LEGISLATIVE BUDGET BOARD
Austin, Texas
 
TAX/FEE EQUITY NOTE
 
79TH LEGISLATURE 3rd CALLED SESSION - 2006
Revision 1
 
May 12, 2006

TO:
Honorable Tom Craddick, Speaker of the House, House of Representatives
 
FROM:
John S. O'Brien, Deputy Director, Legislative Budget Board
 
IN RE:
HB5 by Hamric (Relating to increases in the taxes on cigarettes and other tobacco products.), As Passed 2nd House

Table 1
House Bill 5, As Passed 2nd House: Summary of Elements

This analysis is for taxes effective in fiscal 2008.

Revenue Changes

Dollar Value of Revenue Changes in Fiscal 2008

Initial Impact in Fiscal 2008

Major Industry Initial Impact in Fiscal 2008

Final Incidence of Changes Effective in Fiscal 2008

Initial Tax Impact by Industry:

House Bill 5, As Passed 2nd House, was analyzed using the LBB’s multi-tax model to determine the initial impact of the proposed changes relative to current state and local tax law. The results of the analysis are shown in Table 2 below.

Table 2

Comparison of Initial Tax Impact under
Current Law vs. House Bill 5, As Passed 2nd House
Fiscal Year 2008
Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

 

Gross State Product: Shares

Current Law Liability

Percent of Total

Proposed Law Liability

Percent of Total

Change in Liability

Percent of Total

Percent Change in Liability

[%]

[$ Million]

[%]

[$ Million]

[%]

[$ Million]

[%]

[%]

___Taxes Paid by Business:

Agriculture, Forestry & Fishing

0.8

774.6

2.1

774.6

2.1

0.0

0.0

0.00

Mining

6.7

4,821.1

12.8

4,821.1

12.8

0.0

0.0

0.00

Utilities & Transportation

7.3

4,613.8

12.2

4,613.8

12.2

0.0

0.0

0.00

Construction

5.1

1,188.4

3.1

1,188.4

3.1

0.0

0.0

0.00

Manufacturing

13.0

5,212.4

13.8

5,214.1

13.8

1.7

100.0

0.03

Wholesale & Retail Trade

15.8

3,279.8

8.7

3,279.8

8.7

0.0

0.0

0.00

Information

5.1

3,103.9

8.2

3,103.9

8.2

0.0

0.0

0.00

Finance, Insurance & Real Estate

19.7

8,695.7

23.0

8,695.7

23.0

0.0

0.0

0.00

All Other Services

26.5

6,069.2

16.1

6,069.2

16.1

0.0

0.0

0.00

Total Taxes on Business:

100.0

37,758.9

100.0

37,760.6

100.0

1.7

100.0

0.00

___Taxes Paid by Households:

Residential Owner-Occupied

 

18,814.1

 

18,814.1

 

0.0

 

0.00

Personal Consumption

 

18,872.3

 

19,561.5

 

689.2

 

3.65

Total Taxes on Households:

 

37,686.4

 

38,375.6

 

689.2

 

1.83

 

___Total Taxes

 

75,445.3

 

76,136.2

 

690.9

 

0.92

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. Over time, 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, and the amount of time that elapses before a tax can be shifted, depend on the type of tax and the competitiveness of capital, labor, input material and product markets.

The results of this analysis for tax law changes effective with this proposal are shown in Table 3 and Table 4.

Table 3

Tax Incidence by Income Decile
Current Law vs. House Bill 5, As Passed 2nd House
Taxes Effective in Fiscal Year 2008
Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

Decile

Decile Income: Lower Bound

Decile Income: Upper Bound

Current Law Tax

Percent of Total

Proposed Law Tax

Percent of Total

Change in Tax

Percent Change in Tax

[$]

[$]

[$ Million]

[%]

[$ Million]

[%]

[$ Million]

[%]

1

0

14,042

2,153.2

3.6

2,199.7

3.7

46.5

2.16

2

14,042

23,872

2,485.7

4.2

2,535.2

4.2

49.5

1.99

3

23,872

33,190

3,217.2

5.4

3,278.4

5.5

61.3

1.90

4

33,190

43,403

3,552.4

6.0

3,624.3

6.1

72.0

2.03

5

43,403

53,968

4,375.6

7.4

4,458.8

7.5

83.2

1.90

6

53,968

67,019

5,112.2

8.6

5,191.4

8.7

79.2

1.55

7

67,019

82,976

6,151.9

10.4

6,235.4

10.4

83.5

1.36

8

82,976

104,865

7,470.7

12.6

7,561.4

12.6

90.7

1.21

9

104,865

146,804

9,292.5

15.7

9,356.8

15.6

64.3

0.69

10

146,804

and above

15,336.0

25.9

15,387.7

25.7

51.7

0.34

 

 

Total:

59,147.3

100.0

59,829.1

100.0

681.8

1.15

Summary of Tax Incidence Findings

House Bill 5, As Passed 2nd House, would ultimately increase the taxes of all households by $ 681.8 million for tax law changes effective in 2008 . The difference between the initial increase in revenue of $ 690.9 million in fiscal 2008 and the ultimate increase of $ 681.8 million in tax incidence is primarily due to the exporting of some of the tax changes to non-Texas consumers.

Table 4

Effective Tax Rate by Income Decile
Current Law vs. House Bill 5, As Passed 2nd House
Taxes Effective in Fiscal Year 2008
Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

Decile

Decile Income: Lower Bound

Decile Income: Upper Bound

Current Law Effective Rate

Proposed Law Effective Rate

Change in Effective Rate

Percent Change in Effective Rate

[$]

[$]

[%]

[%]

[%]

[%]

1

0

14,042

32.76

33.47

0.71

2.16

2

14,042

23,872

15.40

15.71

0.31

1.99

3

23,872

33,190

13.01

13.26

0.25

1.90

4

33,190

43,403

11.14

11.37

0.23

2.03

5

43,403

53,968

10.07

10.26

0.19

1.90

6

53,968

67,019

9.76

9.91

0.15

1.55

7

67,019

82,976

9.49

9.62

0.13

1.36

8

82,976

104,865

9.24

9.35

0.11

1.21

9

104,865

146,804

8.71

8.77

0.06

0.69

10

146,804

and above

6.87

6.89

0.02

0.34

 

 

Total:

9.09

9.19

0.10

1.15

 

Summary of Effective Rate Findings

House Bill 5, As Passed 2nd House, would ultimately increase the effective rate for all households by 1.15 percent for taxes effective in fiscal year 2008 . 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:
JOB, SD, EB