TO:	Honorable Ron Wilson, Chair, House Committee on Ways & Means
FROM:	John Keel, Director, Legislative Budget Board
IN RE:	HB589 by Davis, Yvonne (Relating to taxes.), As Introduced

Table 1

House Bill 589, As Introduced:  Summary of Elements

 

Tax Changes

 

·               Repeals numerous provisions of the tax code, including most property, sales and franchise tax exemptions, certain sales and franchise tax refunds, and most franchise tax credits, effective October 1, 2003.

 

Revenue Increases

 

·               $19,950.9 million in fiscal year 2004

·               $24,768.3 million in fiscal year 2005

 

Initial Impact

 

·              57.7 percent to business, 42.3 percent to individuals in fiscal year 2004

·              60.6 percent to business, 39.4 percent to individuals in fiscal year 2005

 

Major Industry Initial Impact

 

·               Largest dollar increase:  $7,869.4 million in fiscal year 2004 and $9,780.2 million in fiscal year 2005, to the manufacturing industry.

·               Largest percentage increase in overall tax liability:  120.0 percent in fiscal year 2004 and 142.1 percent in fiscal year 2005, to the manufacturing industry.

 

Net Revenue Impact After Dynamic Analysis

 

·               $19,509.0 million increase in fiscal year 2004

·               $24,037.5 million increase in fiscal year 2005

 

Final Tax Incidence

 

·               Fiscal 2004 impact to the middle income level (low $50,000s to mid $60,000s): $1,005.9 million increase, or 28.64 percent.

·               Fiscal 2005 impact to the middle income level (mid $50,000s to high $60,000s): $1,247.6 million decrease, or 33.72 percent.

 

Initial Tax Impact by Industry:

 

House Bill 589, As Introduced, was analyzed using the LBB’s multi-tax model to determine the initial impact of the proposed changes relative to current law.  The results of the analysis are shown in Table 2a and Table 2b, below.

 

Table 2a

Comparison of Initial Tax Impact under

Current Law vs. House Bill 589, As Introduced

Fiscal Year 2004

Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

 

 

 

* The Residential Rental category above reflects property taxes on residential property only.   Note: Property taxes include city, county, special district and school district taxes; other taxes on individuals include the mixed beverage tax and the inheritance tax.

Table 2b

Comparison of Initial Tax Impact under

Current Law vs. House Bill 589, As Introduced

Fiscal Year 2005

Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

 

 

*  The Residential Rental category above reflects property taxes on residential property only.   Note: Property taxes include city, county, special district and school district taxes; other taxes on individuals include the mixed beverage tax and the inheritance tax.

 

Tax Incidence by Income Group

 

Economists commonly distinguish between the initial “impact” of a tax and its “incidence.”  The initial impact of a tax falls on taxpayers legally liable to pay the tax, while the incidence refers to the ultimate payer of the tax.  For example, the initial impact of a business tax falls on the firm incurring the tax liability. However, to varying degrees, the tax cost is  “shifted” so that the ultimate burden of the tax falls either to consumers in different retail prices, to employees in changed wages, to owners of land and capital in different investment returns, or most likely, to some combination of all three. The degree to which a tax can be shifted depends on the type of tax and the competitiveness of capital, labor, and product markets.

 

The results of this analysis are shown in Table 3a and Table 3b and Table 4a and Table 4b.

 

Table 3a

Tax Incidence by Income Decile

Current Law vs. House Bill 589, As Introduced

Fiscal Year 2004

Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

 

 

 

 

Table 3b

Tax Incidence by Income Decile

Current Law vs. House Bill 589, As Introduced

Fiscal Year 2005

Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

 

 

 

 

 

 

Summary of Tax Incidence Findings

 

House Bill 589, As Introduced would increase the taxes of all households by $12,431.2 million in fiscal year 2004 and increase taxes of all households by $15,350.4 million in 2005. The difference fiscal year 2004 between the initial increase in revenue of  $19,950.9 million and increase of $12,431.2 million in tax incidence is primarily due to the exporting of some of the tax increase to non-Texas consumers and businesses, changes in federal tax liability, and the absorption of some of the tax changes by business profits, some of which are received by non-Texas shareholders and business owners.  Similar factors account for the difference in fiscal year 2005.

 

Table 4a

Effective Tax Rate by Income Decile

Current Law vs. House Bill 589, As Introduced

Fiscal Year 2004

Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

 

 

 

Table 4b

Effective Tax Rate by Income Decile

Current Law vs. House Bill 589, As Introduced

Fiscal Year 2005

Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

 

 

Summary of Effective Rate Findings

 

House Bill 589, As Introduced would increase the effective tax rate for all households by 28.94% in fiscal year 2004 and increase the effective rate for all households by 41% in 2005. The effective tax rate is the aggregate amount of tax in a given income class divided by the aggregate amount of personal income in that class.