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