Texas Government 2306

1
Texas Government 2306

• Unit 9
• Taxing and Budgeting

2
Texas Fiscal Policy Guiding Principles

• Opposition to deficit spending
• Strong support of low tax rates
• Strong support for very limited spending for most
  public services
• Fiscal Conservatism

3
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

4
Major Revenue Producers

• Federal Government
• Personal income tax
• Texas State Government
• Sales tax
• Local Governments
• Ad valorem (property tax)

5
TAX TERMS/CONCEPTS

• TAX CAPACITY
• o Measure of a states 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

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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

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TEXAS TAX POLICIES1

• 1.  Tax Capacity
•      Measure of states 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

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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.

9
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

10
State Rank Percentage of Income Collected as
Taxes-2004-05
11
State Comparison Tax Burdens as Percent of
Income(Nat. ave. 6 Tx 4.5)
12
Megastates Tax Burden - 2001
13
Texas State Revenues - 2005
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Texas Tax Collections-Type of Tax--2005
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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

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Tax RatesTwo 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

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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

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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)

19
Federal Income Tax Rates 2004
20
Texas Sales Tax Who Pays?As a Percentage of
Income-2005
21
Texas Tax Burden By Income-1995
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Texas Tax Burden-By Income-1999
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Percentage of Income Paid in Sales Excise Taxes
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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)

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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 peoples property is, the
  wealthier they are and able to pay taxes
• Income or expenditure are inadequate measures of
  true wealth

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Federal Funds to Texas2004-05
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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

28
Megastate Sales, Gasoline, Tobacco Tax
Comparison-2001
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Megastates Source of Tax Revenue2002-2003
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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

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Megastates Property Tax Comparison
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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 facilitiesa federal
  court order
•  

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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)

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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.
  Ruiza federal court)
• To reduce the funding disparity between
  wealthy and poor school districts (Edgewood v.
  Kirbya decision by the Texas Supreme Court)
•    To upgrade MHMR facilitiesa federal court
  order

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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
  Constitutions requirements, or court orders

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FINANCIAL CRISIS OF 1980s

• 1.  Collapse of oil prices1984-5
• from 40/barrel to lt10/barrel
• 2.  Exploding State Population
•  
• 3.  National Recession-Mid-1980s
• 4.  Court Orders
•    Ruiz v. Estellereduce prison overcrowding
• (federal court order)
•      Edgewood v. Kirbyreduce funding disparity
  between wealthy poor school districts (Texas
  Supreme Court decision)
•      Upgrade State MHMR Facilities
• (federal court order)

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Financial Crisis in 2002-03

• Texas was 11 billion short to maintain existing
  levels of funding
• Effects of 9-11 on economyminor recession
• Growing state populationstrained many services
• State Response
• Minor fee and tax increases
• Major cuts in state spendingincluding higher ed.
• Local governments forced to pay for increased
  cost of public schools higher local property
  taxes

38
State LotteryProduced only 2.5 of budget in
2005 (down from 5 )

• Pros
• 1. A Voluntary tax
• 2. 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

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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

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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

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The Budgeting Process in Texas
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TEXAS BUDGETARY PROCESSTHE 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
• GOVERNOR
• Use of item veto on budget bill
• Threat to use general veto item veto
• COMPTROLLER
• Issues revenue estimate