| TO: | Honorable Tom Craddick, Speaker of the House, House of Representatives |
| FROM: | John S. O'Brien, Deputy Director, Legislative Budget Board |
| IN RE: | HB3 by Keffer, Jim (Relating to financing public schools in this state and reducing school property taxes. ), As Passed 2nd House |
House Bill 3, As Passed 2nd House Summary of Elements
Revenue Changes
· Increase state sales tax rate to 6.75 percent. Provide partial sales tax rebate to Lone Star Card holders.
· Exempt school supplies from the sales tax for certain periods.
· Exempt certain clothing from the sales tax for an additional period.
· Increase motor vehicle sales, motor vehicle rental over 30 days and boat and boat motor sales tax rates to 6.75 percent. Require presumptive value of certain motor vehicle transactions.
· Increase cigarette tax rate to $1.16 per pack.
· Increase tax rate on certain other tobacco products.
· Increase tax rate on certain alcoholic beverages.
· Repeal permanent resident exemption from the hotel tax.
· Expand current franchise tax to include certain non-corporations. Reduce earned surplus rate tax rate to 2.5 percent. Add compensation, with the lesser of a 50 percent or $30,000 per employee deduction, to the earned surplus base. Provide alternative tax on certain payroll at 1.75 percent or $1,500 per employee. Provide that franchise tax liability would be 0.25 percent of gross receipts, plus the amount that the tax on earned surplus or payroll would exceed the tax on gross receipts.
· Repeal revenue limit of the Telecommunications Infrastructure Fund.
· Reduce school district maintenance and operations taxes to $1.15 per $100 valuation.
Dollar Value of Revenue Changes in Fiscal 2007
· $3,870.9 million property tax reduction, $4,817.8 million increase in other state and local taxes, $946.9 million net tax.
Initial Impact in Fiscal 2007
· Net increase to business, net reduction to individuals.
Major Industry Initial Impact in Fiscal 2007
· Largest dollar increase: $896.8 million to the service industry; largest percentage increase in overall tax liability: 19.9 percent, to the construction industry.
Final Incidence of Changes Effective in Fiscal 2007
· Lowest income level ($0 to low $10,000s income range):
$17.1 million increase, or 0.9 percent.
· Middle income level (low $40,000s to low $50,000s income range):
$177.2 million increase, or 4.4 percent.
· Highest income level (low $140,000s and above):
$80.3 million decrease, or 0.6 percent.
Initial Tax Impact by Industry:
House Bill 3, 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 3, As Passed 2nd House
Fiscal Year 2007
|
Current Law (millions) |
Share of Total |
HB 3 Liability (millions) |
Share of Total |
Dollar Change (millions) |
Percent Change from Current Law | ||
|
Agriculture |
690.2 |
2.05% |
$ 650.5 |
1.89% |
($ 39.7) |
(5.75)% | |
|
Mining |
3,782.8 |
11.23% |
3,806.8 |
11.06% |
24.0 |
1.89% |
0.63% |
|
Utilities and Trans. |
4,177.6 |
12.40% |
4,105.4 |
11.92% |
( 72.2) |
(5.69)% |
(1.73)% |
|
Construction |
1,128.7 |
3.35% |
1,353.7 |
3.93% |
225.0 |
17.73% |
19.93% |
|
Manufacturing |
4,636.7 |
13.77% |
4,805.1 |
13.96% |
168.4 |
13.27% |
3.63% |
|
Trade |
3,028.0 |
8.99% |
3,597.1 |
10.45% |
569.1 |
44.84% |
18.79% |
|
Information |
2,866.5 |
8.51% |
3,048.4 |
8.85% |
181.9 |
14.33% |
6.35% |
|
Fin., Ins., Real Estate |
7,817.7 |
23.21% |
7,133.7 |
20.72% |
( 684.0) |
(53.89)% |
(8.75)% |
|
Services |
5,552.4 |
16.49% |
6,449.2 |
18.73% |
896.8 |
70.65% |
16.15% |
|
Subtotal Industry |
$33,680.6 |
100.0% |
$34,949.9 |
101.5% |
$1,269.3 |
100.0% |
3.77% |
|
|
|
|
|
|
|
|
|
|
Individuals/Consumers |
|
|
|
|
|
|
|
|
Residential, Single Family |
$16,186.7 |
|
$14,357.4 |
|
($1,829.3) |
|
(11.30)% |
|
Sales & Excise Taxes |
$17,708.0 |
|
$19,214.9 |
|
$1,506.9 |
|
8.51% |
|
Total Taxes on Individuals |
$33,894.7 |
|
$33,572.3 |
|
($ 322.4) |
|
(0.95)% |
|
|
|
|
|
|
|
|
|
|
Total – All Taxes |
$67,575.3 |
|
$68,522.2 |
|
|
1.40% |
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 3, As Passed 2nd House
Taxes Effective in Fiscal Year 2007
Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business
|
Expanded Family Range (Dollars) |
Current Law Tax (millions) |
HB 3 Tax (millions) |
Change in Tax (Millions) |
Percent Change in Tax | |||
|
1 |
$0 |
to |
$13,415 |
$2,009.5 |
$2,026.6 |
$ 17.1 |
0.85% |
|
2 |
$13,415 |
to |
$22,833 |
2,315.9 |
2,410.2 |
94.3 |
4.07% |
|
3 |
$22,833 |
to |
$31,735 |
2,999.9 |
3,140.8 |
140.9 |
4.70% |
|
4 |
$31,735 |
to |
$41,463 |
3,303.0 |
3,449.3 |
146.3 |
4.43% |
|
5 |
$41,463 |
to |
$51,750 |
4,076.2 |
4,253.4 |
177.2 |
4.35% |
|
6 |
$51,750 |
to |
$64,325 |
4,734.5 |
4,910.9 |
176.4 |
3.73% |
|
7 |
$64,325 |
to |
$79,271 |
5,679.8 |
5,859.6 |
179.8 |
3.17% |
|
8 |
$79,271 |
to |
$100,593 |
6,860.2 |
7,028.9 |
168.7 |
2.46% |
|
9 |
$100,593 |
to |
$140,853 |
8,547.9 |
8,632.8 |
84.9 |
0.99% |
|
10 |
Over |
|
$140,853 |
13,910.3 |
13,830.0 |
( 80.3) |
(0.58)% |
|
|
Total |
|
|
$54,437.2 |
$55,542.5 |
2.03% | |
House Bill 3, As Passed 2nd House would ultimately increase the tax burden of all households by $1,105.3 million for tax law changes effective in 2007. The difference between the initial increase in revenue of $946.9 million in fiscal 2007 and the ultimate increase of $1,105.3 million in tax incidence is primarily due to the exporting of some of the tax changes 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.
Effective Tax Rate by Income Decile
Current Law vs. House Bill 3, As Passed 2nd House
Taxes Effective in Fiscal Year 2007
Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business
|
Expanded Family Range (Dollars) |
Current Law Effective Rate |
HB3 Effective Rate |
Current Law Effective Rate Less HB 3 Effective Rate |
Percent Change in Effective Rate | |||
|
1 |
$0 |
to |
$13,415 |
32.52% |
32.79% |
0.27% |
0.83% |
|
2 |
$13,415 |
to |
$22,833 |
15.26% |
15.88% |
0.62% |
4.06% |
|
3 |
$22,833 |
to |
$31,735 |
12.90% |
13.51% |
0.61% |
4.73% |
|
4 |
$31,735 |
to |
$41,463 |
11.02% |
11.51% |
0.49% |
4.45% |
|
5 |
$41,463 |
to |
$51,750 |
9.97% |
10.41% |
0.44% |
4.41% |
|
6 |
$51,750 |
to |
$64,325 |
9.61% |
9.97% |
0.36% |
3.75% |
|
7 |
$64,325 |
to |
$79,271 |
9.32% |
9.62% |
0.30% |
3.22% |
|
8 |
$79,271 |
to |
$100,593 |
9.03% |
9.25% |
0.22% |
2.44% |
|
9 |
$100,593 |
to |
$140,853 |
8.52% |
8.60% |
0.08% |
0.94% |
|
10 |
Over |
|
$140,853 |
6.62% |
6.59% |
( 0.03)% |
(0.45)% |
|
|
Total |
|
|
8.90% |
9.08% |
0.18% |
|
| Source Agencies: |
| LBB Staff: | JOB, SD, WP
|