1. Lecture PPTs GOVERNING TEXAS THIRD EDITION ANTHONY CHAMPAGNE
EDWARD J. HARPHAM
JASON P. CASELLAS
© 2016 W. W. Norton & Co., Inc.

2. Chapter 11
Public Finance

3. Public Finance in Texas
In 2010 students at UT Austin protested against cuts in education spending and increases in tuition. As lawmakers work to balance the state budget, the decisions they make about taxes and spending affect all Texans.

4. Why Public Finance Matters
Among other things, public finance affects the cost of going to college
Tuition skyrocketed in the first decade of the twenty-first century
Example: tuition and fees for Texas A&M at Texarkana rose 132 percent between 2003 and 2016
Higher education is expensive in Texas
According to the Dallas Tribune, tuition and fees for four-year schools in Texas rose over 300 percent between 1990 and 2015
Like decisions about the state budget in Austin, tuition and fees decisions faced by university boards of regents remain deeply political.

5. What Is the Budget?
The Texas Constitution mandates a “balanced budget”
Public finance is a complicated business and the devil is in the details
Funds that constitute the “budget” can be divided into five broad budgetary categories
Ask students: What does the phrase “balanced budget” actually mean?

6. What Is the Budget?: General Revenue Funds and Federal Funds
General Revenues Fund budget
Budget for a nondedicated revenue account that functions as the state’s primary operating fund
General Revenue-Dedicated Funds budget
Funds for dedicated revenues that target money for a specific purpose
Federal Funds budget
Grants, payments, and reimbursements received from the federal government
The General Revenues Fund budget includes three educational funds: the Available School Fund, the State Textbook Fund, and the Foundation School Fund.

7. What Is the Budget?: Other Funds and All Funds
Other Funds budget
Funds flowing into the state treasury that are not included in other state budgets
Includes the State Highway Fund, trust funds, and other revenue
All Funds budget
The aggregate of all the other budgets
All spending that goes through agencies, including federal and state programs

8. Table 11.1: Texas Budgetary Funds Appropriated, 2016–17 (in billions of dollars)

9. Table 11.2: All Funds State Budget Allocation by Biennium (in millions of dollars)

10. What Is the Budget?: The State Budget
The state budget involves huge amounts of money
2016–2017 budget
Over 77 billion dollars for Health and Human Services
Over 78 billion dollars for education
Education is often at the top of the list
The bulk of federal funds go to two areas: health and human services, and education
There is great pressure to maximize federal dollars and to minimize state spending and not raise taxes

11. Spending and Revenue in Texas
Texas has a reputation for being a “low service, low tax” state that maintains a favorable environment for business
Trends in state spending
Texas spends less than other states.
Ranked 46th on per capita state expenditures
Ranked 27th in education spending
Ranked 41st in welfare spending
The number of state workers is smaller than in other states
Be sure that every student knows what “per capita” means.
Note that although Texas’s spending per person is low, Texas ranks high when compared to other states on the per capita federal dollars flowing into the state. Are voters typically aware of this? How might this affect the perception of Texas as a “low tax” state?

12. Figure 11.1: Trends in State Government Expenditures

13. Spending and Revenue in Texas: Taxes
Taxes are an important element of public finance
Measures used to compare tax burdens
State tax revenue per $1,000 of personal income: 46th of the 50 states
Per capita state tax revenues
By both measures, Texas’s “low tax” reputation is well earned
Texas is one of nine states with no personal income tax; but there is a high sales tax (13th highest in the United States)
Texas has relatively high property taxes (14th highest in the United States)
Ask students to consider the risks associated with having so much state income dependent on sales taxes.
Note that the concepts of regressive and progressive taxation are covered in the next section.
Texas state taxes are low, but local taxes in some respects are a different story. Still, when state and local taxes are taken together, Texas remains a low tax state.

14. Spending and Revenue in Texas: Taxes Continued
Revenue in Texas continued
Government and public policy are funded from a variety of sources
The sales tax is the most important single tax (6.25 percent)
Oil and natural gas production and regulation: tax revenue varies with the price and volume
Taxed based on market values, which is 4.6 percent of the market value of oil produced in the state
Oil revenues fell significantly, from $6.8 billion (2014–15) dollars to $3.9 billion (2016–17)
Ask students to comment on why it is cheaper to live in Texas. Note that the low cost of living is not entirely explained by the lack of state income tax.
See Table 11.3 for a list of top revenue sources.

15. Spending and Revenue in Texas: Taxes Continued
Revenue in Texas continued
Natural Gas Production Tax
7.5 percent of market value. The market value had an almost 40 percent decrease in 2016–17 compared to 2015–16
Motor Fuel Tax
20 cents per gallon of gasoline, again with a significant decrease from the previous year (2015–2016).
Part of dedicated fund for specified purpose
Public roads and education
Motor Vehicle Sales Tax and Rentals Manufactured Home Sales Tax also declined
The revenue shortfall creates challenges for the legislative session beginning in January 2017: how to balance the budget with less revenue coming into to finance public policy in Texas is an issue.

16. Spending and Revenue in Texas: Motor Fuels Tax
Gas prices have fluctuated widely in recent years. In early 2016, regular gas prices fell below $1.50 a gallon for a time. A couple of years before, however, the price of gas fluctuated around a much higher price: $3.50 a gallon. The state of Texas collects a tax of 20 cents per gallon on motor fuels. The federal government collects an additional 18.4 cents per gallon, but Texans still pay less tax on gasoline than residents of many other states.

17. Table 11.3: State Revenue, Biennial Comparison (in millions of dollars)

18. Spending and Revenue in Texas: Other Tax Revenues
Revenue in Texas continued
Other tax revenues come from
Motor vehicle sales and rentals and manufactured home sales tax
Franchise tax imposed on all corporations
Tobacco taxes on cigarettes and tobacco products
Alcoholic beverage taxes
Insurance occupation taxes: a complex schedule is applied to insurance premiums
Motor vehicles: 6.25 percent tax on the sales price; 10 percent tax on rentals.
Ask students to comment on “sin” tax as a source of revenue: alcohol, tobacco, and strip clubs, for example. You may wish to extend this by noting the ongoing discussions nationwide about soda, junk food, and other “lifestyle choices” that contribute to the cost of health care. How far can “sin” taxes go? What are the justifications for levying such taxes?

19. Spending and Revenue in Texas: Other Tax Revenues Continued
Revenue in Texas continued
Other tax revenues come from
Utility taxes, three sources
Tax on gas, electric, and water utility
Taxes on the gross receipts of public utilities
Gas utility pipeline tax
Hotel and motel tax: 6 percent
Inheritance tax: had been eliminated by 2005
In addition to all of these, there are a small number of other taxes on such items as attorney services, cement, sulfur, coin-operated machines, and bingo rental receipts, which together are expected to generate $357.9 million for the 2016–17 biennium.

20. Figure 11.2: State Tax Revenue Sources, 2016–17 Biennium

21. Spending and Revenue in Texas: Income Tax
The question of the income tax in Texas
With a regressive tax such as sales tax, the tax burden falls more heavily on lower-income individuals
With a progressive tax, the tax burden falls more heavily on upper-income individuals
Progressive income taxes
Few politicians have been willing to support an income tax in Texas
Sales and use taxes are generally considered regressive; property taxes, somewhat regressive.
With a progressive income tax, people with lower income pay a lower tax rate than people with higher income. Discuss this with the students.
Ask students to comment on ways to address the progressive-regressive tax dilemma.
Reasons for the resistance to an income tax in Texas include the state’s goal of maintaining a pro-business environment. One of the attractive features of Texas to business has always been the absence of an income tax. Note the other U.S. states with no individual income tax.
A constitutional amendment passed in Texas in 1993 effectively gives the electorate a veto over any proposal for an income tax. What would convince your students to vote in favor of an income tax in the states? How would they, if they were to support the idea, attempt to convince others?

22. Spending and Revenue in Texas: Other State Revenue
Next to taxes, the second-largest source of revenue for Texas is the federal government
Federal grants and matching funds are low; but federal aid to Texas has been increasing
Other revenue sources: interest income, licenses and fees, and similar sources
Two other sources of note
Lottery (1991)
Tobacco settlement (1998)
Matching funds: federal monies going to a state based on state spending for a program
How might lottery revenue as part of a state’s operating budget be considered a regressive tax?
Has the lottery produced significant funds for education, living up to the expectations and maybe the promises of its supporters?
Tobacco taxes and dropping tobacco settlement receipts over time both illustrate a point for discussion: While the public has an interest in decreasing tobacco use, a decline in cigarette sales means a decline in revenue for the state.

23. Table 11.4: Estimated State Revenue Collections, 2016–17 Biennium

24. Table 11.5: Tax Collections Biennial Comparison (in billions of dollars)

25. State Funds
Money spent by the state doesn’t just flow into and out of a single pot
About 400 funds direct money to a wide variety of functions
An understanding of how money flows lies at the heart of mastering the state budget
The Texas budgetary process is complex; how does this impact the ability of the average citizen to understand it and at the same time give advantages to various special-interest groups?

26. State Funds: General Revenue Fund and Permanent School Fund
The General Revenue Fund is the state’s primary operating fund
Nondedicated general revenue
General revenue: dedicated accounts
The Permanent School Fund (PSF) funds primary and secondary schools
Distributes funds to school districts across the state based on attendance and similar criteria
The amount of money available to public education through the PSF is determined by the State Board of Education
The nondedicated revenue part of the General Revenue Fund is where most state taxes and fees flow. Expenditures may be made directly from the nondedicated funds and may be transferred to special funds or accounts for allocation.
Ask students to research their school’s budget and comment on the source of funds for their institution.

27. State Funds: Available School Fund, State Highway Fund, and Economic Stabilization Fund
The Available School Fund (ASF) is a dedicated fund for support of public education
Funded through distributions of the PSF
The purposes of the State Highway Fund are constructing, maintaining, and policing roadways in Texas and acquiring rights of way
The Economic Stabilization Fund (ESF), or Rainy Day Fund, is meant to provide relief during times of financial distress.
Revenue sources for the State Highway Fund include motor vehicle registration fees, the federal highway fund, and sales tax on motor lubricants. As well, a significant portion of the motor fuels tax deposited in the General Revenue Fund is then allocated to the State Highway Fund; and a 2014 constitutional amendment provides for diverting over a billion dollars of oil and gas tax revenue into the State Highway Fund.

28. Table 11.6: Economic Stabilization Fund History (in billions of dollars)

29. State Funds: Funds for Higher Education
Texas 400 funds include a few that lie at heart of higher education in the state:
Permanent University Trust Fund (PUF)
Support of most institutions of the University of Texas (UT) and Texas A&M University systems
Higher Education Fund (HEF)
Support for universities that do not have access to PUF monies
National Research University Fund (NRUF)
Funds efforts to achieve national prominence as research institutions
The National Research University Fund (NRUF) provides funding to universities seeking to achieve national prominence as research institutions. Note that the University of Texas at Austin and Texas A&M University are already considered national research institutions and therefore do not qualify.
What are students’ opinions on state funds for higher education? Aside from students and their families, who are the stakeholders? What is the state’s interest in promoting research institutions of national prominence in Texas?

30. The Texas Constitution and the Budget
Constitutional factors affect how the Texas budget is made
The legislature must write a two-year budget and meets only once every two years
Agencies are forced to project budgetary needs without clear knowledge of the problems to be faced in two years
A large portion of the biennial budget is dedicated for special purposes by federal law or by the Texas Constitution or state statute
See Figure 11.3, which outlines the Texas biennial budget cycle.

31. The Texas Constitution and the Budget: Article 3
A number of specific constitutional provisions constrain the legislature’s budgetary control
According to Article 3, Section 49a (Pay-as-You-Go Limit), the state must maintain a balanced budget
All bills that get as far as appropriations must be sent to the comptroller, putting the comptroller at the heart of the budget process
Article 3, Section 51a, limits spending for needy dependent children to 1 percent of the state budget
Appropriations: authorization by the legislature to a government agency or body to spend up to a particular amount of money
Ask students to comment on the wisdom of a pay-as-you-go system in terms of the Texas state budget.
Is 1 percent enough of the state’s budget to pay in support of needy dependent children and their caretakers?

32. The Texas Constitution and the Budget: Articles 3, 8, and 16
A number of specific constitutional provisions constrain the legislature’s budgetary control continued
Article 8, Section 22, limits the growth of certain appropriations; when the state’s economy shrinks, appropriations also have to shrink
The Legislative Budget Board (LBB) is responsible for determining the proper financial figures
Article 16, Section 69, assigns budget-execution authority to the governor and the LBB
Article 3, Section 49j limits the amount of debt the state can incur, based on the resulting debt service
Budget-execution authority: as now defined by Article 16, Section 69, budget-execution authority is exercised by the governor or the LBB, who may propose an agency stop spending, that money be transferred between agencies, or that the purpose of an appropriation be changed. If the governor makes the proposal, the LBB must approve it; and vice versa.
Limits on debt: as defined by Article 3, Section 49j, the legislature cannot authorize additional debt if the resulting debt service—money spent by the state to pay off the debt, including interest and principal payments—is greater than 5 percent for the average General Revenue Fund revenue for the three preceding fiscal years.
One result of this constitutional debt limit is that, compared to other states, the Texas debt burden is relatively low.

33. The Budgetary Process In theory, Texas has a “dual-budget” system
Responsibility shared by the Governor’s Office of Budget, Planning, and Policy (GOBPP) and the LBB
In practice, the budget is primarily the responsibility of the legislature
The budgetary process involves two stages
Development of a draft budget by the LBB
The legislative process, by which appropriations bills make their way through the committee process
The LBB’s draft budget, not the governor’s, is the basis for final legislation. The LBB is chaired by the lieutenant governor. The vice chair is the Speaker of the House.
Senate and House versions of the appropriations bills work their way through the committee system in the “markup” process. Differences between the two versions are then reconciled in a conference committee.
The comptroller has the formal authority to “certify” the budget, conforming that it is within the current revenue estimates. Remind students of what this means in terms of the comptroller’s personal power in the legislative process.
After certification, the budget goes to the governor, who can sign, not sign, or veto the entire bill—or exercise the line-item veto.
See Table 11.8, which outlines key players in the budgetary process.

34. Budget Crises in Twenty-First-Century Texas
The collapse of oil prices in the mid-1980s brought on a budget crisis
Tax rates increased in almost every year between 1984 and 1991
The economy turned around in the early 1990s, and the budgetary situation brightened
In the recession in 2008, all this changed; but Texas initially dodged the worst effects
Two factors delayed the full impact of the recession upon the Texas budget: LBB projections in January 2009 underestimated the impact; and Texas was initially protected by an infusion of federal funding.

35. Budget Crises in Twenty-First-Century Texas: 2011
By 2011, pressures on the budget had continued unabated
The Great Recession brought on a sharp contraction of real estate prices
Property tax revenues declined
Another contributing factor in the state’s financial short-fall was long-term structural problems brought on by property tax reform
Property tax rates were lowered
President Obama’s health care reform creates new short- and long-term spending commitments that could pose new and unanticipated budgetary challenges
Although Texas escaped the worst of the real estate collapse—largely because the real estate bubble had been more muted in Texas than elsewhere—credit tightened and property values declined across the state, as did property tax revenues.
This is a good point at which to remind students of how much the state and local governments of Texas depend on sales and property taxes. What does this mean when recession hits and personal incomes—and spending—decrease?

36. Budget Crises in Twenty-First-Century Texas: Public School Funding
Pressures to balance Texas’s state budget often create difficult and controversial choices for legislators, like how much funding to provide for public schools.

37. Budget Crises in Twenty-First-Century Texas: Balanced Budget, 2012–2013
A special session of the legislature in June 2011 finally passed a bill to bring the budget for 2012–13 back into balance
Most important initiatives: spending cuts
Funding to public schools was cut by $4 billion for the 2012–13 biennium
Sales tax receipts improved in 2011 and 2012
Despite budget shortfalls, the Texas economy was outperforming much of the rest of the nation

38. Budget Crises in Twenty-First-Century Texas: 2013 Session
Looking beyond the budget crisis of 2011
The 2013 legislative session was comparatively smooth regarding budget matters
The most controversial budget issue dealt with by the legislature in the 2013 session centered upon transportation policy
How to pay for fixing highways (build and repair)
Legislators finally brokered a compromise in the third special session.

39. Thinking Critically about Public Finance in Texas
Public finance will continue to be a troubling issue for Texas
Revenues from the sales tax, severance taxes, and local property taxes are increasing once again, but uncertainty remains
Texas’s economy is tied inextricably to the U.S. economy
State budgetary policy depends on the national recovery policy

45. Figure 11.3: Texas Biennial Budget Cycle

46. Glenn Hegar
After the legislature passes the biennial state budget, the state comptroller certifies the budget, confirming that it is within current revenue estimates for the period. Here, state comptroller Glenn Hegar certifies the 2016–17 budget.

47. Rainy Day Fund Campaign
Unlike the federal government, Texas state government cannot approve a budget deficit and must pass a balanced budget every two years. Discussion of the budget reached a fevered pitch during the 2010 legislative session, when Texas faced a budget shortfall because of the national recession and a serious shortfall in projected revenues from various taxes. Some Texans considered it a “rainy day” and urged the state government to tap the Rainy Day Fund for education and health services.

48. Home Foreclosures
A key component of the 2008 financial crisis was home foreclosures like this one in San Antonio. This crisis put intense strains on the Texas state budget.

49. Balancing the Budget and Schools
Pressures to balance Texas’s state budget often create difficult and controversial choices for legislators, like how much funding to provide for public schools.

50. Highway Construction
Public finance deeply affects the trade-offs in Texas’s public policy. In 2013 the legislature compromised on a bill that would continue to fund highway construction (like this one in Sebastian) while still balancing the state budget.

51. Two Ways to Calculate the Constitutional Spending Limit

52. Table 11.8: Key Players in the Budgetary Process

53. Lecture PPTs GOVERNING TEXAS THIRD EDITION ANTHONY CHAMPAGNE
EDWARD J. HARPHAM
JASON P. CASELLAS
© 2016 W. W. Norton & Co., Inc.