The 77th Legislature will have an estimated $60.8 billion available for general purpose spending in the 2002-03 biennium. This figure represents the sum of the 2000-01 ending balance, 2002-03 tax revenue, and 2002-03 non-tax receipts, less estimated transfers to the Economic Stabilization Fund. (See Table 2.)
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Table 2
General Revenue-Related Funds by Source |
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|---|---|---|---|
| Revenue in Millions | Percent | ||
| Tax Collections | 2000-01 | 2002-03 | Change |
| Sales Tax | $ 28,537 | $30,559 | 7.1% |
| Motor Vehicle Sales & Rental Taxes | 5,699 | 6,172 | 8.3 |
| Motor Fuels Taxes | 1,126 | 1,557 | 38.3 |
| Franchise Tax | 3,979 | 3,897 | (2.1) |
| Insurance Taxes | 1,605 | 1,713 | 6.7 |
| Natural Gas Tax | 1,806 | 1,761 | (2.5) |
| Cigarette & Tobacco Taxes | 1,071 | 986 | (8.0) |
| Alcoholic Beverage Taxes | 1,044 | 1,094 | 4.8 |
| Oil Production and Regulation Taxes | 832 | 659 | (20.7) |
| Inheritance Tax | 564 | 587 | 4.1 |
| Utility Taxes | 556 | 583 | 4.8 |
| Hotel Occupancy Tax | 483 | 530 | 9.6 |
| Other Taxes | 72 | 72 | 0.7 |
| Total Tax Collections | $ 47,373 | $ 50,170 | 5.9% |
| Non-Tax Collections | |||
| Licenses, Fees, Fines, and Penalties | $1,849 | $ 2,161 | 16.9 |
| Interest and Investment Income | 1,657 | 1,660 | 0.2 |
| Lottery Proceeds | 1,706 | 1,606 | (5.9) |
| Settlement of Claims | 618 | 795 | 28.5 |
| Other Receipts | 2,053 | 1,903 | (7.3) |
| Total Non-Tax Collections | $ 7,883 | $ 8,124 | 3.1% |
| Total Net Revenue | $ 55,256 | $ 58,294 | 5.5% |
| Balances and Adjustments | |||
| Beginning Fund 1 Balance | $ 3,855 | $ 2,932 | |
| Beginning Funds 2 and 3 Balances | 58 | 2 | |
| Change in GR-Dedicated Account Balances | (479) | 0 | |
| Reserve for Transfers to the ESF | (430) | (475) | |
| Total Balances and Adjustment | $ 3,004 | $ 2,459 | |
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Total General Revenue-Related Funds
Available for Certification |
$ 58,260 | $60,754 | 4.3% |
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Note: Totals may not sum because of rounding.
SOURCE: Carole Keeton Rylander, Texas Comptroller of Public Accounts. | |||
The 2000-01 Ending Balance
Transfers to the Economic Stabilization FundThe estimated ending certification balance will be $2.9 billion after setting aside a required $327 million transfer to the Economic Stabilization Fund (ESF). Better than anticipated economic growth has provided the chief stimulus for the revenue surplus.
Transfers to the ESF are estimated to total $802 million over the three-year period 2001-03. As required by the Texas Constitution, estimated transfers to the ESF have been deducted from available revenues and balances. In addition to the transfer of $327 million from fiscal 2001 natural gas tax collections, $475 million is estimated to be transferred to the ESF from natural gas collections during the 2002-03 biennium. After the transfer from fiscal 2003 natural gas tax collections, the ESF balance should total nearly $1.1 billion.Tax Revenue
Taxes provide the most important source of general revenue for the state. As in years past, sales and use tax collections will continue to dwarf all other tax revenue sources, with the motor vehicle sales and use tax a distant second. The franchise tax, which serves as the state’s general business tax, is the third largest general revenue source and the largest state tax not levied on consumption.Non-Tax ReceiptsSales and Use Tax. The sales and use tax is levied at 6.25 percent. Subject to certain exemptions, the tax is paid by businesses and consumers for a wide range of goods and services purchased in Texas or brought into Texas for use in the state. The sales and use tax also includes the boat and boat motor sales and use tax and the motor lubricant sales and use tax (the latter is dedicated to the State Highway Fund).
In fiscal 2000, Texas sales and use tax receipts totaled $13.9 billion, a 6.9 percent year-over-year increase. While up from the 4.9 percent increase registered in 1999, this growth rate was still well below the 9.9 percent increase in 1998.
The growth in sales and use tax collections in fiscal 2000 was fueled in part by strong retail sales and continued growth in the service industries. The retail sector, which represents 54.3 of all taxable transactions, grew by 7.4 percent, and the service sector increased by 8.9 percent. In contrast, the slowdown in housing starts discussed in the "Economic Outlook," above, caused the construction sector to grow by a modest 4.4 percent from fiscal 1999 to 2000. In addition to the economic factors affecting this tax, it is expected that refunds of sales tax paid on items used in conjunction with several federal government contracts could be made during the 2002-03 biennium.
Sales and use tax collections are expected to rise moderately in 2002-03, reaching $30.6 billion for the biennium. Compared to the $28.5 billion that is expected in 2000-01, this represents a 7.1 percent biennium-to-biennium increase.
For the 2002-03 biennium, the sales and use tax is expected to provide 60.9 percent of general revenue-related tax revenue and 52.4 percent of all net revenue deposited to the general revenue-related funds. In 1962 (the first year the tax was collected), the sale and use tax was levied at 2.0 percent and accounted for 20.4 percent of general revenue-related state tax receipts.
Franchise Tax. The franchise tax is the state’s primary tax on business. All corporations, including subchapter S corporations, banks, savings and loan institutions, and limited liability companies doing business in Texas, pay the franchise tax. Until 1991, a firm’s franchise tax liability was based solely on its net worth. The 72nd Legislature modified the tax to include earned surplus as an additional tax base for all tax years beginning in 1992. Earned surplus is essentially a company’s modified federal taxable income apportioned to Texas.
The 1991 changes require that the earned surplus tax be paid to the extent that it exceeds the tax liability on net worth. In practice, taxpayers pay the higher of their net worth tax or their earned surplus tax. The current tax rates are 0.25 percent for taxable capital (net worth) and 4.5 percent for earned surplus.
Two factors are expected to exert the principal forces of change in franchise tax revenues in 2002-03. First, corporate profit growth has cooled substantially from its double-digit pace during the late 1990s. Over the next several years, higher interest rates, lack of available workers, and other supply constraints are expected to exert downward pressure on profits, meaning that the state can expect to see much slower growth in gross franchise tax liability (i.e., before the application of tax credits). Second, franchise tax relief (principally in the form of credits and exemptions enacted by the 76th Legislature) is expected to reduce net franchise tax collections in absolute terms in 2002-03. For the 2002-03 biennium, the overall effect of both factors will be a 2.1 percent decline in franchise tax collections when compared to collections in 2000-01.
SB 441, 76th Legislature, created a small business exemption and five tax credits. Beginning in fiscal 2000, businesses with less than $150,000 in gross receipts are effectively exempted from paying the franchise tax. Beginning in fiscal 2001, a series of two child care credits and three economic development credits will provide tax relief.
The child care credits consist of a credit for pre-school child care when provided by an employer and a credit for donations to before- and after-school child care programs for school-age children. The economic development credits include a research and development credit, a job creation credit, and an investment credit.
Total franchise tax collections in 2002-03 will be $3.9 billion, slightly less than the $4.0 billion estimated for 2000-01. In the 1998-99 biennium, franchise tax collections accounted for 9.4 percent of total tax collections. The share is expected to fall to 8.4 percent in 2000-01; by 2002-03 the share will drop to 7.8 percent.
Motor Vehicle Taxes. The state’s principal motor vehicle taxes consist of the motor vehicle sales and use tax, the motor vehicle rental tax, and the manufactured housing sales and use tax. Combined, these taxes will contribute an estimated $6.2 billion to state revenue in fiscal 2002-2003, up 8.3 percent from the $5.7 billion expected to be collected in the 2000-2001 biennium. The largest of these taxes, the motor vehicle sales and use tax, levied at 6.25 percent, will generate $5.6 billion in 2002-2003.
During most of the 2000-2001 biennium, auto sales remained strong, spurred by a relatively strong economy, low interest rates, and dealer incentives. Although the upward pressure on tax revenues produced by the long-term consumer shift towards trucks, sport utility vehicles, and luxury vehicles is expected to continue, higher interest rates are expected to provide a braking force. Thus, while the dollar volume of sales is expected to increase during the 2002-03 biennium, the rate of growth is expected to taper off.
Oil and Gas Severance Taxes. These taxes consist of the oil production tax, levied at 4.6 percent of value; the natural gas tax, levied at 7.5 percent of value; and the oil regulation tax, levied at 3/16th of one cent per barrel of oil produced in the state. (A fourth energy-related tax, the oil well service tax, is classified under "other taxes.")
Severance tax collections are the product of two factors: production and price. Statewide oil production peaked more than a quarter century ago, in 1972, when it reached 1.2 billion barrels. By 1999, oil production had dropped to 378 million barrels, a decline of nearly 20 percent in a single year. Contributing to the decline, the oil price collapse that began December 1997 saw prices plunge below $10 per barrel in 1999, when the average taxable price for the fiscal year fell to $12.93 per barrel. Drilling activity dropped off the scale, and production declines followed. Consequently, the state’s long-term slide in oil production tax collections accelerated.
In 2000, however, oil prices rebounded to levels not seen since the 1990 Gulf War. Exploration increased, and there was a slight up-tick in production. In fiscal 2000, the average taxable price of oil rose to $25.11 per barrel. In turn, oil production tax revenues, which had declined to $210 million in fiscal 1999, jumped to $416 million in fiscal 2000.
As prices return to more historical levels, so should future tax collections. Because of continuing production declines, however, oil production and regulation taxes are expected to generate only $659 million in revenue for the 2002-03 biennium, compared to $832 million in 2000-01, a 20.7 percent decline.
Natural gas tax collections are also expected to taper in the upcoming biennium, but not to as great a degree, and not for the same reasons. Due to a payment "speed-up" enacted in 1983, odd-numbered fiscal years receive 13 months of natural gas tax payments while even-numbered years receive 11 months of payments, making year-to-year revenue comparisons difficult without adjusting for the payment cycle. Driven by record-high prices, natural gas tax revenue came in at $698 million in fiscal 2000. Adjusting for prepayments, this represents $737 million for fiscal 2000–a 64 percent increase from adjusted fiscal 1999 collections. The recent rapid increase in natural gas prices is attributable in large part to concern over low inventory levels for the winter heating season, increased demand from natural gas-fired electric generation plants, and an overall low supply level due to the decrease in drilling in response to low prices in 1998 and 1999.
The factors in place for the upcoming biennium continue to be supportive of high prices. However, due in part to the expiration of the odd-year repayment schedule, natural gas tax revenues are expected to decline by $45 million to $1.8 billion for the 2002-03 biennium, a 2.5 percent drop.
Insurance Taxes. Most of the insurance that is purchased in Texas is subject to two types of taxes: insurance premium taxes and insurance maintenance taxes. While the tax base for each is generally the amount of gross premiums written, the rates vary depending upon the type of insurance.
Insurance maintenance taxes are used to fund regulatory costs, and the tax rates are adjusted each year based on each regulatory agency’s appropriation and unexpended balance from the previous year. Insurance premium tax collections are deposited into the General Revenue Fund and are thus available for general purpose spending. Property and casualty insurance is taxed at a rate of 1.6 percent, and title insurance is taxed at a rate of 1.35 percent. Life, accident, and health insurance is subject to a 1.75 percent rate, which also applies to HMO gross revenues.
Historically, insurance premium tax revenues have proved highly volatile, largely because of turbulence in the workers’ compensation insurance market, the application of premium tax credits for past guaranty fund assessments to cover insurer insolvencies, and legislative changes in the payment schedule. For the most part, the problems of the past have disappeared, and the tax base has stabilized.
On the property and casualty side, many markets had become extremely competitive, or "soft" during the last several years, but there are some signs that the overall market is now "hardening." Returns on investments have fallen, and costs are up (particularly medical costs, an important factor in workers’ compensation and portions of auto coverage). Likewise, increased upward pressure can be expected on HMO revenues and accident and health insurance premiums. Title and life coverage are expected to exhibit more modest growth, the former reflecting a slightly cooler (but still healthy) housing market; the latter, greater competition, especially from banking institutions.
Overall, insurance tax collections are expected to increase moderately in the 2002-03 biennium, rising to $1.7 billion from the $1.6 billion expected for the 2000-01 biennium. This represents a 6.7 percent biennium-to-biennium increase, compared to the relatively modest 3.0 percent biennial growth rate estimated for 2000-01.
Tobacco and Alcoholic Beverage Taxes. In the aggregate, tobacco and alcoholic beverage tax collections are expected to total $2.1 billion in 2002-03, $35 million less than the amount estimated for 2000-01.
In 2002-03, combined cigarette and tobacco tax collections–$986 million–will decline by 8.0 percent relative to 2000-01 receipts. The cigarette tax is by far the largest of the tobacco and alcohol taxes, accounting for 47 percent of total collections in fiscal 2000. Cigarette consumption is expected to continue to decline in response to health concerns and the higher prices imposed by tobacco companies to make tobacco settlement payments to the states. In fiscal 1999, the manufacturer price for a 20-pack of premium cigarettes jumped 46 percent over the price in the previous year; in fiscal 2000, prices rose by an additional 20 percent. More price hikes and ensuing declines in consumption are expected to occur in 2002-03. When compared to collections for the 2000-01 biennium, cigarette tax collections in 2002-03 are expected to decline by 9 percent to $909 million.
Texas imposes several alcohol taxes. The mixed beverage tax, levied at 14 percent of gross receipts, is by far the largest, accounting for 69 percent of all alcohol tax receipts and 34 percent of combined tobacco and alcohol tax collections in fiscal 2000. The mixed beverage tax differs from all other alcohol taxes, as it is based on the value, rather than on the volume or quantity sold. Mixed beverage tax collections are expected to continue rising through the forecast period, bringing in $767 million in the 2002-03 biennium–an increase of 6.3 percent over the preceding biennium.
Collections from the liquor and beer excise taxes are expected to increase moderately in the 2002-03 biennium. In contrast, wine and ale excise tax collections will decline slightly. Total revenue collections from these five taxes should reach $327 million in 2002-03, growing by 1.6 percent over 2000-01 collections. As a group, all alcoholic beverage taxes are expected to generate $1.1 billion in 2002-03, up 4.8 percent from the $1.0 billion for 2000-01.
Motor Fuels Taxes. After deducting for transfers to the State Highway Fund, motor fuels tax revenues will grow by 38.3 percent in the 2002-03 biennium to $1.6 billion, compared to the $1.1 billion for 2000-01. In fiscal 2000, the General Revenue Fund repaid to the State Highway Fund a legislatively-mandated delay of the June and July 1999 motor fuel allocations. Without the repayment, motor fuels tax collections during the 2002-03 biennium would be expected to grow by 6.7 percent over collections in the preceding biennium. Collections will also benefit from implementation of a new fraud elimination system adopted by the 76th Legislature.
Utility Taxes. For the 2000-01 biennium, utility tax revenues–principally drawn from the gas, electric, and water utility tax–are expected to increase by 9.6 percent to $556 million. Electric bills have increased substantially in fiscal 2001 because of higher natural gas prices paid by electric utilities in 2000 to fuel generation plants. In addition, the exceptionally long and hot summer of 2000 increased electricity usage in the first quarter of fiscal 2001. For the 2002-03 biennium, utility tax revenues are expected to show continued moderate growth, rising an estimated 4.8 percent, to $583 million, in response to population gains and usage increases.
Annual revenues from the gas, electric, and water utility tax during the 2002-03 biennium are expected to remain slightly below fiscal 2001 revenues. Although a healthy growth in demand for electricity is expected to continue, the increase will be offset by a statutorily-mandated 6 percent reduction in the price of electricity that will occur on January 1, 2002, when competition in the electric industry begins, as well as by expected reductions in the price of natural gas.
The public utility gross receipts assessment–paid by electric and telecommunications utilities–is expected to show continued moderate growth during the 2002-03 biennium. Increased price competition in those industries will dampen the growth in revenue collections to some extent. Revenues from the gas utility pipeline tax are expected to remain flat over the biennium because the cost to transport natural gas within the state is not expected to increase in the short term.
Hotel Occupancy Tax. The state hotel occupancy tax is levied at 6 percent of the charge for hotel stays under 30 days. Revenue from the hotel occupancy tax has grown as a result of the strong Texas and national economies and increased tourism and convention activity. Continued growth in the economy should guarantee an increasing revenue stream through 2003. Revenue from the tax is expected to rise by 9.6 percent in 2002-2003, generating $530 million–compared to the $483 million in collections for 2000-01.
Inheritance Tax. The inheritance tax in Texas is a "pick-up" on the federal inheritance tax. The tax due to Texas is equal to the federal credit allowed for state inheritance taxes paid. Thus, the Texas inheritance tax does not increase the total amount of inheritance taxes paid by an estate; it simply takes advantage of the federal credit to reallocate part of the total tax from the federal government to the state.
Pursuant to a 1997 change in federal law, the first $675,000 of a decedent’s estate is exempt from inheritance taxes for deaths occurring in calendar 2000 and 2001. The estate exemption will continue to increase gradually until it reaches $1,000,000 for deaths occurring in 2006 and thereafter. In fiscal 2000, Texas collected $278 million in inheritance taxes. Despite the higher exemptions, the inheritance tax is expected to total $587 million for 2002-03. This represents a 4.1 percent increase over the $564 million estimated for the 2000-01 biennium.
In addition to the $50.2 billion in tax revenue estimated for the 2002-03 biennium, the state’s general revenue-related funds are expected to collect $8.1 billion in non-tax revenue. Non-tax revenue comes from the interest and dividend earnings of the Permanent School Fund (PSF), state lottery proceeds, and fees and other sources.Lottery Proceeds. The Texas lotto game began a new matrix in July 2000, when the number of balls increased to 54 from 50. While the new format reduced the odds of winning, it increased the likelihood of larger jackpots, the idea being to draw more participants. In addition, the prize payout reverted to 55 percent in fiscal 2000, up from the 50 percent rate applicable for the 1998-99 biennium. Instant tickets ("scratch-offs") have continued to dominate the game mix, with sales for fiscal 2000 at $1.7 billion, compared to sales of $993 million for all on-line games (lotto, Cash 5, Pick 3, Texas Million).
Total lottery sales were up slightly in fiscal 2000, but net revenues after prizes and expenses declined by 8.2 percent. For the 2002-2003 biennium, lottery transfers are projected to total $ 1.6 billion, down 5.9 percent from the $1.7 billion for 2000-01. Net revenues are lower in part due to a larger prize payout, the transfer of unclaimed prizes to the Multicategorical Teaching Hospital Fund Account, and the continued maturation of the lottery.
Interest and Dividends. Interest and investment income is expected to remain relatively flat in 2002-03 at $1.7 billion. Most interest and dividend income accruing to general revenue-related funds is produced by the $21 billion corpus in the Permanent School Fund (PSF). In contrast to the decline in earnings experienced during the 2000-01 biennium (the consequence of restructuring the PSF asset portfolio), revenue from the PSF is expected to increase during the 2002-03 biennium. That increase, however, will be offset to a large degree by estimated decreases in the interest earnings on state deposits to the General Revenue Fund.
Fees and Other Revenues. Fees and other revenues consist of a disparate collection of revenues related to transportation, the conduct of businesses and professions, public utilities, tobacco settlement proceeds, unclaimed property, third-party payments from private vendors in the state-federal Medicaid program, and federal payments to the state for treating indigent patients. Altogether, revenues from these sources will increase by 7.5 percent, from $4.5 billion in 2000-01 to $4.9 billion in 2002-03.
The newly instituted non-bypassable utility fee accounts for well over half of the growth in this group of revenues in 2002-03. The fee–not to exceed 65 cents per megawatt hour–was created by the Legislature in 1999 as part of SB 7, which deregulated the Texas electric utility industry. Proceeds from the fee are to be used for programs to assist low-income electric customers, for customer education programs, and for school funding losses due to utility value declines attributable to electric deregulation. The Public Utility Commission (PUC) administers the fee and sets the rate. During the 2000-01 biennium, the PUC assessed electric utilities on an "as-needed" basis for administrative and customer education costs, as well as an estimated $65 million in fiscal 2001 for school funding losses. Mainly because only partial-year revenues were collected in 2000-01, the PUC projects that total revenues will more than quadruple, from $77 million in 2000-01 to $317 million in 2002-03.
In the next biennium, tobacco settlement receipts will account for the remaining growth in fees and other revenues. In fiscal 1999, Texas began receiving regularly scheduled court settlement payments from tobacco product manufacturers. Beginning with the 2000-01 biennium, payments are being adjusted for changes in inflation, the volume of domestic cigarette sales, and manufacturersë domestic profits. But even though cigarette sales are declining, Texas’ tobacco settlement receipts are expected to increase by $187 million, or 31.2 percent, to $786 million in 2002-03, as scheduled court-ordered payment levels rise substantially.
Countering the above-mentioned gains, one major component of this revenue category is expected to decline in 2002-2003. The general revenue allocation from the Disproportionate Share Program (through which the federal government helps compensate the state for the costs of taking care of indigent patients at psychiatric, chest, and university teaching hospitals) will fall by $48 million, or 8.3 percent, to $532 million. This decline reflects past Congressional budget-tightening actions to limit state payments from the program.