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