Taxes and Revenue in Texas GOVT 2306

This section outlines the various sources of revenue in the state This section outlines the various sources of revenue in the state. By running through this, you should get an idea of what types of taxes are imposed in the state, and what other way the state of Texas obtains revenue.

The material here is drawn from various sources.

One is Chapter Two of the Fiscal Size Up: Revenue Sources and Economic Outlook. You can access the document by clicking here – it takes you to the Legislative Budget Board – then hit “Budget” on the drop down menu, then “Fiscal Size Up.”

Another is this document created by the House Research Organization: Sources of State Revenue in Texas.

This page from the Comptroller’s Office – Texas Taxes – should also be helpful. Among other things – the Comptroller is the official tax collector for the state.

Still another is Article 8 of the Texas Constitution It covers Taxation and Revenue

We will run through the subject of Article 8 and then the previous documents.

Section One: EQUALITY AND UNIFORMITY; TAX IN PROPORTION TO VALUE; INCOME TAX; EXEMPTION OF CERTAIN TANGIBLE PERSONAL PROPERTY FROM AD VALOREM TAXATION.

This section allows for the collection of sales taxes – ad valorem taxation - by the state and local governments. Taxess have to be uniform throughout the state. It details what entities are exempt from sales taxes – there’s lots of language concerning exemptions. This is a common subject of amendments.

Section One contains over a dozen subsections detailing exemptions to sales and property taxes that have been authorized by voters in past elections. A handful of more exemptions are proposed in the amendments offered in the election of November 2013.

Of special note is the homestead exemption which is the subject of Section 1-b. The state is protective of primary residences.

Note also that Section 1-e prevents the state from levying property taxes – they are reserved for local governments. Sec. 1-e. ABOLITION OF AD VALOREM PROPERTY TAXES. No State ad valorem taxes shall be levied upon any property within this State.

Section Two: OCCUPATION TAXES; EQUALITY AND UNIFORMITY; EXEMPTIONS FROM TAXATION

Section Three: GENERAL LAWS; PUBLIC PURPOSES Section Three: GENERAL LAWS; PUBLIC PURPOSES. Taxes shall be levied and collected by general laws and for public purposes only.

Section Four: SURRENDER OR SUSPENSION OF TAXING POWER Section Four: SURRENDER OR SUSPENSION OF TAXING POWER. The power to tax corporations and corporate property shall not be surrendered or suspended by act of the Legislature, by any contract or grant to which the State shall be a party.

Section Five was repealed in 1999

Section Six: WITHDRAWAL OF MONEY FROM TREASURY; DURATION OF APPROPRIATION. No money shall be drawn from the Treasury but in pursuance of specific appropriations made by law; nor shall any appropriation of money be made for a longer term than two years.

Section 7: BORROWING, WITHHOLDING, OR DIVERTING SPECIAL FUNDS Section 7: BORROWING, WITHHOLDING, OR DIVERTING SPECIAL FUNDS. The Legislature shall not have power to borrow, or in any manner divert from its purpose, any special fund that may, or ought to, come into the Treasury; and shall make it penal for any person or persons to borrow, withhold or in any manner to divert from its purpose any special fund, or any part thereof.

Sec. 7-a. REVENUES FROM MOTOR VEHICLE REGISTRATION FEES AND TAXES ON MOTOR FUELS AND LUBRICANTS; PURPOSES FOR WHICH USED. Sec. 7-b. REVENUES FROM FEDERAL REIMBURSEMENT; PURPOSES FOR WHICH USED.

Section 8: RAILROAD COMPANIES; ASSESSMENT AND COLLECTION OF TAXES Section 8: RAILROAD COMPANIES; ASSESSMENT AND COLLECTION OF TAXES. All property of railroad companies shall be assessed, and the taxes collected in the several counties in which said property is situated, including so much of the roadbed and fixtures as shall be in each county.

Section 9: MAXIMUM STATE TAX; COUNTY, CITY, AND TOWN LEVIES; COUNTY FUNDS; LOCAL ROAD LAWS. (a) No county, city or town shall levy a tax rate in excess of Eighty Cents ($ .80) on the One Hundred Dollars ($100) valuation in any one (1) year for general fund, permanent improvement fund, road and bridge fund and jury fund purposes.

This section caps the tax rates local governments can charge.

Section 10: RELEASE FROM PAYMENT OF TAXES Section 10: RELEASE FROM PAYMENT OF TAXES. The Legislature shall have no power to release the inhabitants of, or property in, any county, city or town from the payment of taxes levied for State or county purposes, unless in case of great public calamity in any such county, city or town, when such release may be made by a vote of two-thirds of each House of the Legislature.

Section 11: PLACE OF ASSESSMENT; VALUE OF PROPERTY NOT RENDERED BY OWNER. All property, whether owned by persons or corporations shall be assessed for taxation, and the taxes paid in the county where situated, but the Legislature may, by a two-thirds vote, authorize the payment of taxes of non-residents of counties to be made at the office of the Comptroller of Public Accounts. And all lands and other property not rendered for taxation by the owner thereof shall be assessed at its fair value by the proper officer.

Sec. 12. (Repealed Aug. 5, 1969.)

Section 13: SALES OF LANDS AND OTHER PROPERTY FOR TAXES; REDEMPTION Section 13: SALES OF LANDS AND OTHER PROPERTY FOR TAXES; REDEMPTION. (a) Provision shall be made by the Legislature for the sale of a sufficient portion of all lands and other property for the taxes due thereon that have not been paid.

You can lose your land if you do not pay taxes on it.

Section 14: ASSESSOR AND COLLECTOR OF TAXES Section 14: ASSESSOR AND COLLECTOR OF TAXES. The qualified voters of each county shall elect an assessor-collector of taxes for the county, except as otherwise provided by this section.

The tax assessor is a locally elected political office.

Section 15: LIEN OF ASSESSMENT; SEIZURE AND SALE OF PROPERTY Section 15: LIEN OF ASSESSMENT; SEIZURE AND SALE OF PROPERTY. The annual assessment made upon landed property shall be a special lien thereon; and all property, both real and personal, belonging to any delinquent taxpayer shall be liable to seizure and sale for the payment of all the taxes and penalties due by such delinquent; and such property may be sold for the payment of the taxes and penalties due by such delinquent, under such regulations as the Legislature may provide.

Sec. 16. (Repealed Nov. 6, 2001.)

Section 17: SPECIFICATION OF SUBJECTS NOT LIMITATION OF LEGISLATURE'S POWER. The specification of the objects and subjects of taxation shall not deprive the Legislature of the power to require other subjects or objects to be taxed in such manner as may be consistent with the principles of taxation fixed in this Constitution.

Section 18: EQUALIZATION OF VALUATIONS; SINGLE APPRAISAL Section 18: EQUALIZATION OF VALUATIONS; SINGLE APPRAISAL. The Legislature shall provide for equalizing, as near as may be, the valuation of all property subject to or rendered for taxation, and may also provide for the classification of all lands with reference to their value in the several counties.

Section 19: FARM PRODUCTS, LIVESTOCK, POULTRY, AND FAMILY SUPPLIES; EXEMPTION. Farm products, livestock, and poultry in the hands of the producer, and family supplies for home and farm use, are exempt from all taxation until otherwise directed by a two-thirds vote of all the members elect to both houses of the Legislature.

Section 20: FAIR CASH MARKET VALUE NOT TO BE EXCEEDED; DISCOUNTS FOR ADVANCE PAYMENT.

No property of any kind in this State shall ever be assessed for ad valorem taxes at a greater value than its fair cash market value nor shall any Board of Equalization of any governmental or political subdivision or taxing district within this State fix the value of any property for tax purposes at more than its fair cash market value. . .

Section 21: INCREASE IN TOTAL PROPERTY TAXES; NOTICE AND HEARING; CALCULATION.

Subject to any exceptions prescribed by general law, the total amount of property taxes imposed by a political subdivision in any year may not exceed the total amount of property taxes imposed by that subdivision in the preceding year unless the governing body of the subdivision gives notice of its intent to consider an increase in taxes and holds a public hearing on the proposed increase before it increases those total taxes.

Section 22: RESTRICTION ON APPROPRIATIONS Section 22: RESTRICTION ON APPROPRIATIONS. In no biennium shall the rate of growth of appropriations from state tax revenues not dedicated by this constitution exceed the estimated rate of growth of the state's economy. The legislature shall provide by general law procedures to implement this subsection.

This places a cap on the rate of growth of state government.

Section 23: APPRAISAL OF PROPERTY; ENFORCEMENT OF STANDARDS Section 23: APPRAISAL OF PROPERTY; ENFORCEMENT OF STANDARDS. There shall be no statewide appraisal of real property for ad valorem tax purposes; however, this shall not preclude formula distribution of tax revenues to political subdivisions of the state.

Section 24: PERSONAL INCOME TAX; DEDICATION OF PROCEEDS Section 24: PERSONAL INCOME TAX; DEDICATION OF PROCEEDS. (a) A general law enacted by the legislature that imposes a tax on the net incomes of natural persons, including a person's share of partnership and unincorporated association income, must provide that the portion of the law imposing the tax not take effect until approved by a majority of the registered voters voting in a statewide referendum held on the question of imposing the tax. The referendum must specify the rate of the tax that will apply to taxable income as defined by law.

This section states that an income tax cannot be imposed on the state unless it is approved by the voters in a statewide referendum. It does not prohibit a state income tax, but creates a high bar for it to be imposed.

Texas is one of a small number of states that do not collect state income taxes.

States with no state income tax.

That’s enough for the Article 8 of the Texas Constitution That’s enough for the Article 8 of the Texas Constitution. Now let’s run through detail from other sources for info on state taxes.

These two graphics should help get a preliminary idea of where funds are collected in the state. They are from the Fiscal Size Up 2012-13.

Major Point: 38. 9% of revenues in Texas come from federal funds. 61 Major Point: 38.9% of revenues in Texas come from federal funds. 61.1% come from taxes and other sources imposed in the state.

Here’s a little background on Federal Funds.

Federal Funds are distributed to the state largely through grant in aid programs unique to each spending item. They are used to entice states – or compel them – to provide services they might not otherwise. Often these are programs that provide benefits to the poor.

States might not otherwise provide those policies States might not otherwise provide those policies. The next slide shows where federal funds are spent in the state.

As you can see, most federal funds are used to fund health and human services in the state. The next largest item is education.

The Supreme Court has ruled that control over these funds can be used by the national government to influence state policy. Controversies exist depending on the degree of discretion given to states in how they can implement a given policy. Are there conditions attached to these items?

Here are two types of grants: Categorical Grants Block Grants

There is an important difference between the two There is an important difference between the two. Categorical Grants can only be used for narrowly defined purposes. Block Grants are given with general provisions provided regarding how they should be spent.

Texas tends to prefer block grants to categorical grants Texas tends to prefer block grants to categorical grants. It makes sense since it gives the states more control than they would otherwise have.

Now for a closer look at the way revenue is collected in Texas.

Not all revenue is collected in taxes Not all revenue is collected in taxes. Some is collected in fees, fines, income and other sources. Here’s a run through:

Taxes Sales Tax Oil and Gas Production Taxes Motor Fuels Tax Motor Vehicle Sales and Rental Tax Franchise Tax Cigarette and Tobacco Taxes Alcoholic Beverage Taxes Insurance Occupation Taxes Utility Tax Inheritance Tax Hotel Occupancy Tax

Plus “other taxes” “Other taxes” are levied on a variety of items such as cement, sulphur, attorney services, coin-operated machines, and bingo rental receipts. CPA estimates these taxes will generate $375.1 million in the 2012–13 biennium, an increase of 9.0 percent from 2010–11 biennial collections of $344.2 million.

Here is a list of non-tax revenues Federal Receipts Fees, Fines, Licenses, and Penalties Interest and Investment Income Lottery Revenue Land Income Tobacco Settlement Revenue

Plus “other revenue” The remaining $9. 7 billion, or 5 Plus “other revenue” The remaining $9.7 billion, or 5.3 percent, of state revenue comes from a variety of sources: sales of goods and services, child support collections, revenue from unclaimed property, settlement of claims, and various federal programs. CPA estimates that collections of other revenue in the 2012–13 biennium will be 0.8 percent less than the 2010–11 biennial collections.

Here’s a quick run through the types of taxes that are collected in the state. The number in parenthesis is the percentage of state revenues collected by that tax.

Sales Taxes (24.8%)

What is a sales tax? “A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow (or require) the seller to collect funds for the tax from the consumer at the point of purchase.”

A sales tax is a type of excise tax, which collects revenue by adding a cost to various items that are sold on the market. They are imposed by the producer or retailer, and indirectly paid by the consumer. Some items are exempt from taxes, notable items that are considered to be essential, like non-processed food.

“The sales and use tax continues to comprise most of the state’s tax revenue. The current state tax rate is 6.25 percent, the same rate in place since 1990. Subject to certain exemptions, the state sales and use tax is imposed on retail sales, leases, and rentals of goods purchased within or brought into the state, as well as some taxable services.”

Click here for the page in the Comptroller’s website on sales and use taxes.

Texas allows other – lower – levels of government to collect sales taxes as well, but places a limit on how much can be collected in total: Texas cities, counties, transit authorities and special purpose districts have the option of imposing an additional local sales tax for a combined total of state and local taxes of 8 1/4% (.0825)

Sales taxes are controversial because they are argued to be regressive Sales taxes are controversial because they are argued to be regressive. The poor pay a higher percentage of their income in sales taxes than the wealthy. I can’t really vouch for the numbers on the following chart, but it shows the percentage of income paid in sales taxes by different income categories.

From The Hill: “Practically every state charges a higher share of taxes from lower- and middle-class families than the highest earners, a new study from a liberal-leaning group found. The Institute on Taxation and Economic Policy found that the bottom 20 percent of earners paid an effective tax rate of 11.1 percent to state and local governments, while the top-earning quintile paid about half as much, 5.6 percent. The middle 20 percent pays a rate of 9.4 percent.”

Since many states use sales taxes, state tax systems are commonly argued to be more regressive than those on the national level. The national government uses the income tax, which tends to be progressive. The higher the income, the higher the tax. We cover this in GOVT 2305, but click here for a reminder of how the national income tax is collected.

Franchise Tax (4.5%)

What is a franchise tax? A tax levied at the state level against businesses and partnerships chartered within that state. In some states, companies with operations in that state may also be liable for the tax even if they are chartered in another state. This is a privilege tax that gives the business the right to be chartered and/or operate within that state.

The Comptroller’s Office defines the Franchise Tax this way: “The Texas franchise tax is a privilege tax imposed on corporations, including banking corporations and limited liability companies, that are chartered in Texas. The tax is also imposed on non-Texas corporations that do business in Texas.”

The current franchise tax was established in 2006 in a special session of the 79th Legislature. The value of businesses subject to taxation was changed. This has been controversial every since because the revenue collected from the revision was lower than what was collected before. Click here for background on the controversy associated with the franchise tax.

From the HRO Report:

The margins tax replaced the franchise tax in 2006, when the 79th Legislature, in its third called session, enacted HB 3 by J. Keffer. The margins tax was designed to generate more revenue by applying to a broader base of businesses. According to the comptroller, the new tax applied to 180,000 more business entities and lowered the tax rate that taxable businesses would pay. It was created to help generate revenue for the Property Tax Relief Fund, which helps the state pay for reductions in local school district property taxes.

In fiscal 2008-09, the margins tax generated $8. 7 billion In fiscal 2008-09, the margins tax generated $8.7 billion. In fiscal 2010-11, it is expected to generate $5.8 billion, and in fiscal 2012-13, $5.3 billion. According to studies by the comptroller’s business tax advisory commission, the tax is bringing in less revenue because more businesses than anticipated are calculating it using total revenue minus cost of goods sold. Proposals to change the margins tax include clarifying what can and cannot be claimed under the various exemptions, increasing the rates on which the margin is taxed, and expanding the types of business entities required to pay the tax.

Motor Vehicle Sales and Rental Taxes (3.5%)

“The motor vehicle sales tax is levied at a rate of 6 “The motor vehicle sales tax is levied at a rate of 6.25 percent on the price of a vehicle, less the value of any trade-in. The rental tax rate is 10 percent for rentals of 30 days or fewer, and 6.25 percent for rentals exceeding 30 days. Also included in motor vehicle sales and rental taxes is the tax on manufactured housing. This tax is levied at a rate of 5 percent of 65 percent of the manufacturer’s selling price.”

Motor Fuel Taxes (3.4%)

“Texas taxes three major types of motor fuel: gasoline, diesel fuel, and liquefied petroleum gas (LPG—propane, butane, or compressed natural gas). Currently, gasoline and diesel fuel are taxed $0.20 per gallon; LPG is taxed at a rate of $0.15 per gallon. In the 2010–11 biennium, motor fuels tax collections totaled $6.1 billion. CPA estimates that fuel tax collections will grow 2.6 percent, forecasting $6.3 billion in revenue for the 2012–13 biennium. Historically, motor fuel taxes have accounted for about 10 percent to 12 percent of total state tax collections; however, in the 2010–11 biennium the motor fuel taxes accounted for only 8.3 percent of total tax collections. Motor fuel taxes are expected to comprise 7.8 percent of total tax collections for the 2012–13.”

Severance Taxes (2.6%)

What is a Severance Tax? Severance taxes are incurred when non-renewable natural resources are extracted (or severed) within a taxing jurisdiction. Resources that typically incur severance taxes when extracted are oil, natural gas, coal, uranium, and timber. Some jurisdictions use other terms like gross production tax.

In Texas, this applies mostly to: Oil and Gas Production Taxes

The state levies an oil production tax at 4 The state levies an oil production tax at 4.6 percent of value, a natural gas production tax at 7.5 percent of value, and an oil regulation tax of three-sixteenths of one cent per barrel of oil produced. During the 2010–11 biennium, annual oil production was approximately 324.8 million barrels in fiscal year 2010 and 377.7 million barrels in fiscal year 2011. Oil was taxed at a price of approximately $72.75 per barrel in fiscal year 2010 and $87.85 per barrel in fiscal year 2011. Annual natural gas production was 7.1 trillion cubic feet in fiscal year 2010 and 7.3 trillion cubic feet in fiscal year 2011, while taxable natural gas prices were $3.96 per thousand cubic feet (mcf) in fiscal year 2010, and approximately $4.13 per mcf in fiscal year 2011.

This is the source of funds that are deposited into the rainy day fund This is the source of funds that are deposited into the rainy day fund. Otherwise known as the Economic Stabilization Fund.

Cigarette and Tobacco Taxes (1 Cigarette and Tobacco Taxes (1.6%) From the Comptroller’s office: A tax is imposed on cigars and tobacco products when a permit holder receives them for the purpose of making a first sale in this state

From the HRO Report:

Excise taxes on tobacco products and alcoholic beverages are among the oldest and most common taxes in the world. Texas has taxed liquor since the days of the republic and cigarettes since the Great Depression. All 50 states and the federal government impose these so-called “sin” taxes. Tobacco and alcohol taxes. Texas levies two separate tobacco taxes — one on cigarettes and another on cigars and other tobacco products, including chewing tobacco, smoking tobacco, and snuff. Taxes on cigarettes are levied per package.Taxes on cigars and other tobacco products are set by weight. The state levies separate taxes on package sales of liquor (distilled spirits), beer, malt liquor, and wine and on by-the-drink sales of mixed drinks.

Most tobacco and alcohol tax revenue goes into the General Revenue Fund. Some tobacco tax revenues are dedicated to special purposes, such as to property tax relief or to the Physician Education Loan Repayment Program. The program provides loan repayment funds to physicians who agree to practice in a Health Professional Shortage Area, usually an underserved rural area, for at least four years.

A word on sin taxes.

Cigarette and alcohol – along with others like the pole tax – are focused on behaviors considered by some to be undesirable. The revenue is sometimes earmarked for projects associated with the consequences of the activity – like lung cancer research or funding for victims of domestic violence.

Some argue that Texas could increase revenue by legalizing and taxing casino gambling and marijuana. While this may be true, there are political forces opposed to both moves.

Insurance Occupation Taxes (1.6%)

Alcoholic Beverage Taxes (1.0%)

From the Comptroller: A gross receipts tax is imposed on the amount received from the sale, preparation or service of mixed beverages and from the sale, preparation or service of ice or nonalcoholic beverages that are sold, prepared or served for the purpose of being mixed with an alcoholic beverage and consumed on the premises of the mixed beverage permittee. This is also considered a sin tax.

Utility Tax (0.5%)

Hotel Occupancy Tax (0.4%)

From the Comptroller: A tax is imposed on a person who pays for a room or space in a hotel costing $15 or more each day. Local hotel taxes apply to sleeping rooms costing $2 or more each day. The tax covers hotels, motels and bed and breakfasts, as well as condominiums, apartments and houses rented for less than 30 consecutive days. Persons leasing their houses or rooms in their house must collect hotel occupancy tax from their customers, in the same way a hotel or motel collects the tax from its patrons.

These are popular taxes – especially in municipalities – because they impose taxes on visitors, not residents.

Inheritance Tax (0.0%)

Texas once had an estate tax, but it is being phased out Texas once had an estate tax, but it is being phased out. No Texas inheritance tax is due on estates with date of death on or after January 1, 2005.

Two links from the Comptrollers office explain the shift here and here.

Other Taxes “Other taxes” are levied on a variety of items such as cement, sulphur, attorney services, coin-operated machines, and bingo rental receipts. CPA estimates these taxes will generate $375.1 million in the 2012–13 biennium, an increase of 9.0 percent from 2010–11 biennial collections of $344.2 million.

Non Tax Revenues As you probably guessed, these are revenues received by the state through sources other than taxes

Fees, Fines, Licenses, and Penalties These accounted for 8 Fees, Fines, Licenses, and Penalties These accounted for 8.2% of total revenue in 2012-2013.

Interest and Investment Income This accounted for 1% of total 2012-2013 revenue

Lottery Revenue 1.9% of state revenue came from the sale of lottery tickets. Click here for the Wikipedia on Texas Lottery.

The voters approved an amendment to the Texas Constitution in November 1991 authorizing lottery sales in Texas. It is overseen by the Texas Lottery Commission, which was established in 1993.

From Wikipedia: According to the Texas Lottery Commission, the allocation of lottery sales is as follows: - 63 percent is paid out in prizes - Approximately 25 percent is paid to the Foundation School Fund, which is used to support public education in Texas - 5 percent is paid as retailer commissions - 5 percent is retained to cover Lottery Administration costs - Approximately 2 percent (specifically, the value of unclaimed prizes) is transferred to the Texas Legislature for allocation to other programs in Texas

Controversy: The lottery was sold as benefiting public education, but is it really? - Lottery a tiny share of school funding. - Is the Texas Lottery really funding education? - Texas School Funding at a Glance. - Transfers top $15 billion.

Land Income This accounted for 0.8% of state 2012-2013 revenue

Tobacco Settlement Revenue

From the TDSHS: In 1996, Texas filed a federal lawsuit accusing the tobacco industry of violating conspiracy, racketeering, consumer protection, and other provisions of state and federal law. The state sought to recover billions of tax dollars it had spent to treat tobacco-related illnesses. In settling the lawsuit, the industry agreed to pay the state $15 billion over 25 years and to pay about $2.3 billion through 2003 to Texas counties and hospital districts based on their provision of indigent health care.

Other Revenue The remaining $9. 7 billion, or 5 Other Revenue The remaining $9.7 billion, or 5.3 percent, of state revenue comes from a variety of sources: sales of goods and services, child support collections, revenue from unclaimed property, settlement of claims, and various federal programs. CPA estimates that collections of other revenue in the 2012–13 biennium will be 0.8 percent less than the 2010–11 biennial collections.

This is plenty. Hopefully this section gives you an idea of the nature of taxation in the state.