LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE 75th Regular Session February 14, 1997 TO: Honorable Paul Sadler, Chair IN RE: House Bill No. 4 Committee on Revenue and Public Education Funding By: Craddick/et al. 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-As Introduced Implementing the provisions of the bill would result in a net negative impact of $(1,420,358,762) to General Revenue Related Funds through the biennium ending August 31, 1999. 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 HOMESTEAD EXEMPTION/TAX RATE REDUCTION The bill would require the state to reimburse local school districts for lost ad valorem tax revenue for a $20,000 residence homestead exemption and beginning in tax year 1997, and a $0.20 per $100 valuation reduction in school district maintenance and operation tax rates for the 1998 and later tax years. This provision of the bill would become effective upon passage of House Joint Resolution 4, Seventy-fifth Legislature, Regular Session, 1997 (HJR 4) and would apply to school district property taxes imposed for and after the 1997 tax year. SCHOOL DISTRICT BUSINESS INVENTORY TAX EXEMPTION The bill would amend Chapter 11 of the Tax Code to add Section 11.25, which would provide a school district property tax exemption for tangible personal property held for sale or consumption as inventory. The exemption would apply only to a school district's maintenance and operation tax rates. Persons who receive the exemption for freeport property or for tangible personal property having a value less than $500 could not receive the business inventory exemption on that property. Inventory would be specifically defined to include goods held for sale, supplies, raw materials, goods in process, finished goods, supplies, consigned goods, bill and hold goods, floor-planned goods, and in-transit goods. This exemption would take effect January 1, 1998 and would apply only to school district property taxes imposed for a tax year that begins on or after that date. ADMINISTRATIVE The bill would grant the Comptroller of Public Accounts (Comptroller) rulemaking authority to require school districts or appraisal districts to report information necessary to compute the amount of lost property taxes. The reimbursements would be made from the Texas School Trust Fund, created by the passage of HJR 4. The bill would require the Comptroller to administer the fund and to invest any money credited to the fund but not immediately needed for payments to school districts. The bill would stipulate that reimbursements to school districts be paid no later than January 31 of the school year for which the reimbursement was made. Reimbursements to local school districts would be treated as local revenues under the Foundation School Program and would be specifically exempted from the calculation of state aid per pupil for purposes of establishing the minimum teacher salary. FRANCHISE TAX In addition, the bill would repeal the state's franchise tax and impose the Texas Business Tax. The franchise tax would be repealed effective January 1, 1998. The Texas Business Tax would be imposed effective July 1, 1998. The franchise tax repeal would not affect the regular annual franchise payment due on May 15, 1997. A final franchise report would be required, although the bill does not specify a due date for the report. The period of business activity covered by this final report would start with the ending date of the firm's accounting year on which the 1997 regular annual report would be based and would end on December 31, 1997. Franchise tax provisions would continue to apply, subject to the statute of limitations, to audits, collections, and refunds relating to tax periods before January 1, 1998. TEXAS BUSINESS TAX The Texas Business Tax (TBT) would be imposed on all business entities in the state, including corporations, subchapter S corporations, limited liability companies, general partnerships, limited partnerships, limited liability partnerships, joint ventures, sole proprietorships, trusts, and estates. Taxpayers with multi-state business activity would apportion their net base to Texas based on a gross receipts apportionment factor. The gross receipts factor would be identical to the gross receipts factor now used for the franchise tax. Taxpayers whose sales were entirely in Texas would allocate their entire tax base to Texas. From this apportioned tax base, taxpayers would subtract a $500,000 standard deduction. A tax rate of 1.25 percent would then be applied. SALES TAX/STATE LIMITED SALES & USE TAX The bill would increase the rate of the state limited sales and use tax and sales tax on motor vehicle sales and rentals for less than 30 days from 6.25 percent to 6.75 percent effective January 1, 1998 The net revenue derived from the imposition of sales and use taxes at a rate of one-half of one percent of the sales price of taxable items would be deposited in the Texas School Trust Fund. LOTTERY The bill would dedicate net lottery revenue to the Texas School Trust Fund. 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. Methodolgy The following methodology was utilized to estimate the impact of the bill. Property Tax Reduction Provisions: The Comptroller estimated the number of homeowners qualified for the homestead exemption and estimated the total 1996 value loss. This value loss was trended up to reflect the growth in homeowners, property values, and maintenance and operations tax rates through the projection period. From fiscal year 1999 forward, the estimate incorporates the additional cost to the tax ceiling on homesteads of the elderly. Inventory values were collected from appraisal districts, and the loss in the maintenance and operations tax levy was calculated. The levy loss was trended to reflect the growth in inventory value and maintenance and operations tax rates over the projection period. Significant property reclassification is expected and is incorporated in the estimate. (There are many gray areas in property classification, so business owners are expected to shift property that is now classed as non-inventory property into inventory.) The taxable value losses for the homestead exemption and the inventory exemption were deducted from the trended state total taxable values through the projection period. The net taxable value remaining after the homestead exemption and inventory exemption value losses were deducted was multiplied by 0.002 (20 cents per $100) to calculate the loss for the 20 cent tax rate reduction. Note: This fiscal impact does not reflect any additional costs to the General Revenue Fund resulting from litigation concerning the definition of taxable values under V.T.C.A., Government Code, Section 403.302 (d). Texas Business Tax: Data on corporations, partnerships, and sole proprietorships was obtained from many sources, including: (1) the Comptroller's tax records, (2) the Internal Revenue Service, (3) the Michigan Department of Treasury, (4) the United States Federal Reserve System, and (5) United States Bureau of the Census. Tax calculations specified by the bill were performed and the resulting fiscal impact was computed. Note: Because of the uncertainty surrounding the issue of whether the Texas Business Tax 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 tax are contingent upon voter approval of HJR 4. Sales Tax Increase: The estimate of the fiscal impact of the sales tax was based on the Comptroller's 1998-99 Biennial Revenue Estimate. This analysis assumed, pursuant to the language in Article 4, that the General Revenue Fund would bear the majority of the decrease in the state sales tax base caused by the increased cost of taxable items (i.e., an increase in the sales tax rate from 6.25 to 6.75 percent). In addition, it was assumed that the term "sales price" refers to the price of an item, regardless of whether the tax imposed was remitted as sales tax or use tax. The Texas School Trust Fund would not receive funds computed on a basis that includes the sale of motor lubricants. Although the bill appears to suggest that such items be included, HJR 4 clearly states that the fund would receive distributions after deducting those amounts dedicated under Article 8, Section 7a of the Texas Constitution (motor lubricants). Lottery Revenue: The fiscal impact was based the net lottery estimate in the Comptroller's 1998-99 Biennial Revenue Estimate. 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 Probable Probable Savings/(Cost) Savings/(Cost) Savings/(Cost) Savings/(Cost) from General from General from General from General Revenue Fund - Revenue Fund - Revenue Fund - Revenue Fund - $20,000 M&O Tax Reduction Exemption of Repeal of State Homestead Inventory Held Franchise Tax Exemption For Resale 0001 0001 0001 0001 1998 ($702,967,348) $0 $0 ($247,758,000) 1998 (897,389,926) (1,169,770,986) (859,027,301) (1,852,412,000) 2000 (936,038,879) (1,206,621,836) (926,224,825) (1,922,259,000) 2001 (976,134,872) (1,249,656,407) (994,806,957) (2,018,772,000) 2002 (1,017,728,266) (1,290,495,344) (1,063,966,293) (2,120,110,000) Fiscal Year Probable Probable Revenue Probable Revenue Probable Revenue Savings/(Cost) Gain/(Loss) from Gain/(Loss) from Gain/(Loss) from from General General Revenue General Revenue State Highway Revenue Fund - Fund - Texas Fund - Sales Tax Fund - Sales Tax Dedication of Business Tax and Motor Motor Lubricants Lottery Revenue Vehicle Tax to Texas School Increase Trust Fund 0001 0001 0001 0006 1998 ($1,298,836,000) $97,997,000 $509,606,000 $899,000 1999 (1,394,824,000) 2,811,818,000 901,660,000 1,635,000 2000 (1,457,486,000) 3,005,078,000 976,170,000 1,748,000 2001 (1,511,429,000) 3,174,968,000 1,052,108,000 1,868,000 2002 (1,547,023,000) 3,343,303,000 1,129,955,000 1,994,000 Fiscal Year Probable Revenue Probable Probable Change in Number Gain/(Loss) from Savings/(Cost) Savings/(Cost) of State Texas School Comptroller Office of Employees from Trust Fund from Administrative Attorney General FY 1997 Lottery Dedication Cost - General Administrative Revenue Fund Cost - General Revenue Fund 0001 0001 0001 1998 $1,298,836,000 ($6,419,244) ($289,449) 34.5 1999 1,394,824,000 (5,118,089) (287,419) 62.5 2000 1,457,486,000 (3,747,139) (287,419) 62.5 2001 1,511,429,000 (3,803,650) (287,419) 62.5 2002 1,547,023,000 (3,862,986) (287,419) 62.5 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 ($349,831,041) 1999 (1,070,527,721) 2000 (1,013,931,098) 2001 (1,016,385,305) 2002 (1,023,192,308) Similar annual fiscal implications would continue as long as the provisions of the bill are in effect. LOCAL The bill would impact other local taxing units that provide funding for their local appraisal district operating budget. Under current law, each taxing unit participating in the district is allocated a portion of the amount of the budget. This is equal to the percentage of unit levy to the total district levy for all taxing units. A reduction in school district levies, will increase the proportional cost to other taxing units in the appraisal district. It has been estimated that other taxing units will experience an increase of approximately $20 million per year in their pro rata cost of appraisal district operations. This figure does not include increases in administrative cost incurred by appraisal districts from the provisions of the bill. Source: Agencies: 304 Comptroller of Public Accounts 701 Texas Education Agency - Administration 302 Office of the Attorney General LBB Staff: JK ,RR ,BR