Table 1
Summary of Elements: HB 2505, As Introduced

This analysis is for taxes effective in fiscal 2011.

Revenue Changes

• State sales tax rate increase from 6.25% to 6.75%
• Decrease tax rates applicable to taxable margin, decrease the maximum taxable margin to various lesser maximums, and raise the tax-exempt threshold for total revenue

Dollar Value of Revenue Changes in Fiscal 2011

• $1,708.6 million business tax reduction
• $1,514.8 million other state and local taxes increase
• $193.8 million net tax reduction

Initial Impact in Fiscal 2011

• A net decrease to business of $1,040.3 million
• A net increase to households of $846.6 million

Major Industry Initial Impact in Fiscal 2011

• The largest dollar decrease: $258.2 to the Manufacturing industry
• The largest percentage decrease: 6.7 percent to the Construction industry

Final Incidence of Changes Effective in Fiscal 2011

• Lowest income level (income range from $0 to $27,088):
  An increase of $16.2 million, or 0.30 percent.
• Middle income level (income range from $49,112 to $75,402):
  An increase of $22.4 million, or 0.21 percent.
• Highest income level (income range from $117,899 and above):
  A decrease of $47.7 million, or 0.17 percent.

Initial Tax Impact by Industry

HB 2505, As Introduced 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. HB 2505, As Introduced
Fiscal Year 2011
Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

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 Quintile
Current Law vs. HB 2505, As Introduced
Taxes Effective in Fiscal Year 2011
Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

Summary of Tax Incidence Findings

HB 2505, As Introduced would ultimately increase the taxes of all households by $22.7 million for tax law changes effective in 2011. The difference between the initial reduction in revenue of $193.8 million in fiscal 2011 and the ultimate increase of $22.7 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.

Table 4

Effective Tax Rate by Income Quintile
Current Law vs. HB 2505, As Introduced
Taxes Effective in Fiscal Year 2011
Comparisons Include Property Tax, Sales and Excise Taxes and Taxes on Business

Summary of Effective Rate Findings

HB 2505, As Introduced would ultimately increase the effective rate for all households by 0.03 percent for taxes effective in fiscal year 2011 . 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.