SLR C.S.H.J.R. 4 75(R) BILL ANALYSIS REVENUE & PUBLIC EDUCATION FUNDING, SELECT C.S.H.J.R. 4 By: Sadler, Hilbert, Brimer, Chisum, Craddick, Hernandez, Hochberg, Junell, Stiles, Williamson, Wilson 4-17-97 Committee Report (Substituted) BACKGROUND The Governor submitted a constitutional proposal to the legislature which provided for the creation of the Texas School Trust Fund, increased residential homestead exemptions on maintenance and operations of school districts, and excluded the business activity tax from Article VIII, section 24 and Article VII, section 3. The Select Committee on Revenue and Public Education Funding, after extensive examination, developed a plan to provide additional property tax relief and create a reliable stream of revenue for public education. PURPOSE C.S.H.J.R. 4 ensures a stable source of revenue for public education and provides property tax relief by establishing first priority spending for public education; dedicating lottery proceeds; creating a limited tax on non-residential property; authorizing a franchise tax on business entities other than sole proprietorships; and allowing portability of the school property tax freeze for the elderly. The constitutional amendment would be placed on the uniform election date in August, 1997. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Adds Section 1(b), Article VII, Texas Constitution, to establish the financial support of elementary and secondary public school education as the first priority among state spending and appropriations, subject only to constitutional revenue dedications and the payment of lawfully incurred state debt. Authorizes the legislature by general law, notwithstanding certain other constitutional restrictions, to fulfill its priority financial support obligations by providing spending priorities and minimum financial effort including guaranteed draws against undedicated revenue. SECTION 2. Amends Section 1-e, Article VIII, Texas Constitution, to qualify the prohibition on state ad valorem taxes. Authorizes the legislature to impose a state ad valorem tax for public school purposes, at a rate not to exceed $1.05 per $100 of taxable value, on nonexempt, nonresidential property. Authorizes the legislature to provide for appraisal, equalization of value, and tax collection, and to honor, for purposes of the state tax, abatement agreements on property entered into by a school district before 1997. Removes obsolete language relating to the disposition of the balance from the previous state ad valorem tax. Adds a temporary subsection providing for appraisal at the county level through the end of the 1999 tax year, and validating such appraisal if the appraisal and equalization process conform to accepted standards and practices. SECTION 3. Amends Section 3, Article VII, Texas Constitution, to provide that lottery proceeds, less prize money and administrative costs, may be spent only for elementary and secondary public education. Standardizes certain terminology and remove obsolete references to poll taxes. Revises language to reflect and cross reference the new version of the state ad valorem tax in SECTION 2. Deletes specification of certain maximum tax rates but allows the legislature to set a statutory cap on school district ad valorem tax rates. Revises school district taxation powers to apply to residential property, as such property may be defined by law, for purposes of maintenance and operations, and also to all otherwise nonexempt property for purposes of the erection and equipment of school buildings (debt service) if approved by school district voters. SECTION 4. Amends Section 1, Article VIII, Texas Constitution, to authorize the legislature to impose privilege or franchise taxes, measured by income or capital, on businesses entities other than sole proprietorships. Provides that the prohibition against the application of certain taxes to municipal corporations does not prohibit the imposition of taxes on a municipal gas, electric, or water utilities. Adds a temporary provision to provide that the use of income earned income or receipts after 1997 to measure or apportion a privilege or franchise tax is not prohibited. SECTION 5. Amends Section 1-b, Article VIII, Texas Constitution, to limit the optional school district exemption for the elderly and disabled, and the optional school district residence homestead exemption, to taxes for debt service. Saves previously adopted exemptions, applicable to both debt service and maintenance and operations, and continues them for debt service purposes rather than requiring readoption. Authorizes the legislature to provide for the portability of the tax freeze on residence homesteads of the elderly. Provides that if the tax imposed on an elderly homeowner's property in 1997 under a lower school district tax rate is less than the cap previously imposed, the 1997 amount becomes the new cap for that homeowner. Removes obsolete references to county education districts. SECTION 6. Amends Section 1-j, Article VIII, Texas Constitution, to provide that the freeport exemption on certain property does not apply to the state ad valorem tax if the property is located in a school district that taxes it for the tax year. SECTION 7. Adds Section 22(d), Article VIII, Texas Constitution, to make a change conforming to the new constitutional subsection in SECTION 1. Provides that the restriction on the rate of growth of appropriations from nondedicated revenue does not apply to the establishment of the financial support of elementary and secondary public school education as the state's first spending priority. SECTION 8. Adds Section 24(k), Article VIII, Texas Constitution, to provide that the restrictions on imposition of a personal income tax does not apply to a privilege or franchise tax measured by the income of a business entity other than a sole proprietorship. SECTION 9. Establishes an election date of August 9, 1997, for the constitutional amendment proposed by the joint resolution. Establishes the ballot language for the amendment proposition. COMPARISON OF ORIGINAL TO SUBSTITUTE Both H.J.R. 4 and C.S.H.J.R. 4 propose constitutional amendments providing for local property tax relief and substituting various forms of state funding for public education purposes. H.J.R. 4 grants an additional constitutional residential homestead exemption of $20,000 for school district property taxes for maintenance and operation. The legislature may limit school district actions to reduce or repeal exemptions, and may provide for the exemption of tangible personal property held for sale or consumption as inventory. C.S.H.J.R. 4 revises school district ad valorem taxation powers to apply only to residential property, and authorizes the legislature by law to set a cap on school district tax rates. It transfers nonresidential property for school funding purposes to ad valorem taxation by the state, and caps the state rate at $1.05 per $100 of taxable value. C.S.H.J.R. 4 limits certain optional school district exemptions just to taxes for debt service only. Allows portability for over-65 exemption. H.J.R. 4 creates a Texas School Trust Fund to repay revenue lost by school districts requires transfers of state revenue to the fund as necessary to make those repayments. It channels to the trust fund any revenue from taxes on business activities, the revenue from one half-cent of the state sales and use tax rate, and any other revenue the legislature statutorily deposits or transfers to the credit of the fund. C.S.H.J.R. 4 does not create the trust fund, but establishes the financial support of public schools a first priority for state spending, and authorizes the legislature to provide for a first draw of certain available revenue to support that obligation, notwithstanding other constitutional provisions. C.S.H.J.R. 4 dedicates lottery revenue to public education funding and authorizes, in addition to the state ad valorem tax, the imposition by the legislature of privilege or franchise taxes on business entities other than sole proprietorships. It allows the taxation of gas, electric, or water utilities of a municipal corporation. H.J.R. 4 clarifies that the constitutional prohibition relating to personal income taxes does not apply to taxes on business entities, nor do certain constitutional dedications apply. An established rate of a tax on business activities may not be increased except by a law enacted by an extraordinary majority of three-fifths of the membership of each house of the legislature. C.S.H.J.R. 4 clarifies that the constitutional prohibition relating to personal income taxes does not apply to a privilege or franchise tax measured by income, for entities other than a sole proprietorship. Both H.J.R. 4 and C.S.H.J.R. 4 provide for a uniform election date of August, 1997.