Texas Government
2306
Unit 10
Taxing and Budgeting
Texas Fiscal Policy:
Guiding Principles
1.
Opposition to deficit spending
2.
Strong support of low tax rates
3.
Strong support for very limited spending for
most public services
= Fiscal Conservatism
Texas Constitution & Budgeting
 Requires a balanced budget (no deficit
spending)
 Biennial legislative sessions requires a
two-year budget
 Role of Comptroller: revenue forecaster
– Sets limits on what state can spend
Major Revenue Producers
 Federal Government
– Personal income tax
 Texas State Government
– Sales tax
 Local Governments
– Ad valorem (property tax)
TAX TERMS/CONCEPTS
  TAX CAPACITY
• o Measure of a state’s wealth/per capita income
  TAX EFFORT
• o Measure of how close a state comes to its tax
capacity
  PER CAPITA TAXES
• o Average tax paid per person
  PROGRESSIVITY/REGRESSIVITY
o To what extent are taxes paid according to the
ability to pay
Regressive vs. Progressive Taxes
 Regressive
 All taxpayers pay the
same rate, regardless of
income
 Progressive
 Tax rate increases as
income increases
 Shifts the tax burden to
 Shifts the tax burden to
the middle class & poor
 Ex.: sales & property tax
the upper class &
wealthy
 Ex.: income tax
TEXAS TAX POLICIES
1
 1. Tax Capacity
  Measure of state’s wealth/per capita income
• Texas Ranking = 97
National Average = 100
 2. Tax Effort
  Measure of how close a state comes to its tax
capacity
• Texas Ranking = 87
National Average = 100
TEXAS TAX POLICIES
2
 3. Per Capita Taxes
  Average tax paid per person
• Texas:
$1,280 -- 9.5% of income
• U.S. ave.:
$1,819 -- 11.3% of income
4. Progressivity/Regressivity
  Progressive = as income increases, tax rate
increases
  Regressive = tax rate same regardless of income
  Texas = 2nd most regressive tax structure in U.S.
Revenues
 In the 2006-07 fiscal year Texas revenues came from the
following sources:
 45.7% from state taxes;
 35.5% from federal funding; (Is this good or bad?)
 2.5% from the state lottery;
 16.3% from investments, revenues from public lands, licenses,
fees, and other collections
State Rank & Percentage of Income
Collected as Taxes-2004-05
State Comparison: Tax Burdens
as Percent of Income(Nat. ave.: 6 %; Tx:
4.5%)
Megastates: Tax Burden - 2001
Texas State Revenues - 2005
Texas Tax Collections-Type of
Tax--2005
TEXAS TAXES--% OF
STATE TAX REVENUE
1. Sales Tax

57%

11%

11%

7%
5. Oil/Gas Production Tax

4.4%
6. “Sin” Taxes

4%
7. Insurance Co. Taxes

2. Motor Fuels Tax
3. Motor Vehicle Sales/
Rental Taxes
4. Corporate Franchise Tax
8.
All Other Taxes
3%
 3%
Tax Rates—Two Types
 Progressive tax rates - increase as the base
increases like the federal income tax:
Those at the bottom have no taxable income and pay
nothing
Persons with higher incomes can better afford to pay
higher tax rates
 Regressive taxation – the rate declines as
the base increases
Problems with Texas Tax System
 It is regressive - falls more heavily on the
poor
 It is elastic – relies on sales & excise taxes
that rise or fall quickly in response to
economic upturns and downturns = not a
stable source of revenue for the state
Types of Sales Taxes
1
 General sales tax – collected on the retail
price of most items (26.3% of ’06-’07
revenues)
 Selective sales tax – levied on particular
items such as liquor, cigarettes, gasoline, or
luxury items (sometimes called hidden or
excise taxes)
Federal Income Tax Rates: 2004
Texas Sales Tax: Who Pays?
As a Percentage of Income-2005
Texas Tax Burden By Income-1995
Texas Tax Burden-By Income-1999
Percentage of Income Paid in
Sales & Excise Taxes
Taxation2
 Regulatory taxes – taxes that do more than
pay for services, these also attempt to
control social and economic behavior:
Sin taxes (on tobacco & alcohol);
“use/benefits received” taxes (motor vehicle
rental tax, tolls on toll roads);
Excise taxes (gasoline tax)
Taxation3
 Benefits-received taxes – taxing those who benefit
from a public service
 Ability-to-pay taxes – levied on property, sales,
and income:
 The more valuable people’s property is, the wealthier
they are and able to pay taxes;
 Income or expenditure are inadequate measures of true
wealth
Federal Funds to Texas:2004-05
Borrowing
 The Texas constitution limits state
borrowing and requires a balanced
budget thereby limiting the state debt.
 Texas does issue bonds:
General obligation bonds;
Revenue bonds
Megastate: Sales, Gasoline, &
Tobacco Tax Comparison-2001
Megastates: Source of Tax Revenue
2002-2003
Taxation: Property Taxes
 Many services in Texas are financed by
local, instead of state, taxes
 Property taxes are the main source of
revenue for most local governments. Two
types of “ad valorem” (according to
value) taxes:
Real property;
Personal property
Megastates: Property Tax
Comparison
TEXAS BUDGET
1
  Dedicated/earmarked funds” - about 46%
of the state budget 
  Federal funds - about 36% of budget; must
be spent according to fed. govt. regulations
Court orders – have also forced the
Legislature to direct funds to specific programs
or uses
§
§
To reduce prison overcrowding (Estelle v. Ruiz)
To reduce the funding disparity between wealthy
and poor school districts—(Edgewood v. Kirby)
§
To upgrade MHMR facilities—a federal court order
Dedicated/Earmarked Funds
§ Gasoline (motor fuel) tax-3/4 is
earmarked for the State Highway Fund and ¼
for the Available School Fund
§ Earnings from state lands (oil revenues,
etc.)—go directly to the Permanent University
Fund (for the UT and A & M university systems)
and the Permanent School Fund (for public
schools)
Other Budgetary Funds
“Locked In”
§ Federal funds (about 36% of the state revenues
and state budget) are earmarked by block and
categorical grants to basically three areas:
§ Health & Human Services
§ Highways
§ Education
§ Court orders have also forced the Legislature to
direct funds to specific programs or uses:
§ To reduce prison overcrowding (Estelle v. Ruiz—a
federal court)
§ To reduce the funding disparity between wealthy
and poor school districts (Edgewood v. Kirby—a
decision by the Texas Supreme Court)
§ To upgrade MHMR facilities—a federal court order
TEXAS BUDGET
2
 § RESULT:
• Only 16% of the state budget is composed
of “discretionary funding” (funding the
Legislature has control over)—funding
unaffected by federal or state statutory
requirements, Texas Constitution’s
requirements, or court orders
FINANCIAL CRISIS OF 1980s
 1. Collapse of oil prices—1984-5
• from $40/barrel to <$10/barrel
 2. Exploding State Population
 3. National Recession-Mid-1980s
 4. Court Orders
  Ruiz v. Estelle—reduce prison overcrowding
• (federal court order)
  Edgewood v. Kirby—reduce funding disparity
between wealthy & poor school districts (Texas
Supreme Court decision)
  Upgrade State MHMR Facilities
• (federal court order)
Financial Crisis in 2002-03
 Texas was $11 billion short to maintain existing
levels of funding
 Effects of 9-11 on economy—minor recession
 Growing state population—strained many
services
 State Response:
– Minor fee and tax increases
– Major cuts in state spending—including higher ed.
– Local governments forced to pay for increased cost
of public schools = higher local property taxes
State Lottery
Produced only 2.5% of budget in 2005 (down from 5% +)
 Pros
 Cons
1. A Voluntary tax
 1. Immoral way to
2. Texans gamble
anyway, might as
well keep $ in the
state
3. Delays more
painful options:
i.e. an income tax
raise money
 2. The poor most
likely to play it
 3. Feeds on
gambling addicts
TAX REFORM OPTIONS
 1. Raise sales tax rate
 2. Broaden sales tax base
  Tax services (legal, financial, etc.)
  Tax food and drugs
 3. Raise “Sin Taxes” or legalize gambling
 3. Increase Gasoline/Motor Fuel Tax
 4. Personal Income Tax (Tx: one of 7 states w/o it)
  1992 constitutional amendment prohibits a state
income tax without voter approval
The Budgetary Process
 Through the appropriations process the legislature
legally authorizes the state to spend money
 Agencies make budget requests on past spending
and provisions for increases
 Dedicated or earmarked funds prevent the
legislature from systematically reviewing state
spending
The Budgeting Process in Texas
TEXAS BUDGETARY
PROCESS—THE ROLE OF:
 PRESIDING OFFICERS
Serve as LBB chair and vice-chair & appoint 4 members
 LEGISLATIVE BUDGET BOARD
Writes “rough draft” Legislature uses for state budget
 LEGISLATURE
Drafts & approves 2-year budget
 GOVERNOR
Use of item veto on budget bill
Threat to use general veto & item veto
 COMPTROLLER
Issues “revenue estimate”