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