LEGISLATIVE BUDGET BOARD
Austin, Texas
 
TAX/FEE EQUITY NOTE
 
83RD LEGISLATIVE REGULAR SESSION
Revision 1
 
May 1, 2013

TO:
Honorable Harvey Hilderbran, Chair, House Committee on Ways & Means
 
FROM:
Ursula Parks, Director, Legislative Budget Board
 
IN RE:
HB500 by Hilderbran (relating to the computation of the franchise tax, including certain exclusions from the tax.), Committee Report 1st House, Substituted

Summary of Elements: HB 500, Committee Report 1st House, Substituted (CSHB 500)

 

This analysis is for taxes effective in fiscal year 2015.

Revenue Changes

         The bill would make permanent the franchise tax no tax due exception for businesses whose total revenue from its entire business is less than $1 million.

         The bill would raise the minimum deduction for businesses that do not subtract cost of goods sold or compensation when calculating their taxable margin from 30% to 35%

         The bill would classify the activities performed at auto body repair shops, heavy equipment rental businesses, or rental purchase businesses as retail trade, for purposes of determining these entities tax rate.

         The bill would modify the total revenue apportionment calculation for Internet hosting.

         The bill would provide a total revenue exclusion for entities performing land men services.

         The bill would provide a total revenue exclusion for entities engaged in transporting aggregates.

         The bill would provide a total revenue exclusion for commercial property landlords.

         The bill would provide a total revenue exclusion for entities engaged in transporting barite.

         The bill would provide a total revenue exclusion for physician practices.

         The bill would provide a total revenue exclusion for entities engage in transporting commodities by waterways.

         The bill would provide a total revenue exclusion for entities engaged in agricultural aircraft operations.

         The bill would provide a total revenue exclusion for motor carriers.

         The bill would modify the costs of goods sold calculation for entities engaged in the business of harvesting trees for wood.

Dollar Value of Revenue Changes in Fiscal Year 2015

         $198.9 million in franchise tax reduction

         $198.9 million in net tax reduction

Initial Impact in Fiscal 2015

         A net decrease to business of $198.9 million

         A net decrease to households of $0.0 million

Major Industry Impact in Fiscal 2015

         The largest dollar decrease: $87.8 million to the Other Services industry

         The largest percentage decrease: 1.4 percent to the Other Services industry

 

Initial Tax Impact by Industry

HB 500, Committee Report 1st House, Substituted 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 1 below:

Table 1

Comparison of Initial Tax Impact under

Current Law vs. HB 500, Committee Report 1st House, Substituted

Fiscal Year 2015

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

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 &

               770.1

1.6%

             768.09

1.6%

-2.0

1.0%

-0.26%

Mining

            8,898.6

18.3%

          8,892.64

18.4%

-6.0

3.0%

-0.07%

Utilities & Transportation

            5,904.9

12.1%

          5,897.34

12.2%

-7.6

3.8%

-0.13%

Construction

            2,266.3

4.7%

          2,248.13

4.6%

-18.2

9.1%

-0.80%

Manufacturing

            6,158.5

12.7%

          6,148.80

12.7%

-9.7

4.9%

-0.16%

Wholesale & Retail Trade

            4,466.8

9.2%

          4,441.59

9.2%

-25.2

12.7%

-0.56%

Information

            3,052.3

6.3%

          3,012.19

6.2%

-40.1

20.2%

-1.31%

Finance, Insurance & Real Estate

          10,817.9

22.2%

        10,815.48

22.3%

-2.4

1.2%

-0.02%

All Other Services

            6,291.0

12.9%

          6,203.22

12.8%

-87.8

44.1%

-1.40%

Total Taxes on Business:

          48,626.4

100.0%

        48,427.48

100.0%

-198.888

100.0%

-0.41%

Taxes Paid by Households:

 

 

 

 

 

 

Residential Owner-Occupied

23,340.97

 

        23,340.97

 

0

 

0

Personal Consumption

22,180.80

 

        22,180.80

 

0

 

0

Total Taxes on Households:

45,521.77

 

        45,521.77

 

0

 

0

 

 

 

                    -  

 

 

 

 

Total Taxes

94,148.14

 

        93,949.25

 

-198.888

 

-0.21%

 

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 degrees to which a tax can be shifted, and the amount of time that elapses before a tax can be shifted, depends on the type of tax, the elasticity of consumption of the good or service with respect to the tax rate, and the competitiveness of capital, labor, input materials, and product markets.

The results of this analysis for tax law changes effective with this proposal are shown in Table 2 and Table 3.

Summary of Tax Incidence Findings

HB 500, Committee Report 1st House, Substituted would ultimately reduce the taxes of all households by $143.0 million for tax law changes effective in 2015.  The difference between the initial reduction in revenue of $198.9 million in fiscal 2015 and the ultimate reduction of $143.0 million in household 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.

Final Incidence of Changes Effective in Fiscal 2015

         Lowest income level (income range from $0 to $31,771):

A decrease of $11.8 million, or 0.20 percent.

         Middle income level (income range of $57,478 to $87,377):

A decrease of $23.1 million, or 0.20 percent.

         Highest income level (income range of $136,297 and above):

A decrease of $57.9 million, or 0.19 percent.

Table 2

Tax Incidence by Income Quintile

Current Law vs. HB 500, Committee Report 1st House, Substituted

Taxes Effective in Fiscal Year 2015

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

 

Quintile

Quintile Income: Lower Bound

Quintile 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

31,771

          5,896.7

8.0%

     5,884.90

8.0%

-11.8

-0.20%

2

31,771

57,478

          8,430.0

11.5%

     8,413.01

11.5%

-17.0

-0.20%

3

57,478

87,377

        11,684.7

15.9%

   11,661.62

15.9%

-23.1

-0.20%

4

87,377

136,297

        16,736.1

22.8%

   16,702.93

22.8%

-33.2

-0.20%

5

136,297

and above

        30,708.7

41.8%

   30,650.81

41.8%

-57.9

-0.19%

 

 

Total:

        73,456.3

 

   73,313.28

 

-143.0

-0.19%

 

 

Summary of Effective Rate Findings

 

HB 500, Committee Report 1st House, Substituted would ultimately decrease the effective rate for all households by 0.19 percent for taxes effective in fiscal year 2015.  The effective rate is the aggregate amount of tax paid in a given income class divided by the aggregate amount of personal income in that income class.

 

Table 3

Effective Rate by Income Quintile

Current Law vs. HB 500, Committee Report 1st House, Substituted

Taxes Effective in Fiscal Year 2015

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

 

Quintile

Quintile Income: Lower Bound

Quintile Income: Upper Bound

Current Law Effective Rate

Proposed Law Effective Rate

Change in Effective Rate

Percent Change in Effective Rate

[$]

[$]

[%]

[%]

[%]

[%]

1

0

31,771

22.1%

22.0%

0.0%

-0.2%

2

31,771

57,478

12.0%

12.0%

0.0%

-0.2%

3

57,478

87,377

10.5%

10.5%

0.0%

-0.2%

4

87,377

136,297

9.4%

9.3%

0.0%

-0.2%

5

136,297

and above

6.0%

6.0%

0.0%

-0.2%

 

 

Total:

8.2%

8.2%

0.0%

-0.19%

 



Source Agencies:
LBB Staff:
UP