LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE, 77th Regular Session April 24, 2001 TO: Honorable Rodney Ellis, Chair, Senate Committee on Finance FROM: John Keel, Director, Legislative Budget Board IN RE: SJR6 by Duncan (Proposing a constitutional amendment to exempt from ad valorem taxation tangible personal property held at certain locations only temporarily for assembling, manufacturing, processing, or other commercial purposes.), Committee Report 1st House, Substituted ************************************************************************** * The proposed exemption could cause an increase in state cost of * * public school financing due to the reimbursement of local school * * districts revenue losses, in districts exempting goods in transit. * * The cost to the state for publication of the resolution is * * $80,000. * ************************************************************************** The resolution would propose a constitutional amendment to provide for a new exemption for "goods in transit." To qualify for the exemption, personal property would have to be acquired or imported into Texas and stored at a location in Texas not owned or under the control of the owner of the goods. Oil and gas and their immediate derivatives would not qualify for the exemption. In addition, the inventory would have to be transported or distributed to another location no later than 270 days after the property was acquired in or imported into the state. The exemption would take effect on January 1, 2002 and apply to taxes imposed in 2002 and beyond. The exemption would have to be granted by all taxing units unless the governing body of a taxing unit proposed by official action to tax goods in transit. Before acting to tax goods in transit, the governing body of a taxing unit would have to conduct a public hearing where the public would be allowed to speak for or against the action to tax the property. Methodology Summary Currently, Article VIII, Section 1-j of the Texas Constitution and Section 11.251 of the Tax Code provide for a "freeport exemption." This exemption, which can be granted at the option of each city, county, school district, or junior college district, exempts goods, wares, ores, raw materials, and other types of inventory that are brought into or acquired in the state and transported out of the state within 175 days of acquisition. The proposed amendment would provide a similar exemption for property acquired or imported into Texas, stored at a location in the state not owned or under the control of the property owner, and transported to another location either inside or outside of the state within 270 days. The proposed amendment would provide a local option procedure to continue taxing the property. It is not known how many jurisdictions might hold an election and vote to continue taxing the covered items. For illustrative purposes, however, if all taxing jurisdictions provided the exemption, the estimated loss to the state in fiscal 2004 from reimbursements to school districts for their fiscal 2003 losses would be $35.9 million; and the fiscal 2003 losses to cities and counties would be $7.8 million and $11.2 million, respectively. (While the exemption would be for the 2002 tax year, the local levy loss would be in fiscal 2003, and the state reimbursement to school districts would be in fiscal 2004.) Losses would continue to escalate though 2006 and beyond, based on data from the U.S Bureau of the Census, historic trends and industry estimates. Note: No taxpayer behavior relating to intra-corporate restructuring to avoid taxation was assumed in the preparation of this analysis. If any such behavior were to materialize, additional revenue reductions would occur. Section 403.302 of the Government Code requires the Comptroller to conduct a property value study to determine the total taxable value for each school district. Total taxable value is an element in the state's school funding formula. Depending on language in accompanying enabling legislation, the state could reimburse school districts for their total levy losses, including losses for this exemption, after a one-year lag. Local Government Impact The proposed exemption could cause revenue losses to cities, counties, school districts, and special districts exempting goods in transit. Source Agencies: 304 Comptroller of Public Accounts LBB Staff: JK, SD, WP, BR