TAXES

Recent proposals from Congressional leaders would extend lucrative tax breaks for an estimated 540 multi-million-dollar estates in Texas while letting tax improvements expire for 1.5 million moderate-income Texas working families with nearly 3 million children, according to a new report from the nonpartisan Center on Budget and Policy Priorities.

There has recently been a lot of attention focused on who pays the taxes that are necessary to support our public services. On the federal level, the discussion has been about the federal income tax and payroll taxes for Social Security and Medicare. In Texas, the two major taxes are the sales tax, which provides more than half of all state tax revenue, and the local property tax, which is a major support for schools, cities, counties, and community colleges.

Public education is the foundation of our democracy and the engine of our economy, and Texans have a collective responsibility to ensure that public education is adequately supported. This responsibility needs to be fairly distributed among Texas families in a way that supports economic growth. Recently, some have proposed that Texas replace local school property taxes, or even all local property taxes, by increasing the rate of the state sales tax or expanding the sales tax to more goods and services. Such a tax swap would be a bad deal for businesses, families, and public education. This policy page outlines the reasons why.

Texas one of six states studied in detail

(AUSTIN, Texas)â€"The State Budget Crisis Task Force, a national blue-ribbon group convened by Richard Ravitch and Paul Volcker to study state tax and budget issues, released its recommendations today at a press conference in Washington, D.C.  Texas was one of six states studied in detail. We have closely followed the work of the task force.  Several of its recommendations are important for our state.

The proposed Federal Digital Goods and Services Tax Fairness Act of 2011 (“DGSTFA,” H.R. 1860/S.971) would limit state and local governments’ ability to levy taxes on downloaded music, movies and online services like photo storage and payroll processing. This would reduce the ability of Texas and its local governments to provide necessary public services. The revenue losses would grow as more types of entertainment, information, and business-to-business services use online technologies.

During the legislative session, we recommended that the state spend the Rainy Day Fund to prevent damaging cuts to vital state services, particularly public education. The Rainy Day Fund is a constitutional fund designed to save money in good times to pay ongoing expenses during bad times when revenue is short. After the economy improves, and revenue rebounds, general revenue once again pays for ongoing expenses. During the 2011 legislative session, with billions available for appropriation from the Rainy Day Fund, the state had no need to cut spending on public educationâ€"the proven path to good-paying jobs. Unfortunately, the state cut public education spending by $5.3 billion.

The latest numbers from the Comptroller confirm that the high-cost-gas exemption reduced state revenue from the natural gas production tax by $1.04 billion in fiscal year 2011, after reducing revenue by $1.31 billion in fiscal 2010.

The $27 billion revenue shortfall faced by the Legislature in 2011 was not solely the result of the national recession and the needs of a growing population. Roughly a third of this gap was due to decisions made five years before, when the Legislature required school districts to cut their property taxes, but failed to create new sources of state revenue to fully replace the foregone revenue, creating a $10 billion hole or structural deficit. This hole will appear in every state budget until the Legislature fills it with additional revenue.

Senior Fiscal Analyst Dick Lavine on the Texas Comptroller of Public Accounts revised revenue estimate released yesterday.

“To meet the needs of all Texans for educationâ€"the proven path to better jobsâ€"and health and human servicesâ€"vital protection for Texas familiesâ€"our state must reform its out-of-date revenue system."

Schools, colleges, parks, social services, and other infrastructure are what make Texas a good place to live and work. Taxes are how Texans pay for these things. The state relies heavily on sales taxes, which take a bigger share of the income of low- and middle-income families. To try to make our tax system more fair, since 1999, Texas has held a sales tax holiday the third weekend of every August that temporarily suspends sales taxes for purchases of clothing, shoes, backpacks, and school supplies priced at less than $100. Sales tax holidays actually do little for low- and middle-income families, while costing Texas needed tax revenue. This Policy Point considers the sales tax holiday.

At the beginning of the session, the state faced a $27 billion gap between anticipated revenue and the amount needed to fund current services. Rather than relying on cuts alone to close the gap, CPPP urged a balanced approach that used the state’s Rainy Day Fund and added new revenue to minimize damaging cuts. With the Governor putting the Rainy Day Fund and new revenue off limits, however, the Legislature has been left with no alternative but larger-than-necessary cuts reduced only to the extent possible by payment delays and tax speedups.

A small number of bills that would actually increase the amount of revenue available to fund a balanced approach to the 2012-13 budget by reducing tax exemptions or raising tax rates have taken at least an initial step forward. Texas needs additional revenue, along with dollars from the Rainy Day Fund, to minimize damaging cuts to public education, higher education, and health and human services.

Despite the extreme revenue shortfall that has led to budget proposals reducing or eliminating a long list of essential state services, numerous bills that would further cut the amount of revenue available to fund the 2012-13 state budget continue to move through the legislative process.

Yesterday, Senate Joint Resolution 12 by Patrick, proposing a constitutional amendment requiring a two-thirds vote for any tax increase was set for Senate deliberation as soon as Monday. SJR 12 is bad governance and bad tax policy.

SJR 12 would be a disaster for Texas and should be rejected.

Texas has until August 2011 to collect $555 million in federal funds to reduce employer unemployment insurance (UI) taxes. To draw down the money, the state need only make three common-sense policy changes that would save jobs, increase economic activity, and stabilize employer tax rates in 2012 and 2013. To date, 39 states have been approved for $3.4 billion in U.S. Department of Labor incentive payments. This policy page outlines the modest steps Texas must take to help both employers and employees.

CPPP Executive Director Scott McCown, Senior Fiscal Analyst Dick Lavine, and Senior Budget Analyst Eva DeLuna Castro show how a balanced approach to balancing the state's budget will meet of the needs of Texas today and tomorrow.

CPPP Senior Fiscal Analyst Dick Lavine offered this invited testimony on long- and short-term revenue shortfalls to the House Select Committee on Fiscal Stability during their meeting on August 23, 2010.

CPPP Senior Fiscal Analyst Dick Lavine offered this invited testimony on the problems facing Texas' regressive, inadequate tax system to the Texas Senate Select Committee on Public School Finance Weights, Allotments, and Adjustments during their meeting in San Antonio on May 19.

As you listen to the audio below, download and follow along in the powerpoint presentation that Dick distributed to the committee members.

Senior Fiscal Analyst Dick Lavine testified before the Texas House Ways and Means Committee about the optional homestead exemption.

CPPP Senior Fiscal Analyst Dick Lavine appeared on this week's edition of Texas Matters, where he discussed the best ways for lawmakers to deal with Texas' projected $10-15 billion budget deficitâ€"and how we got here in the first place.

For the past two years, online booking companies such as Expedia and Priceline have sought federal legislation to sharply restrict the authority of state and local governments to apply their general sales and hotel occupancy taxes to hotel rooms booked by these companies. They are now attempting to add this provision as an amendment to upcoming federal job-creation bills.

Such legislation could effectively prohibit taxation of the entire retail charge for hotel rooms that online companies book. This could permanently reduce Texas state and local revenue by some $65 million per year, at a time when the national recession is forcing reductions in public services needed by families struggling to stay afloat.

Our federal lawmakers shouldn't let online booking companies shortchange state and local governments by dodging part of their tax burden!

Today the Governor proposed two constitutional amendments, a California-style budget and tax restriction based on minority rule and a Colorado-style spending restriction based on an arbitrary formula unrelated to what Texas needs or can afford. Texans are best protected by a representative democracy based on majority rule without arbitrary restrictions. Texas faces many challenges but spending too much is not the problem. Texas ranks near the bottom in state spending. The Texas problem is that low- and moderate-income families pay too much in taxes while the top pays too little. Minority rule and arbitrary spending limits are designed to protect the top, not to protect Texas.

Our state needs adequate revenue to keep our public structures working and to prevent painful cuts in state services. The state’s new Annual Cash Report for fiscal 2009, though, reveals that tax collections for the year were $1.1 billion short of the Comptroller’s forecast. Ominously, for the first 2 months of the new 2010 fiscal year, sales taxes have generated 12.7 percent less revenue than in the same period in fiscal 2009. Texas needs its elected officials to take forceful action, including a second package of federal aid to states, school districts, and local governments, to help our state maintain public services until steady economic growth resumes.

Texas' Tax System Is Nation's Fifth Most Regressive

Austin, Texasâ€"The Center for Public Policy Priorities (CPPP) today highlighted a new national study showing that Texas taxes on the bottom 20 percent of income earners are the fifth highest in the nation. The study, published today by the Institute on Taxation & Economic Policy (ITEP), shows low- and middle-income Texans pay a far higher share of their income in state and local taxes than do the richest families in Texas, making it the fifth most regressive state tax system. CPPP emphasized that Texas should work toward a tax system where families at all income levels pay similar percentages of their income to support state and local public services.

(A Continuing Series)
Revenue Drain from Future Budgets Has Already Begun

Two weeks ago we listed the bills that threaten to reduce the revenue needed to support public structuresâ€"including public education, child health services, and transportation infrastructureâ€"that help Texans maintain their quality of life. This Policy Page updates that information as almost all of these bills continue to progress through the legislative process.

Caution: bills that do not pass in their current form may reappear as amendments to other legislation.

Public structuresâ€"including public education, child health services, and transportation infrastructureâ€"help maintain Texans' quality of life, and they require adequate revenue to function properly. To provide adequate revenue, our state needs a balanced tax code without tax cuts, abatements, and subsidies that let some dodge their share of responsibility. Reducing taxes paid by some businesses means that other businesses or families have to make up the difference to help us take care of our public structures so they continue to take care of us. Investments in Texas’ future through education, health and human services, and transportation will lead to a better chance for more prosperous future for all of us than would so-called “economic development incentives” that lower taxes on a select few companies. This Policy Page concludes with two bills that would increase state revenue by eliminating certain special treatments.

On Monday, May 4, the House will consider HB 4765 by Representative Rene Oliveira, which would reduce franchise tax revenue available to fund the 2010-11 budget by $172.1 million. Bills that reduce franchise tax revenue, which is dedicated to replacing school property tax revenue lost to the tax cuts enacted in the 2006 special session, could endanger the state's receipt of federal stimulus money that is intended to restore state support for education by signaling that the state does not need the federal aid for this purpose. In any event, now is not the time to cut business taxes. Texas needs to focus on protecting families.

The case of the sales tax discounts and refunds

Public structuresâ€"including public education, child health services, and transportation infrastructureâ€"help maintain Texans’ quality of life, and they require adequate revenue to function properly. To provide adequate revenue, our state needs an up-to-date tax code without loopholes that let some dodge their share of responsibility. The Texas Tax Code contains more than a few tax breaks, special treatments, and refunds that have outlived legislators’ rationale for adopting them. This Policy Page briefly describes three of these special-interest dealsâ€"the “timely filer” discount, the “prepayment” discount, and the sales tax refund for economic developmentâ€"and suggests that the Legislature apply a sunset process to the tax code, as it does to all state agencies. An up-to-date tax code will help us take care of our public structures so they continue to take care of usâ€"without the rest of us having to pick up the slack for those using anachronistic tax loopholes to avoid paying their fair share.

Our quality of life in Texas depends on our public structuresâ€"including public education, child health services, and transportation infrastructureâ€"maintained by Texas tax dollars. A good tax system would not only provide adequate revenue to maintain these structures, but would also match the share of taxes paid with the share of income earned by each Texas family. However, the Comptroller's newly released biennial study of the fairness of the Texas tax system, Texas Exemptions and Tax Incidence, demonstrates conclusively that low- and moderate-income Texas families bear a disproportionate share of state and local taxes. We need a fairer system to fund public structures so can improve and maintain Texas families' quality of life.

A circuitbreaker is a targeted property tax reduction program that operates like an electric circuitbreaker, which cuts off the electric current to a house before an electrical surge can cause damage. A property-tax circuitbreaker reduces property taxes that exceed a certain percentage of a taxpayer’s income. Circuitbreaker programs account for a taxpayer’s ability to pay when calculating a property tax bill. Without a circuitbreaker, the property taxes owed on a home can rise, even when a homeowner’s income does notâ€"or worse, when the homeowner loses income due to unemployment. Policymakers can target circuitbreakers to taxpayers who have the most difficulty paying property taxes and reduce their tax liability to a manageable level. Because of this careful focus, circuitbreaker programs cost far less than across-the-board rate reductions or increases in exemptions. This Policy Page examines variations among several states’ thresholds for triggering the circuitbreaker and how they administer their programs.

A circuitbreaker is a targeted property tax reduction program that operates like an electric circuitbreaker, which cuts off the electric current to a house before an electrical surge can cause damage. A property-tax circuitbreaker reduces property taxes that exceed a certain percentage of a taxpayer’s income. Circuitbreaker programs account for a taxpayer’s ability to pay when calculating a property tax bill and cost far less than across-the-board rate reductions or increases in exemptions. This Policy Page examines variations among several states’ thresholds for triggering the circuitbreaker and how they administer their programs.

Today, Congress released the details of the American Recovery and Reinvestment Act (ARRA), which provides $789 billion to stimulate the economy. Many of these measures will also help protect vulnerable Texans during this economic downturn. To take full advantage of the benefits in the recovery package and set our economy on the road to recovery, Texas must plan immediately. We applaud Speaker Joe Straus for appointing the Select Committee on Federal Economic Stabilization Funding, charged with monitoring federal action and suggesting to standing committees needed steps to qualify for federal economic recovery funds. This paper summarizes the portions of the bill that affect the state budget.

As the national recession deepens, Texas must look for ways to generate needed revenue for vital programs like Medicaid that low- and moderate-income Texas families rely on when they need it most. Implementing a hospital quality assurance fee (QAFs) in Texas could generate nearly a billion dollars in state and federal funding that could be used to increase payment to Medicaid providers and expand coverage to the uninsured.

The 81st Legislature faces the tough task of writing a state budget for 2010-11 in the midst of a serious economic recession. Even in times of robust economic growth, the state’s antiquated revenue system does not produce adequate revenue. Texas must address this problem in the long run to ensure our prosperity. In the short run, policymakers may look at sin taxes as a way to raise additional revenue.

Today the Comptroller of Public Accounts announced her Biennial Revenue Estimate. The Comptroller forecast $9.1 billion less general revenue to write the budget for 2010-11 than was available for 2008-09. But the Comptroller also forecast $9.1 billion available in the Rainy Day Fund. The 81st Legislature must now write a budget for 2010-11.

Spending cuts would hurt the Texas economy and hurt vulnerable Texans. That means:

• Texas needs federal fiscal relief;
• Texas should spend a significant portion of the Rainy Day Fund to protect the state from the full effects of the recession; and
• Texas should consider new revenue sources.

NOTE: Booklet version is formatted for two-sided printing. If you can only print one-sided, use "side by side" version.

Policy Page 263 described the spending needs that are still not a part of the state budget for 2006-07. The latest version of the supplemental appropriations bill, SB 16 by Ogden, identifies $2.95 billion in immediate needs. The state’s ability to respond to these needs, while reducing school property taxes and improving public education, has called into play a little-known restriction on state budgeting â€" the constitutional limit on spending â€" which limits the amount available for spending in the current biennium. An additional limit â€" the dedication of all revenue from tax changes made in the special session to further reducing property taxes â€" proposed by HB 2 by Pitts would further hamstring the next Legislature in writing the 2008-08 budget. This Policy Page explains the constitutional cap and the proposed dedication and the restrictions they would impose on the current special session and on future state budgets.

SJR 38 by Ogden, the constitutional amendment that would create a state property tax, is likely to be voted on in the next day or two by the Senate Finance Committee. A state property tax could provide an equitable and growing source of funding for public education. However, the proposed committee substitute contains several dangerous provisions that would cap revenue growth and require a supermajority vote to expand school enrichment taxes. With these provisions, a state property tax would no longer offer an acceptable source of funding for public education.