LEGISLATIVE BUDGET BOARD
                                   Austin, Texas
         
                                   FISCAL NOTE
                               75th Regular Session
         
                                  April 18, 1997
         
         
      TO: Honorable Paul Sadler, Chair            IN RE:  House Bill No. 4, Committee Report 1st House, Substituted
          Committee on Revenue and Public Education Funding                              By: Craddick
          House
          Austin, Texas
         
         
         
         
         FROM:  John Keel, Director    
         
In response to your request for a Fiscal Note on HB4 ( Relating 
to school property tax cuts, the distribution of replacement 
revenue, the imposition, administration, rates, collection, 
and enforcement of various taxes, and the allocation of revenue 
from those taxes and other sources for the funding of primary 
and secondary education; providing penalties.) this office has 
detemined the following:
         
         Biennial Net Impact to General Revenue Funds by HB4-Committee Report 1st House, Substituted
         
Implementing the provisions of the bill would result in a net 
negative impact of $(993,761,293) to General Revenue Related 
Funds through the biennium ending August 31, 1999. It is anticipated 
that $1 billion of available revenue from the 1998-99 biennium 
will be appropriated by the Legislature for property tax relief.
         
The bill would make no appropriation but could provide the legal 
basis for an appropriation of funds to implement the provisions 
of the bill.
         
 
Fiscal Analysis
 
SCHOOL FINANCE

The bill would repeal recapture.  The bill 
amends the Foundation School Program's two-tiered funding formulas 
with a single-tiered, guaranteed yield system for maintenance 
and operations with a maximum school district tax rate of 70 
cents per $100 of valuation on residential property.  The guaranteed 
yield would be set at $53.15 per penny per student.  The M&O 
guaranteed yield would be based on residential property only. 
 Additional state aid would be provided for districts unable 
to generate the level of revenue they would be projected to 
have available in 1998-99 under current law.

In addition, 
a separate guaranteed yield would be created for either local 
enrichment or existing debt service.  The combined tax rate 
would be limited to 10 cents.  The bill would also create a 
guaranteed yield for debt authorized and issued after September 
1, 1997.  The yield would be $36.40 per student per penny.  
Districts qualifying for funds would be limited by appropriation.

METHODOLOGY 
 

To estimate these effects a school finance model was run.

The 
guaranteed yield for maintenance and operations would increase 
the cost to the state by $12.45 billion in the 1998-99 biennium. 
 The hold harmless for current projected M&O revenues would 
add approximately $205 million to the cost of the FSP for the 
1998-99 biennium.

The existing debt service tier would cost 
the state an additional $300 million for the 1998-99 biennium. 
 These costs are partially offset by the elimination of the 
current facilities grant program ($170 million). This note assumes 
that no districts would access the enrichment tier in the 1998-99 
biennium.  If districts increase their tax rates by the 2.5 
cents authorized under the bill's rollback provisions, the cost 
of this tier is projected to be $3.5 million in the year 2000 
growing to $10.5 million by the year 2002.

The new debt tier 
would cost the state an additional $110 million in the 1998-99 
biennium, based on assumed issuance of $2 billion of new debt. 
 Because this tier is limited to debt issued after September 
1, 1997, this note assumes that the cost would not begin until 
1999.  Assuming that district debt issuance maintains at $2 
billion for 1999 and 2000, and then declines to $1 billion by 
2002, the cost to the state is projected to be $220 million 
in 2000, growing to $395 million by 2002.

The bill also would 
create an experienced teacher allotment that would provide additional 
funds to local districts with average teacher minimum salaries 
exceeding the state average by more than 3 percent.  The additional 
cost to the state would be approximately $46 million for the 
1998-99 biennium.

The estimates in this note are based on 
projections of district property values provided by the Comptroller 
of Public Accounts and Legislative Budget Board projections 
of student enrollment growth of 2 percent per year statewide. 
 

STATE AD VALOREM TAX

FISCAL ANALYSIS

The bill would 
establish a state property tax of $1.05 per $100 of value on 
business property and set the school district tax rate on residential 
property at approximately $0.70 per $100.  The provisions in 
this bill would create a gain to the General Revenue Fund, earmarked 
for public education, and a loss of local revenue to school 
districts, beginning in fiscal 1998.

METHODOLOGY

For the 
purposes of estimating the effect of this article, all property 
used for habitation, other than hotels and motels, was classified 
as "residential."  All other property was classified as "business." 
 The business and residential tax bases were estimated from 
information reported by schools and appraisal districts.  The 
appropriate tax rates were applied to the business and residential 
tax bases, and the resulting levies were trended for growth 
over the projection period.  The school district's reduced residential 
levy was subtracted from the estimate of the school district 
M&O levy under current law to derive a school district levy 
loss.  The business levy would be a gain to the state.

The 
bill would allow persons 65 years of age or older who move from 
one homestead to another to continue a tax freeze that they 
would otherwise lose under current law.  A mobility factor was 
estimated by dividing the national number of 65 and over homesteads 
moving within their states by the total U.S. number of 65 and 
over homesteads.    Each year's levy loss, net of 65 and over 
deaths, is cumulative.  The school funding formula would reimburse 
school districts after a one year lag, resulting in a state 
cost and a corresponding reduction in the cost to school districts.

An 
estimated loss also was included for the 65 and over taxpayers 
who would receive lower frozen levy amounts (or keep their existing 
tax freeze amounts if lower) under the proposed bill.

The 
bill would require the Comptroller to pay a share of each appraisal 
district's budget based on the state ad valorem tax levy as 
a percentage of the total levy for all taxing units in each 
appraisal district.  The school districts' share was reduced 
because of their reduced levy.  The cities' and counties' shares 
were increased because the total property tax levy from all 
taxing units would be reduced while the city and county levies 
would remain unchanged.  The Comptroller's collections expenses 
would be a cost to general revenue.  The appraisal budget and 
collections costs were estimated from actual costs reported 
by appraisal districts, trended over the projection period.

NOTE: 
 All estimates are contingent on the passage of constitutional 
amendments establishing a state ad valorem tax, abolishing optional 
homestead exemptions for school district M&O purposes, permitting 
the school tax freeze for an elderly person to be transferred 
to a newly acquired homestead, and any other amendments required 
to implement the provisions of the bill.

FRANCHISE TAX BASE 
EXPANSION

FISCAL ANALYSIS

The bill would amend Chapter 
171 of the Tax Code to make a series of changes to the state's 
franchise tax.  Non-corporate business entities other than sole 
proprietors would be included under the franchise tax.  Business 
entities newly taxable would include general partnerships, limited 
partnerships, limited liability partnerships, business trusts, 
and professional associations.  Passive income received by newly-taxable 
entities would be excluded from taxation.  Passive income would 
include receipts of interest, dividends, capital gains, rents, 
royalties, and income from oil and gas working interests.  The 
franchise tax floor would be raised from $100 to $500:  any 
tax liability below $500 would not be assessed.

For taxable 
entities other than partnerships, the statutory exemption from 
the officer compensation addition requirement (Section 171.110(b) 
of the Tax Code) available to 35-or-fewer-shareholder corporations 
would be revised.  Compensation would have to be added to the 
tax base, to the extent deducted in computing federal taxable 
income, for officers, directors, and owners who own 0.1 percent 
or more of the firm but who are not officers.  The first $100,000 
of compensation paid to a "0.1 percent-or-more" business owner 
would be deductible.

For partnerships, the earned surplus 
base would be the total income of the partnership taxable to 
the partners.  A $100,000 deduction would be available for each 
partner in 35-or-fewer-partner firms to the extent of compensation 
(guaranteed payments) actually paid.

The exemption from GAAP 
accounting requirements for taxable capital for taxpayers with 
35 or fewer owners ( Section 171.113 of the Tax Code) would 
be amended:  only taxpayers with gross receipts of less than 
$500,000 would qualify for the exemption.

Certain exemptions 
for non-profit and for-profit corporations would be repealed. 
 The unrelated business taxable income of non-profit corporations 
that retained their exempt status would become subject to tax. 
 Six separate changes would affect the computation of the gross 
receipts apportionment factor.  Finally, the deduction for solar 
energy devices and the temporary (FAS 96) credit would be repealed.

METHODOLOGY

Data 
on business entities were obtained from many sources, including: 
 (1) the Comptroller's tax records, (2) the Internal Revenue 
Service, (3) the United States Federal Reserve System, and (4) 
other states' published tax information.  Tax calculations specified 
by the bill were performed and the fiscal impact was computed.

Raising 
the tax floor from $100 to $500 would be a revenue loss.  Repealing 
the exemptions for certain for-profit corporations would have 
an insignificant revenue impact on the state.  All other provisions 
would be a revenue gain.

NOTE:  Because of the uncertainty 
surrounding the issue of whether the earned surplus of non-corporate 
business entities proposed under this article would be considered 
an income tax and thereby subject to Article VIII, Section 24 
of the Texas Constitution, the estimated revenue gains from 
enactment of this section are contingent upon voter approval 
of a constitutional amendment clarifying that issue.  In addition, 
the proposed Committee Substitution for House Joint Resolution 
4 would have to be amended to clarify that the franchise tax 
would apply to income earned after December 31, 1996.

SALES 
TAX BASE EXPANSION

FISCAL ANALYSIS

The bill would expand 
the taxable base of the sales tax to include previously exempted 
items or services.  Items that became taxable as a result of 
this article would be subject to local government sales taxes. 
 Cities and counties would hold elections to select the manner 
in which the additional sales tax revenue would be spent.  Transit 
authorities, however, would have their tax rates reduced to 
offset an increased tax base unless voters approved an exemption 
to the reduction.

A temporary prior contract exemption would 
be provided, set to expire January 1, 2000.  This section would 
take effect October 1, 1997.

METHODOLOGY

The fiscal impacts 
were based on the Comptroller's 1997 study, Sales and Franchise 
Tax Exemptions.  An incremental increase to the state sales 
tax was estimated for each proposed item, projected through 
fiscal 2002 using appropriate economic variables, and adjusted 
for an effective date of October 1, 1997.

It is not known 
how cities or counties would allocate their additional sales 
tax revenue.  This analysis assumes that transit authorities 
would experience a permanent reduction in their sales tax rates. 
 The fiscal impact on certain special purpose districts, such 
as crime control and prevention districts, hospital districts, 
or municipal management and improvement districts, cannot be 
determined.

INCREASE AND EXPAND INSURANCE PREMIUM TAXES

FISCAL 
ANALYSIS

The bill would amend various articles in the Insurance 
Code to eliminate certain insurance premium tax credits and 
exemptions, to revise the insurance premium tax rate structure, 
and to eliminate the franchise tax credit available to title 
insurance holding companies.

METHODOLOGY

The potential 
fiscal impact of the provisions in this article was estimated 
based on Comptroller tax collection data and the 1998-99 Biennial 
Revenue Estimate.

LOTTERY SURCHARGE

FISCAL ANALYSIS

The 
bill would amend the State Lottery Act to increase the state 
share of lottery proceeds through a reduction of the prize percentage.

This 
article would take effect September 1, 1997.

METHODOLOGY

The 
estimate fiscal impact was based on the 1998-99 Biennial Revenue 
Estimate, as adjusted to reflect the change proposed by this 
article.

OTHER AMENDMENTS TO THE TAX CODE

The bill would 
also amend the Tax Code to increase excise taxes on Alcohol 
and Tobacco Products.  It would repeal the motor fuels tax exemption 
on aviation fuel and the exemption for certain commercial vessels. 
 It would increase various other taxes.

ADMINISTRATIVE COST

The 
bill would increase the tax base by an estimated 700,000 new 
taxpayers.  All major activities of the Comptroller's Office 
would be affected by the increased workload.

Assuming that 
voters would approve the amendment proposed by CSHJR 4 in 1997, 
the Comptroller's Office would require an emergency appropriation 
of $2 million in fiscal 1997 to begin educating and notifying 
the new taxpayers, training current staff, hiring contract programmers, 
and purchasing additional computer hardware.

When all provisions 
of the tax bill are fully implemented the following activities 
would require additional personnel:  The Audit Division would 
require 48 additional auditors and support staff to handle the 
increased workload.  The Enforcement Division would require 
100 additional taxpayer compliance officers and support staff 
for increased field assignments.  The Revenue Processing Division 
would require 84 additional accounts examiners for file maintenance 
responsibilities.  The Property Tax Division would require 65 
additional  appraisers and support staff to administer the state 
ad valorem tax.  Finally, the Tax Policy Division would require 
60 additional policy analysts to assist new taxpayers.

This 
administrative cost estimate does not include funds for additional 
leased-space or facilities for 357 FTEs.
 
Methodolgy
 
GENERAL

Some provisions of the bill, are contingent on the 
adoption of a constitutional amendment proposed by House Joint 
Resolution 4, Seventy-fifth Legislature, Regular Session, 1997. 
 The proposed constitutional amendment will be submitted to 
the voters at an election to be held August 9, 1997.
The probable fiscal implications of implementing the provisions 
of the bill during each of the first five years following passage 
is estimated as follows:
 
Five Year Impact:
 
Fiscal Year Probable           Probable Revenue   Probable Revenue   Probable  Net      
            Savings/(Cost)     Gain/(Loss) from   Gain/(Loss) from   Revenue                              
            from Foundation    General Revenue    General Revenue    Gain/(Loss) from                     
            School Fund        Fund - State Ad    Fund - Expansion   General Revenue                      
                               Valorem Tax on     of State           Fund -                               
                               Business Property  Franchise Tax Base Expansion of                         
                                                                     Sales Tax Base                       
            0193               0001               0001               0001                                  
       1998  ($6,248,200,000)    $4,033,871,211      $387,709,000      $506,552,000                  
       1998   (6,649,100,000)     4,094,379,279       375,117,000       677,068,000                  
       2000   (6,961,000,000)     4,155,794,968       356,606,000       721,828,000                  
       2001   (7,147,300,000)     4,218,131,893       377,075,000       759,538,000                  
       2002   (7,441,900,000)     4,281,403,871       413,117,000       796,117,000                  
 
 
Fiscal Year Probable Revenue   Probable Revenue   Probable Revenue   Probable Revenue   
            Gain/(Loss) from   Gain/(Loss) from   Gain/(Loss) from   Gain/(Loss) from                     
            General Revenue    General Revenue    General Revenue    Foundation                           
            Fund - Insurance   Fund - Lottery     Fund - Other Tax   School Fund                          
            Premium Tax                           Increases                                               
            0001               0001               0001               0193                                  
       1998      $169,904,000      $130,926,000      $505,334,000       $49,590,000                  
       1999       230,770,000       168,986,000       702,991,000        85,243,000                  
       2000       235,344,000       177,418,000       698,881,000        89,311,000                  
       2001       240,027,000       184,278,000       729,247,000        92,161,000                  
       2002       244,852,000       188,619,000       722,492,000        95,266,002                  
 
Fiscal Year Probable Revenue   Probable Revenue   Probable           Probable           Change in Number   
            Gain/(Loss) to     Gain/(Loss) to     Savings/(Cost)     Savings/(Cost)     of State          
            local School       Counties/Cities    Comptroller        Office of          Employees from    
            Districts -                           Administrative     Attorney General   FY 1997           
                                                  Cost - General     Administrative                       
                                                  Revenue Fund       Cost - General                       
                                                                     Revenue Fund                         
            LCL-SCHOOL         LCL-COUNTY         0001               0001                                  
       1998  ($6,262,000,000)     ($72,123,000)    ($107,839,180)      ($1,264,028)             295.0
       1999   (6,525,000,000)     (111,210,000)     (104,597,079)       (1,201,496)             295.0
       2000   (6,833,000,000)     (117,898,000)     (107,700,983)       (1,201,496)             373.0
       2001   (7,100,000,000)     (123,470,000)     (106,637,767)       (1,201,496)             304.0
       2002   (7,378,000,000)     (128,804,000)     (108,706,753)       (1,201,496)             304.0
 
         Net Impact on General Revenue Related Funds:
 
The probable fiscal implication to General Revenue related funds 
during each of the first five years is estimated as follows:
 
              Fiscal Year      Probable Net Postive/(Negative)
                               General Revenue Related Funds
                                             Funds
               1998       ($573,416,997)
               1999        (420,344,296)
               2000        (634,719,511)
               2001        (654,681,370)
               2002        (809,941,376)
 
Similar annual fiscal implications would continue as long as 
the provisions of the bill are in effect.
          
   Source:            Agencies:   302   Office of the Attorney General
                                         304   Comptroller of Public Accounts
                                         
                      LBB Staff:   JK ,BR ,GC ,DD