure in U.S.

Revenues In the 2006-07 fiscal year Texas revenues came from

the following sources:

45.7% from state taxes;

35.5% from federal funding; (Is this good or bad?)

2.5% from the state lottery;

16.3% from investments, revenues from public lands, licenses, fees, and other collections

State Rank & Percentage of Income Collected as Taxes-2004-05

State Comparison: Tax Burdens as Percent of Income(Nat. ave.: 6 %; Tx:

4.5%)

Megastates: Tax Burden - 2001

Texas State Revenues - 2005

Texas Tax Collections-Type of Tax--2005

TEXAS TAXES--% OF STATE TAX REVENUE

1. Sales Tax

2.  Motor Fuels Tax

3.  Motor Vehicle Sales/Rental Taxes

4.  Corporate Franchise Tax

5.  Oil/Gas Production Tax

6.  “Sin” Taxes

7.  Insurance Co. Taxes

8. All Other Taxes

57%

11%

11%

7%

4.4%

4%

3%

3%

Tax Rates—Two Types

Progressive tax rates - increase as the base increases like the federal income tax:

Those at the bottom have no taxable income and pay nothing

Persons with higher incomes can better afford to pay higher tax rates

Regressive taxation – the rate declines as the base increases

Problems with Texas Tax System

It is regressive - falls more heavily on the poor

It is elastic – relies on sales & excise taxes that rise or fall quickly in response to economic upturns and downturns = not a stable source of revenue for the state

Types of Sales Taxes1

General sales tax – collected on the retail price of most items (26.3% of ’06-’07 revenues)

Selective sales tax – levied on particular items such as liquor, cigarettes, gasoline, or luxury items (sometimes called hidden or excise taxes)

Federal Income Tax Rates: 2004

Texas Sales Tax: Who Pays?As a Percentage of Income-2005

Texas Tax Burden By Income-1995

Texas Tax Burden-By Income-1999

Percentage of Income Paid in Sales & Excise Taxes

Taxation2

Regulatory taxes – taxes that do more than pay for services, these also attempt to control social and economic behavior:Sin taxes (on tobacco & alcohol);

“use/benefits received” taxes (motor vehicle rental tax, tolls on toll roads);

Excise taxes (gasoline tax)

Taxation3

Benefits-received taxes – taxing those who benefit from a public service

Ability-to-pay taxes – levied on property, sales, and income:

The more valuable people’s property is, the wealthier they are and able to pay taxes;

Income or expenditure are inadequate measures of true wealth

Federal Funds to Texas:2004-05

Borrowing

The Texas constitution limits state borrowing and requires a balanced budget thereby limiting the state debt.

Texas does issue bonds:General obligation bonds;Revenue bonds

Megastate: Sales, Gasoline, & Tobacco Tax Comparison-2001

Megastates: Source of Tax Revenue2002-2003

Taxation: Property Taxes

Many services in Texas are financed by local, instead of state, taxes

Property taxes are the main source of revenue for most local governments. Two types of “ad valorem” (according to value) taxes:

Real property;Personal property

Megastates: Property Tax Comparison

TEXAS BUDGET1    Dedicated/earmarked funds” - about 46% of

the state budget

Federal funds - about 36% of budget; must be spent according to fed. govt. regulations

Court orders – have also forced the Legislature to direct funds to specific programs or uses

        To reduce prison overcrowding (Estelle v. Ruiz)         To reduce the funding disparity between wealthy

and poor school districts—(Edgewood v. Kirby)

        To upgrade MHMR facilities—a federal court order

 

Dedicated/Earmarked Funds    Gasoline (motor fuel) tax-3/4 is

earmarked for the State Highway Fund and ¼ for the Available School Fund

     Earnings from state lands (oil revenues, etc.)—go directly to the Permanent University Fund (for the UT and A & M university systems) and the Permanent School Fund (for public schools)

Other Budgetary Funds “Locked In”

      Federal funds (about 36% of the state revenues and state budget) are earmarked by block and categorical grants to basically three areas:

    Health & Human Services     Highways     Education

   Court orders have also forced the Legislature to direct funds to specific programs or uses:

   To reduce prison overcrowding (Estelle v. Ruiz—a federal court)

To reduce the funding disparity between wealthy and poor school districts (Edgewood v. Kirby—a decision by the Texas Supreme Court)

   To upgrade MHMR facilities—a federal court order

TEXAS BUDGET2

  RESULT: • Only 16% of the state budget is composed

of “discretionary funding” (funding the Legislature has control over)—funding unaffected by federal or state statutory requirements, Texas Constitution’s requirements, or court orders

FINANCIAL CRISIS OF 1980s

1.  Collapse of oil prices—1984-5• from $40/barrel to <$10/barrel

2.  Exploding State Population

  3.  National Recession-Mid-1980s

4.  Court Orders    Ruiz v. Estelle—reduce prison overcrowding• (federal court order)      Edgewood v. Kirby—reduce funding disparity

between wealthy & poor school districts (Texas Supreme Court decision)

     Upgrade State MHMR Facilities• (federal court order)

Financial Crisis in 2002-03 Texas was $11 billion short to maintain existing

levels of funding

Effects of 9-11 on economy—minor recession

Growing state population—strained many services

State Response:– Minor fee and tax increases– Major cuts in state spending—including higher ed.– Local governments forced to pay for increased cost of

public schools = higher local property taxes

State LotteryProduced only 2.5% of budget in 2005 (down from 5% +)

Pros1. A Voluntary

tax2. Texans gamble

anyway, might as well keep $ in the state

3. Delays more painful options: i.e. an income tax

Cons 1. Immoral way to

raise money 2. The poor most

likely to play it 3. Feeds on

gambling addicts 4. Brings in crime

TAX REFORM OPTIONS 1.  Raise sales tax rate

2. Broaden sales tax base    Tax food and drugs    Tax services (legal, financial, etc.)

3. Raise “Sin Taxes”

4. Legalize gambling• (casinos, slot machines)

5.  Increase Gasoline/Motor Fuel Tax   6.  Personal Income Tax (Tx: one of 6 states w/o it)

   1992 constitutional amendment prohibits a state income tax without voter approval

The Budgetary Process Through the appropriations process the legislature

legally authorizes the state to spend money

Agencies make budget requests on past spending and provisions for increases

Dedicated or earmarked funds prevent the legislature from systematically reviewing state spending

The Budgeting Process in Texas

TEXAS BUDGETARY PROCESS—THE ROLE OF:

PRESIDING OFFICERS Serve as LBB chair and vice-chair & appoint 4 members

LEGISLATIVE BUDGET BOARD Writes “rough draft” Legislature uses for state budget

LEGISLATURE Drafts & approves 2-year budget

GOVERNORUse of item veto on budget billThreat to use general veto & item veto

COMPTROLLER Issues “revenue estimate”