Finance and Fiscal Policy Chapter 13

Learning Objectives 13.1 Assess the fairness of Texas’s budgeting and taxing policies. 13.2Describe the sources of Texas’s state revenue Describe the procedure for developing and approving a state budget Evaluate the effectiveness of the state’s financing of public services. Copyright © 2016 Cengage Learning. All rights reserved. 2

Fiscal Policies  Taxing Policy  Prefer regressive taxes  Relies heavily on sales tax (among nation’s highest)  Unfair?  Land- and product-based tax system Copyright © 2016 Cengage Learning. All rights reserved. 3

Percent of Average Annual Family Income Paid in Local and State Taxes in Texas (2011) Copyright © 2016 Cengage Learning. All rights reserved. 4 Critical Thinking Question: What are the benefits and problems of a regressive tax system?

Fiscal Policies  Budget Policy  Balanced budget  Texas Constitution prohibits debt  General Revenue Fund  Spending Policy  Ranks 48 th - 50 th in state spending  Little support for social services Copyright © 2016 Cengage Learning. All rights reserved. 5 Learning Check

Revenue Sources  The Politics of Taxation  Most conflict over financing schools  Business franchise tax expanded 2006  But reductions reflect political strength of business owners Copyright © 2016 Cengage Learning. All rights reserved. 6

Revenue Sources  The Politics of Taxation  Sales Tax  Most important single source of revenue  General sales tax 6.25% statewide 8.25% combined state and local Some items exempt Many services untaxed  Selective sales tax Sin taxes, highway taxes, miscellaneous Copyright © 2016 Cengage Learning. All rights reserved. 7

Projected Sources of State Revenue, Fiscal Years Copyright © 2016 Cengage Learning. All rights reserved. 8 Amounts are in billions of dollars Critical Thinking Question: What other sources of revenue do you believe are available in the state of Texas?

Revenue Sources  The Politics of Taxation  Business Taxes - General  Sales tax  Franchise tax  Unemployment compensation payroll tax  Business Taxes - Select  Oil and gas production  Insurance company gross premiums  Public utilities gross receipts  Severance tax Copyright © 2016 Cengage Learning. All rights reserved. 9

Revenue Sources  The Politics of Taxation  Inheritance tax stopped in 2005  Tax burden is low  Tax collection  Comptroller  Department of Motor Vehicles  State Board of Insurance  Department of Public Safety Copyright © 2016 Cengage Learning. All rights reserved. 10

Revenue Sources  Revenue from Gambling  Racing  Lottery  Bingo Copyright © 2016 Cengage Learning. All rights reserved. 11

Revenue Sources  Other Nontax Revenues  Federal Grants-in-Aid  Health and human services  Business and economic development  Education  Land Revenues  Includes oil and natural gas leases Copyright © 2016 Cengage Learning. All rights reserved. 12

Federal Grants to Texas by Biennium (FY2002–2015) (in billions) Copyright © 2016 Cengage Learning. All rights reserved. 13 Critical Thinking Question: Is Texas too reliant on federal grants to balance its budget?

Revenue Sources  Other Nontax Revenues  The Tobacco Suit Windfall  Lawsuit pays Texas $18 billion in damages from American tobacco industry  Miscellaneous sources  Fees, permits, income from investments Copyright © 2016 Cengage Learning. All rights reserved. 14

Revenue Sources  The Public Debt  Bonded indebtedness  General obligation bond  Revenue bond  Bond review  Economic stabilization fund  Rainy Day Fund Copyright © 2016 Cengage Learning. All rights reserved. 15 Learning Check

Budgeting and Fiscal Management  Budgeting Procedure  Budget: a plan of financial operation  Covers two fiscal years  Biennial legislature Copyright © 2016 Cengage Learning. All rights reserved. 16

Budgeting and Fiscal Management  Budgeting Procedure  Legislative Budget Board  Ten members from House and Senate  Governor’s Office of Budget, Planning and Policy  Prepares and presents budget to legislature Copyright © 2016 Cengage Learning. All rights reserved. 17

Budgeting and Fiscal Management  Budget Preparation  Begins with governor’s mission statement  Dual budgeting system  Legislative chambers review  Committees “markup” appropriations bill and submit for vote Copyright © 2016 Cengage Learning. All rights reserved. 18

Texas Biennial Budget Cycle Copyright © 2016 Cengage Learning. All rights reserved. 19 Critical Thinking Question: Is Texas’s budgeting process efficient?

Budgeting and Fiscal Management  Budget Expenditures  Functional  Services purchased by government  Objective  How money was spent Copyright © 2016 Cengage Learning. All rights reserved. 20

All Texas State Funds Appropriations by Function for FY (in millions) Copyright © 2016 Cengage Learning. All rights reserved. 21 Numbers are in millions Critical Thinking Question: On what services do you believe the state should spend more or less money?

Budgeting and Fiscal Management  Budget Execution  Purchasing  Texas Procurement and Support Services  Facilities  Accounting  Comptroller uses double-entry system  Auditing Copyright © 2016 Cengage Learning. All rights reserved. 22

Future Demands  Public Education  Sources of public school funding  Foundation School Fund  Available School Fund  Texas Lottery  Property Tax Relief Fund  General Revenue Fund Copyright © 2016 Cengage Learning. All rights reserved. 23 Critical Thinking Question: What amount of financial support should the state provide for funding public schools?

Future Demands  Public Education  Funding equalization  “Robin Hood” plan  Are all students entitled? Copyright © 2016 Cengage Learning. All rights reserved. 24

Future Demands  Public Higher Education  Closing the Gaps initiative  State aid insufficient  Income through formula funding  Outcomes-based funding Copyright © 2016 Cengage Learning. All rights reserved. 25

Future Demands  Public Higher Education  Community college funding  Minimum of $500,000 each  University funding  General Revenue Fund  Student fees  University of Texas and Texas A&M share Permanent University Fund Copyright © 2016 Cengage Learning. All rights reserved. 26

Future Demands  Public Higher Education  Tuition deregulation  Forced institutions to raise tuition  Texas Tomorrow Funds  Texas Guaranteed Tuition Plan  Tomorrow’s College Investment Plan  State Grant and Loan Programs  TEXAS Grants Program Copyright © 2016 Cengage Learning. All rights reserved. 27

Average Tuition and Fees Academic Year Copyright © 2016 Cengage Learning. All rights reserved. 28 Critical Thinking Question: Who should pay the costs of a college education: students or taxpayers? Source: The College Board, Tuition and Fees by Sector and State over Time

Future Demands  Public Assistance  Children’s Health Insurance Program  ChildLINK  Medicaid Copyright © 2016 Cengage Learning. All rights reserved. 29

Future Demands  Infrastructure Needs  Transportation  Toll roads increasing  Oil and gas taxes now diverted to State Highway Fund  Water  State Water Plan  “Conservation is not enough” Copyright © 2016 Cengage Learning. All rights reserved. 30

Texas Farmers Are Suffering Through The Second Worst Drought in the States' History, Forcing Ranchers to Sell Off Cattle Copyright © 2016 Cengage Learning. All rights reserved. 31 Click picture to view video

Video Discussion Questions 1.Why does prolonged drought affect the overall Texas economy? 2.What other Texas industries have a statewide economic impact? 3.Should the legislature oversee infrastructure issues? Why or why not? Copyright © 2016 Cengage Learning. All rights reserved. 32