The Texas Economy and Taxes: A Look...

Texas Taxpayers and Research Association (TTARA) www.ttara.org

400 West 15th Street, Suite 400Austin, Texas 78701

512.472.8838www.ttara.org

March 7, 2018

An Assessment of the Texas

Economy and State and Local

Finances


Agenda

1. The Economic Outlook2. The State Budget Outlook3. Hot Topics of the Day (and 2019)

a. Property Tax Revenue Limitsi. House/Senate Failure to Compromiseii. Governor Abbott’s Proposal

b. Who’s Responsible for Property Tax Increases?c. Sales Tax/Property Tax Swapd. Property Tax Campaign Promises


The Economic Outlook


Recent U.S. Economic Expansions

Period of Expansion Months Job Growth Annualized Job Growth

Feb 1961–Dec 1969 106 33.4% 3.2%

Nov 1970–Nov 1973 36 11.7% 3.1%

Mar 1975–Jan 1980 58 19.6% 2.9%

Dec 1982–Jul 1990 92 23.7% 2.9%

Mar 1991–Mar 2001 120 22.5% 2.1%

Nov 2001–Dec 2007 73 6.3% 1.4%

June 2009–Ongoing 103 13.8% 1.5%


US Economic Outlook: The Green

• Slow recovery suggests still more room to grow

• Federal tax reform should increase business investment

• Oil/gas outlook appears to be somewhat stable with WTI price hovering in upper $50s


Economic Outlook: The Yellow

• Federal tax reform may be perceived as unsustainable, limiting the beneficial impact of the tax cuts

• Rising interest rates could discourage some new investment

• Tightening labor markets could limit business expansion and/or fuel inflation pressures

• Rising federal deficits


Texas & US Job GrowthPercent Change from Same Month in the Prior Year

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Texas United States


Explaining the Texas MiracleTexas Job Growth in Excess of US Job Growth

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Diff of Texas JobsGrowth vs US


Explaining the Texas MiracleTexas Job Growth in Excess of US Job Growth

$0

$20

$40

$60

$80

$100

$120

$140

$160

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%Diff of Texas JobsGrowth vs USOil Price Per Barrel


Oil and Gas Extraction as Percent of Texas Economic Output, 1970 to present

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014


Oil and Gas Still Matter

• Texas produces 44 percent of all U.S. on-shore crude (2016)

• Texas produces 27 percent of all U.S. on-shore natural gas (2016)

• Texas’s economy is 5 times more dependent on oil and gas than the U.S. as a whole


The State Budget Outlook


The 2018-19 Budget(General Revenue $ billions)

Key Items 2016-17 2018-19 $ Change % Change

Public Education $41.6 $41.0 ($0.6) (1.5 %)Higher Education $14.7 $14.9 $0.2 1.6 %Health/Human Svcs $33.6 $33.5 ($0.1) (0.3 %)Public Safety $11.6 $11.4 ($0.2) (1.6 %)Other $6.5 $6.0 ($0.6) (9.0 %)

Total Spending $108.0 $106.7 ($1.3) (1.2 %)


The 2020-21 Budget Outlook: Going from Really Bad to Just Bad• Comptroller Hegar certified the budget as

balanced with $94 million unspent.• Legislature used a variety of one-time measures

to balance the 2018-19 Budget—creating a structural gap initially estimated at $8 billion (including a $2 billion Medicaid shortfall)

• Thanks largely to better-than-expected revenue performance, that gap may be down to $5 to $6 billion but…

• Hurricane Harvey storm damage could require $2 billion or more not currently in the budget


One-Time Budget Shifts2018-19 2020-21 Net Biennial

Funding Mechanism Savings/Gain Cost Shift

Hwy Sales Tax Shift $1.8 ($1.8) ($3.6)Funds Consolidation $0.7 $0.0 ($0.7)Tax Amnesty <$0.1 <$0.0 <($0.1)Accelerated sale of

unclaimed property $0.5 $0.0 ($0.5)Hwy Dedication Increase N.A. ($0.3) (0.3)MV Sales Tax for Hwys N.A. ($0.8) ($0.8)

Total $3.0 ($2.8) $(5.9)

Medicaid Funding Shortfall $2.0 $0.0 ($2.0)

Total Structural Gap ~($7.9)


One-Time Budget Shifts2018-19 2020-21 Net Biennial

Funding Mechanism Savings/Gain Cost Shift

Hwy Sales Tax Shift $1.1 ($1.1) ($2.2)Funds Consolidation $0.7 $0.0 ($0.7)Tax Amnesty <$0.1 <$0.0 <($0.1)Accelerated sale of

unclaimed property $0.5 $0.0 ($0.5)Hwy Dedication Increase N.A. $0.0 $0.0MV Sales Tax for Hwys N.A. ($0.2) ($0.2)

Total $2.3 ($1.3) $(3.7)

Medicaid Funding Shortfall $2.0 $0.0 ($2.0)

Total Structural Gap ~($5.7)


The Budget Outlook• Legislature in 2019 will have to deal with

emergency items that may draw from the ESF (Rainy Day Fund):o $1 to $2 billion for Medicaido $1 to $4 billion for Hurricane Harvey impacts

• Budget for 2020-21 will be tight, similar to last session.

• There will be no tax “cuts” or “relief” that cost the state money:o Property tax cuts will have to be offset by other taxes,

ando Property tax limitations do not impact state finances.


Hot Topics of the Day (and 2019)


Property Tax Revenue Limits


Senate/House Rollback LimitsProvision Senate HouseApplies to Cities, Counties, and

Special Districts levying more than $20 million in total property tax

Cities, Counties, and Special Districts levying more than $25 million in property tax for M&O

Rollback Limit 4% 6%Petition/Election Rqmts

Automatic election; no petition required

Automatic election; no petition required

Other Provisions

Jurisdictions levying less than $20 million in tax must have opt-in election

All Junior College districts remain under current law rollback provisions


Governor Abbott’s ProposalProvision ElementsApplies to ALL Cities, Counties, Special Districts AND School

Districts that levy a property tax with NOminimum threshold

Property Tax Revenue Limit

2.5% (but can add population plus inflation with voter approval)

Petition Reqts Automatic election (2/3 vote needed); no petition required;

Other Provisions Local debt restrictionsReal time tax noticeAppraisal Review Board reformsCAD boards of elected officials


Jurisdictions Affected under the Revenue Limitation Proposals

Senate House Governor (i.e. all districts)

School Districts 0 0 1,018

Cities 76 39 1,207

Counties 55 42 254

Special Districts 37 10 2,039


Who’s Responsible for Property Tax Increases?


Growth in Texas Property Taxes 2000-2016

$0

$10

$20

$30

$40

$50

$60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

School Districts

Special Districts

Counties

Cities

RecoveryGrowth Relief Recession

$ Billions


Average Annual Property Tax Increase, 2000-2016 by Period

Special Districts

Counties Cities School Districts

2000-2005: Growth 8.6% 8.3% 6.8% 8.6%

2005-2007: Relief 11.8% 10.6% 9.6% (3.3%)

2008-2011: Recession (0.2%) 2.1% 1.8% 1.2%

2011-2016: Recovery 10.3% 6.0% 6.1% 6.3%

2000-2016: Overall 7.9% 6.7% 6.1% 5.1%


Property Values in School Finance

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Property Value Per Student (WADA)

State Aid

Unrecaptured Property Tax

Recaptured Property Tax

State guarantees $5,140 in revenue per student at a $1.00 tax rate



$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000


State Aid



District A$3,000 Property Tax$2,140 State Aid$5,140 Guaranteed

District B$3,500 Property Tax$1,640 State Aid$5,140 Guaranteed



$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000


State Aid



District A, Year 1$3,000 Property Tax$2,140 State Aid$5,140 Guaranteed

District A, Year 2$3,500 Property Tax$1,640 State Aid$5,140 Guaranteed


School “Truth in Taxation”

• A school district’s “effective tax rate” is the rate that allows the school district to raise the same amount of total revenue (state + local property tax) per student as the previous year (Education Code 44.004).

• Unlike a city/county/special district, rising values do not force down a school district’s effective tax rate because rising values cause a loss of state aid

• Essentially district’s must hold tax rates steady in the face of rising values to compensate for a loss in state aid


Sales Tax/Property Tax Swap



Supporters Say:• Property tax is the most economically damaging tax• Property tax punishes accumulation of wealth• Sales tax most acceptable tax to public• Swap will be good for economic growth

Opponents Say:• Are you @#$% crazy???



$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

Current Sales Tax Current PropertyTax

New Sales Tax

$37.2 bl.

$56.1 bl.

$93.3 bl.


Range of Sales Tax Options to Replace All Property Taxes

Total Tax Rate Expand Tax Base

~ 25%

• Raw Materials• Gas & Electricity (Industrial & Home)• Manufacturing Equipment & Machinery• Groceries and all other consumer items• Services (Lawyers, Doctors,

Construction, etc.)• Agricultural equipment & supplies• Advertising• Motor Fuels• Real Estate Sales• Insurance Premiums• Another $12 billion to be named later


Sales vs Property Tax: Refinery

Assessed Value: $5 bl.600,000 bpd processed

$2.30 Property Tax Rate

Property Tax Bill:$110 million

Assessed Value: $5 bl.600,000 bpd processed

6.25% Sales Tax Rate

Sales Tax Bill:$687 million


Swap Opponents Say…A massive sales tax would create• HUGE economic distortions• Massive tax avoidance (especially consumers

buying items on the Internet, though Quill in question)

• Increase net taxes on lower income families• Increase net taxes on renters• Create an incredible shock to (some) local

governments• Make it impossible to issue local debt


Property Taxes by Jurisdiction Type

City, $9.2

County, $9.0

Special District, $8.0

School M&O, $23.7

School Debt, $6.2

Total 2016 Property Taxes: $56.1 billion


Range of Sales Tax Options to Replace Just School M&O

Total Tax Rate Expand Tax Base

~ 14.5%

• Gas & Electricity (Industrial & Home)• Manufacturing Equipment & Machinery• Groceries & Water• Medicine• Services (Lawyers, Doctors,

Construction, etc.)• Agricultural equipment & supplies• Motor Fuels• Insurance Premiums


School Tax Substitution Questions

• How will you rewrite school formulas to distribute money?

• Do you allow a property tax for school enrichment? (if so, schools are still a line on your tax bill)

• If you expand the sales tax base, do you enrich cities and counties that levy a sales tax?

• What is the shift in incidence:o Across businesses?o Between businesses and individuals?

• How do you administer a sales tax on services?


Is Sales Tax Due?


Schlueter’s Axiom on Tax Reform

No one thanks you for the taxes you cut, but they will remember you for the taxes you raised.


Property Tax Campaign Statements


Taxes and the Campaigns: GovernorGregg Abbott (R)• Limit property tax growth (details covered earlier)Andrew White (D)• Close the $5 billion loophole in an appraisal system

that favors commercial and industrial property (“equal and Uniform”?)

Lupe Valdez (D)• No initiatives stated


Taxes and the Campaigns: Lt. GovernorDan Patrick (R)• Allow voters to vote on property tax increases (i.e.,

automatic elections)• Extend 0ver 65 tax freeze to city/county/special

district property taxes (current law applies only to schools)

Mike Collier (D)• Eliminate the use of “equal and uniform” appeals• Require disclosure of property sales price• Eliminate attorneys fees for taxpayers prevailing in

litigation over appraisal


The Monster No One’s Talking About, yet…

Split Roll: Categories of property are taxed differently, either by:• Properties may be split between local and state

taxation, or• Property may be appraised or taxed at a different

nominal rate than other properties.


Thanks for Joining Us!If you have any questions or

comments, please feel free to contact TTARA staff.

State Budget & Fiscal Issues: Dale Craymer [email protected]

Sales & Property Tax: John Kennedy [email protected]

School Finance: Sheryl Pace [email protected]

Property Tax: Debbie Cartwright [email protected]

Franchise Tax & Tax Adminin: Matt Migliore mmigliore@ttara,org

Communications: Ryan Ash [email protected]

Office Manager: Betty Wranischar [email protected]

Membership: Cindy Ferguson [email protected]

(512) 472-8838

The Texas Economy and Taxes: A Look...

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