LEGISLATIVE BUDGET BOARD
Austin, Texas
 
TAX/FEE EQUITY NOTE
 
78TH LEGISLATIVE REGULAR SESSION
 
April 30, 2003

TO:
Honorable Ron Wilson, Chair, House Committee on Ways & Means
 
FROM:
John Keel, Director, Legislative Budget Board
 
IN RE:
HB1603 by Griggs (Relating to increases in the tax on cigarettes and other tobacco products and to the allocation of those increases to the foundation school fund.), As Introduced

Table 1

House Bill 1603, As Introduced:  Summary of Elements

 

Tax Changes

 

·               Increase cigarette tax from $0.41 to $1.41 per pack; increase tax on small cigars from $0.01 to $0.0344 per 10 cigars; increase tax on all three categories of large cigars from $7.50, $11.00 and $15.00 to $25.80, $37.84 and $51.60 per thousand, respectively; and increase tax on tobacco products from 35.213 to 121.0 percent (all effective September 1, 2003).

 

Revenue Increases

 

·               $806.8 million in fiscal year 2004

·               $964.4 million in fiscal year 2005

 

Initial Impact

 

·              0.0 percent to business, 100.0 percent to individuals in fiscal year 2004

·              0.0 percent to business, 100.0 percent to individuals in fiscal year 2005

 

Major Industry Initial Impact

 

·               None.

 

Net Revenue Impact After Dynamic Analysis

 

·               $793.5 million increase in fiscal year 2004

·               $946.0 million increase in fiscal year 2005

 

Final Tax Incidence

 

·               Fiscal 2004 impact to the middle income level (low $50,000s to mid $60,000s): $82.9 million increase, or 2.36 percent.

·               Fiscal 2005 impact to the middle income level (mid $50,000s to high $60,000s): $98.7 million decrease, or 2.67 percent.


 

Initial Tax Impact by Industry:

 

House Bill 1603, 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 1603, As Introduced

Fiscal Year 2004

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

 

Industry / Business

Current Law (millions)

Share of     Total

HB 1603

Liability (millions)

Share of     Total

Dollar Change (millions)

Share of  Dollar Change

Percent Change from Current Law

Agriculture

 495.3

1.7%

$ 495.3

1.7%

$   0.0

0.00%

0.00%

Mining

3,017.6

10.2%

3,017.6

10.2%

   0.0

0.00%

0.00%

Construction

 943.5

3.2%

 943.5

3.2%

   0.0

0.00%

0.00%

Manufacturing

6,558.5

22.2%

6,558.5

22.2%

   0.0

0.00%

0.00%

Transportation/Utilities

5,745.9

19.4%

5,745.9

19.4%

   0.0

0.00%

0.00%

Wholesale Trade

1,295.1

4.4%

1,295.1

4.4%

   0.0

0.00%

0.00%

Retail Trade

1,694.0

5.7%

1,694.0

5.7%

   0.0

0.00%

0.00%

Fin., Ins., Real Estate

5,622.8

19.0%

5,622.8

19.0%

   0.0

0.00%

0.00%

Residential Rental*

1,588.4

5.4%

1,588.4

5.4%

   0.0

0.00%

0.00%

Services

2,302.6

7.8%

2,302.6

7.8%

   0.0

0.00%

0.00%

Not Classified

 299.9

1.0%

 299.9

1.0%

   0.0

0.00%

0.00%

Subtotal Industry

$29,563.6

100.0%

$29,563.6

100.0%

$   0.0

0.00%

0.00%

 

 

 

 

 

 

 

 

 

Individuals/Consumers

 

 

 

 

 

 

 

Residential, Owner Occupied

$13,296.2

 

$13,296.2

 

   0.0

 

0.00%

Sales & Excise Taxes

$10,618.8

 

$11,425.6

 

806.8

 

7.60%

Other Taxes on Individuals

$ 519.2

 

$ 519.2

 

   0.0

 

0.00%

Total Taxes on Individuals

$24,434.2

 

$25,241.0

 

806.8

 

3.30%

 

 

 

 

 

 

 

 

Total – All Taxes

$53,997.8

 

$54,804.6

 

806.8

 

1.49%

 

 

* 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 1603, As Introduced

Fiscal Year 2005

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

 

Industry / Business

Current Law (millions)

Share of     Total

HB 1603

Liability (millions)

Share of     Total

Dollar Change (millions)

Share of  Dollar Change

Percent Change from Current Law

Agriculture

 512.9

1.7%

$ 512.9

1.7%

$   0.0

0.00%

0.00%

Mining

3,038.5

9.8%

3,038.5

9.8%

   0.0

0.00%

0.00%

Construction

 983.8

3.2%

 983.8

3.2%

   0.0

0.00%

0.00%

Manufacturing

6,884.1

22.2%

6,884.1

22.2%

   0.0

0.00%

0.00%

Transportation/Utilities

6,053.8

19.6%

6,053.8

19.6%

   0.0

0.00%

0.00%

Wholesale Trade

1,361.3

4.4%

1,361.3

4.4%

   0.0

0.00%

0.00%

Retail Trade

1,781.3

5.8%

1,781.3

5.8%

   0.0

0.00%

0.00%

Fin., Ins., Real Estate

5,873.6

19.0%

5,873.6

19.0%

   0.0

0.00%

0.00%

Residential Rental*

1,706.8

5.5%

1,706.8

5.5%

   0.0

0.00%

0.00%

Services

2,436.4

7.9%

2,436.4

7.9%

   0.0

0.00%

0.00%

Not Classified

 324.6

1.0%

 324.6

1.0%

   0.0

0.00%

0.00%

Subtotal Industry

$30,957.1

100.1%

$30,957.1

1.0%

$   0.0

0.00%

0.00%

 

 

 

 

 

 

 

 

 

Individuals/Consumers

 

 

 

 

 

 

 

Residential, Owner Occupied

$14,213.0

 

$14,213.0

 

   0.0

 

0.00%

Sales & Excise Taxes

$11,056.1

 

$12,020.5

 

964.4

 

8.72%

Other Taxes on Individuals

$ 463.0

 

$ 463.0

 

   0.0

 

0.00%

Total Taxes on Individuals

$25,732.1

 

$26,696.5

 

964.4

 

3.75%

 

 

 

 

 

 

 

 

Total – All Taxes

$56,689.2

 

$57,653.6

 

964.4

 

1.70%

 

*  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 1603, As Introduced

Fiscal Year 2004

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

 

 

Decile

Expanded Family Range (Dollars)

 

 

Current Law Tax (millions)

 

HB 1603

Tax (millions)

Change in Tax (Millions)

Percent Change in Tax

1

$   0

to

$14,412

$2,037.7

$2,093.4

$  55.7

2.73%

2

$14,412

to

$26,816

2,291.2

2,361.5

  70.3

3.07%

3

$26,816

to

$39,453

2,575.6

2,642.9

  67.3

2.61%

4

$39,453

to

$52,844

3,145.2

3,227.7

  82.5

2.62%

5

$52,844

to

$66,511

3,512.3

3,595.2

  82.9

2.36%

6

$66,511

to

$81,990

3,971.0

4,055.5

  84.5

2.13%

7

$81,990

to

$100,884

4,501.3

4,586.0

  84.7

1.88%

8

$100,884

to

$126,345

5,271.2

5,352.7

  81.5

1.55%

9

$126,345

to

$170,062

6,599.6

6,665.7

  66.1

1.00%

10

Over

 

$170,062

8,969.1

9,033.3

  64.2

0.72%

 

Total

 

 

$42,874.2

$43,613.9

739.7

1.73%

 


 

Table 3b

Tax Incidence by Income Decile

Current Law vs. House Bill 1603, As Introduced

Fiscal Year 2005

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

 

Decile

Expanded Family Range (Dollars)

Current Law Tax (millions)

HB 1603

Tax (millions)

Change in Tax (Millions)

Percent Change in Tax

1

$   0

to

$14,897

$2,138.6

$2,205.6

$  67.0

3.13%

2

$14,897

to

$27,719

2,414.5

2,498.3

  83.8

3.47%

3

$27,719

to

$40,781

2,718.8

2,799.7

  80.9

2.98%

4

$40,781

to

$54,624

3,317.6

3,419.1

101.5

3.06%

5

$54,624

to

$68,751

3,700.2

3,798.9

  98.7

2.67%

6

$68,751

to

$84,751

4,178.4

4,279.1

100.7

2.41%

7

$84,751

to

$104,282

4,748.7

4,848.7

100.0

2.11%

8

$104,282

to

$130,601

5,513.3

5,610.9

  97.6

1.77%

9

$130,601

to

$175,790

6,996.2

7,072.5

  76.3

1.09%

10

Over

 

$175,790

9,399.9

9,476.3

  76.4

0.81%

 

Total

 

 

$45,126.2

$46,009.1

882.9

1.96%

 
 
 
 
 
Summary of Tax Incidence Findings

 

House Bill 1603, As Introduced would increase the taxes of all households by $739.7 million in fiscal year 2004 and increase taxes of all households by $882.9 million in 2005. The difference fiscal year 2004 between the initial increase in revenue of  $806.8 million and increase of $739.7 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 1603, As Introduced

Fiscal Year 2004

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

 

 

Decile

Expanded Family Range (Dollars)

Current Law Effective Rate

HB1603

Effective Rate

Current Law Effective Rate Less HB1603 Effective Rate

Percent Change in Effective Rate

1

$   0

to

$14,412

33.48%

  34.40%

   0.92%

2.75%

2

$14,412

to

$26,816

  14.00%

  14.43%

   0.43%

3.07%

3

$26,816

to

$39,453

   9.72%

   9.98%

   0.26%

2.67%

4

$39,453

to

$52,844

   8.62%

   8.85%

   0.23%

2.67%

5

$52,844

to

$66,511

   7.41%

   7.59%

   0.18%

2.43%

6

$66,511

to

$81,990

   6.70%

   6.84%

   0.14%

2.09%

7

$81,990

to

$100,884

   6.29%

   6.41%

   0.12%

1.91%

8

$100,884

to

$126,345

   5.77%

   5.86%

   0.09%

1.56%

9

$126,345

to

$170,062

   5.64%

   5.69%

   0.05%

0.89%

10

Over

 

$170,062

   4.12%

   4.15%

   0.03%

0.73%

 

Total

 

 

   6.22%

   6.33%

   0.11%

1.77%

 

Table 4b

Effective Tax Rate by Income Decile

Current Law vs. House Bill 1603, As Introduced

Fiscal Year 2005

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

 

Decile

Expanded Family Range (Dollars)

Current Law Effective Rate

HB1603

Effective Rate

Current Law Effective Rate Less HB1603 Effective Rate

Percent Change in Effective Rate

1

$   0

to

$14,897

33.40%

  34.45%

   1.05%

3.14%

2

$14,897

to

$27,719

  14.02%

  14.51%

   0.49%

3.50%

3

$27,719

to

$40,781

   9.76%

  10.05%

   0.29%

2.97%

4

$40,781

to

$54,624

   8.65%

   8.91%

   0.26%

3.01%

5

$54,624

to

$68,751

   7.42%

   7.62%

   0.20%

2.70%

6

$68,751

to

$84,751

   6.70%

   6.86%

   0.16%

2.39%

7

$84,751

to

$104,282

   6.31%

   6.44%

   0.13%

2.06%

8

$104,282

to

$130,601

   5.74%

   5.84%

   0.10%

1.74%

9

$130,601

to

$175,790

   5.68%

   5.74%

   0.06%

1.06%

10

Over

 

$175,790

   4.11%

   4.14%

   0.03%

0.73%

 

Total

 

 

   6.22%

   6.34%

   0.12%

1.93%

 

Summary of Effective Rate Findings

 

House Bill 1603, As Introduced would increase the effective tax rate for all households by 1.77% in fiscal year 2004 and increase the effective rate for all households by 1.93% 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.


Source Agencies:
LBB Staff:
JK, WP