TAXES

A new national study, Measuring Fiscal Disparities Across the U.S. States, compares the revenue capacity and expenditure requirements of all 50 states and concludes that Texas has greater requirements for state and local spending than most other states, but makes less effort to raise the necessary revenue.

The state’s commitment to reduce school property taxes by one-third in fiscal 2008 has called into play a little-known restriction on state budgeting--the constitutional limit on spending--which limits the amount of state taxes that may be spent. The Legislative Budget Board met November 27 to consider setting the amount of the cap, as required by statute, but adjourned until January without taking action. This Policy Page explains the cap, the restrictions it imposes on the state budgets, and how it should be applied.

The Speaker has projected $15.5 billion in “surplus funds” for the 2008-09 budget cycle. If “surplus” means “more than we had,” the Speaker may be right. If “surplus” means “more than we need,” then, as this Policy Page explains, we do not have a surplus at all; we are $3 billion short.

Rising appraisals and property tax rates are often blamed for the recent increase in the number of foreclosures in Texas. Families fall behind in their home-related payments for many reasons, including high utility rates, expensive homeowners insurance, boosts in adjustable rate mortgages, and poor underwriting. Texas laws already provide homeowners many protections against increasing property taxes. The focus of efforts to reduce foreclosure rates and keep families in their homes should be on what is causing the problem, not on property tax rates and appraisals.

CPPP delivered a legislative preview on Texas' tax and buget situation at the William P. Hobby Policy Briefing. As part of the briefing, CPPP and Governor Hobby presented Houston Mayor Bill White and Harris County Judge Robert Eckels with the William P. Hobby Visionary Award for their leadership during hurricanes Katrina and Rita.

This policy brief explains why a Texas-style personal income tax is the best way to meet the needs of Texas. Only a personal income tax can significantly reduce reliance on property taxes �" cutting the school operations tax to as low as 20 cents per $100 of valuation �" while providing over $5 billion annually for education. The expanded business tax cannot raise enough money. A higher sales tax would be volatile and regressive. An income tax would reduce taxes on the middle class and benefit the economy. Public opinion polls show that Texans are open to considering a Texas-style income tax.

The U.S. Congress may soon renew a provision that allows taxpayers to deduct their state and local sales tax payments from their federal taxes. Some claim that this provision would make the sales tax a more attractive source of state revenue because people would be able to write it off. In reality, only one-fifth of Texas families use the current sales-tax deduction, so most Texans would save absolutely nothing from its proposed extension. If the Legislature were to raise the sales-tax rate to help cover the cost of property tax cuts passed in the recent special session, most Texans would only see a higher sales tax �" not an increase in their federal income tax deductions.

On August 21, 2006, the Governor created the Texas Task Force on Appraisal Reform, which is widely expected to recommend capping the rate of appraisal growth. A lower appraisal cap would shift the burden of property taxes onto lower-income families, tax similar properties differently, and discourage the sale of real estate.

Beginning Friday and continuing throughout the weekend, you won’t be charged sales tax when you buy clothes or shoes that cost less than $100. Dazzled by the opportunity to avoid paying taxes, long lines of people will converge on malls across Texas. But will you really save any money this weekend?

Next week the U.S. House may vote on a bill that would seriously undermine Texas' ability to collect its new business tax. A companion bill is proceeding in the U.S. Senate.

Some may be shocked that in less than a month’s time, Texas has gone from having an $8 billion “surplus” to considering 10 percent almost-across-the-board cuts�"about $3 billion in General Revenue. The reason is the huge gap between the spending side of what the Legislature approved in the special session ($23 billion more in state funds for K-12 from 2007 to 2009, most of it to pay for local property tax cuts) and what it raised in new revenue ($8.8 billion from 2007 to 2009). Filling the $14 billion hole dug in the special session entirely wipes out the so-called surplus and still requires finding another $6 billion.

The fiscal notes for the tax and school-finance bills passed during the special session reveal a gap of $10.5 billion between the expected costs of HB 1 and anticipated revenues from HB 3, 4, and 5 in 2008-09. This deficit will place tremendous pressure on the next state budget, which could cause severe budget cutbacks, an increase in the state sales tax or other state taxes, an expansion of gambling as a source of revenue, or all of the above.

On Friday, the Senate Finance Committee adopted the Williams Amendment to HB 1, which would lower school property taxes to $1.00 per $100 of property valuation for the 2007-08 school year. The more money the state spends to reduce local property taxes, the less money the state can spend on anything else. The Senate may vote on HB 1 as early as Monday afternoon. We urge you to contact your Senator at once, asking him or her to support an amendment to remove the Williams Amendment from HB 1.

Using state revenue to replace school property taxes, cutting tax rates to $1.00 in 2008, would force a 16% cut in state spending subject to the constitutional cap on spending in the 2008-09 budget. Such a cut would needlessly force damaging cuts in vital state services.

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 �" the constitutional limit on spending �" which limits the amount available for spending in the current biennium. An additional limit �" the dedication of all revenue from tax changes made in the special session to further reducing property taxes �" 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.

Our state constitution imposes a little-known cap on state budgeting�"a limit on the spending of tax revenue not dedicated by the Constitution. Because of the cap, even with over $8 billion in unallocated revenue, the legislature is finding it difficult to write a budget that includes additional state dollars to 1) reduce local school property taxes; 2) improve education spending, such as through a teacher pay raise, and 3) pay for supplemental needs in 2006-07. We described needed supplemental spending in Policy Page 263, which analyzes the $2.5-billion Senate Bill 16 (Ogden) as introduced. The SB 16 committee substitute laid out on April 24 has an even larger GR price tag of $3 billion. Reducing school property taxes, increasing education spending, and meeting supplemental needs can all be achieved, if the spending cap is correctly applied. This Policy Page explains the spending cap, how it should be applied, and why this is critically important.

Senate Bills 13 and 16 are scheduled for a public hearing by the Senate Finance Committee on Monday, April 24, at 9:30 a.m. Even though the governor’s call for the third special session is still limited to “school district property tax relief; modifying the franchise tax, motor vehicle sales and use tax, and tobacco product taxes, and an appropriation to the Texas Education Agency,” SB 13, 16, and other bills filed by legislators make it clear that other important matters will have to be resolved before the end of the 2006-07 budget cycle.

CPPP urges the House to reject HB 1 as explained in this letter to the House from Scott McCown, our Executive Director.

As the third special session of the 79th Legislature began yesterday, the Comptroller of Public Accounts revised the revenue estimate for the 2006-07 biennium, informing legislators that Texas could receive $8.2 billion more in General Revenue than is currently authorized to be spent. (Of this amount, $2.5 billion would be set aside for a constitutionally required transfer to the Rainy Day Fund.) This Policy Page explains why unused GR is so much higher than the $4.3 billion estimated in February 2006. It also explains why even $8.2 billion in unallocated revenue isn’t enough to make significant long-term reductions in local school property taxes, cover supplemental budget needs through August 2007, rebuild the state’s “rainy day fund”, and leave enough room for future revenue growth to adequately fund other state priorities such as higher education, health care, and public safety.

In this Policy Page, we analyze the Sharp Commission’s proposed tax plan. Although the commission proposes an innovative business tax, the plan creates serious budget problems by cutting old taxes more than it raises new taxes, leaving the state with less net revenue. On the legal front, the commission’s plan does not create the necessary “meaningful discretion” over local tax rates required by the Supreme Court’s June 1 deadline. Finally, the plan increases the overall regressivity of the state’s tax system. On Monday, the Legislature convenes in special session to consider the commission’s proposal and other ideas. What happens will profoundly affect the ability of state government to fund all public services, not just public education. We hope this analysis is useful to you.

Today, the Texas Tax Reform Commission released its Final Report. We appreciate the commission members who undertook this public service and the leadership of the chair, Mr. John Sharp. Please read on for our statement concerning this report.

We have prepared a trilogy of policy briefs to help inform the state’s important debate this spring about public education and tax reform. In our first brief, we explain the state’s need to increase its investment in public education. In our second, we explain how a Texas-style personal income tax is the best way both to adequately support public education and to reduce reliance on the property tax. In that piece, we outline why a new business tax by itself would not raise enough money to significantly cut property taxes and why a higher sales tax would be a move in the wrong direction. In our third brief, we explain alternative ways to reduce property taxes, targeting reductions to those who need them the most.