Available RevenueThe 78th Legislature will have an estimated $54.1 billion available for general purpose spending in the 2004-05 biennium. This figure represents the sum of the 2002-03 ending balance, 2004-05 tax revenue, and 2004-05 non-tax receipts, less estimated transfers to the Economic Stabilization Fund and adjustments to general revenue-dedicated account balances. (See Table 2.)
Table 2
General Revenue-Related Funds by SourceNote: Totals may not sum because of rounding.
Revenue in Millions Percent
Change2002-03 2004-05 Tax Collections Sales Tax $29,017 $30,167 4.0% Motor Vehicle Sales and Rental Taxes 5,679 5,687 0.1 Motor Fuels Taxes 1,509 1,544 2.3 Franchise Tax 3,728 3,687 (1.1) Insurance Taxes 1,964 1,892 (3.6) Natural Gas Tax 1,408 1,445 2.7 Cigarette and Tobacco Taxes 1,103 1,060 (3.9) Alcoholic Beverage Taxes 1,127 1,148 1.9 Oil Production and Regulation Taxes 687 557 (19.0) Inheritance Tax 546 165 (69.7) Utility Taxes 623 641 3.0 Hotel Occupancy Tax 464 475 2.4 Other Taxes 85 82 (3.3) Total Tax Collections $47,939 $48,551 1.3% Non-Tax Collections Licenses, Fees, Fines, and Penalties $1,721 $1,738 1.0% Interest and Investment Income 1,558 1,495 (4.1) Lottery Proceeds 1,710 1,586 (7.3) Sales of Goods & Services 175 178 1.7 Settlements of Claims 1,028 1,008 (1.9) Land Income 13 13 (2.6) Contributions to Employee Benefits 298 320 7.5 Other Revenue Sources 1,818 1,499 (17.5) Total Non-Tax Collections $8,321 $7,837 (5.8)% Total Net Revenue $56,259 $56,389 0.2% Balances and Adjustments Beginning Fund 1 Balance $3,936 $(1,799) Beginning Funds 2 and 3 Balances 57 4 Change in GR-Dedicated Account Balances (97) (334) Reserve for Transfers to the ESF (218) (184) Total Balances and Adjustments $3,678 $(2,314) Total General Revenue-Related Funds Available for Certification $59,938 $54,075 (9.8)%
SOURCE: Carole Keeton Strayhorn, Texas Comptroller
The 2002-03 Ending BalanceThe estimated ending certification balance for 2002-03 will be negative $1.8 billion after setting aside a required $135 million transfer to the Economic Stabilization Fund (ESF).
Transfers to the Economic Stabilization Fund
Transfers from state natural gas tax collections to the ESF should total $329 million over the three-year period 2003-05. 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 $84 million from fiscal 2002 tax collections, this estimate anticipates that an additional $245 million will be transferred to the ESF in 2004-05. After the fiscal 2005 transfer, the ESF balance should approach $1.3 billion--the largest balance in state history.
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 motor vehicle sales and use tax revenues 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. Sales and Use Tax. The state 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 or brought into 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 of which is dedicated to the State Highway Fund.
In fiscal 2002, Texas sales and use tax receipts totaled $14.5 billion, down 1.1 percent from 2001. Following the 4.9 percent increase registered in 2001, the 2002 decline marks the first time that sales tax revenues have registered a year-over-year decline since 1983, when revenues fell by 4.5 percent.
The 2002 drop-off in sales and use tax collections was largely the consequence of downturns in several major sectors of the Texas economy. Sales and use tax collections in the service sector fell 3.1 percent, 2.6 percent in wholesale trade, and 4.3 percent in communications. Other sectors, such as manufacturing and construction, also registered declines. But for the retail sector, which represented 53.5 percent of all taxable transactions, sales tax collections would have fared far worse. Propelled by steady consumer spending, sales tax revenue growth in this sector managed to remain positive, rising by 1.9 percent.
Economic slowdowns in the above-mentioned sectors are expected to continue to limit growth in sales and use tax collections. Exacerbating the problem, significant refunds could be made in 2004-05 for sales taxes paid on items used in conjunction with several federal contracts, depending on the outcome of current litigation.
General revenue sales and use tax collections are expected to rise modestly in 2004-05, contributing $30.2 billion for the biennium. Compared to the $29.0 billion expected in 2002-03, this represents a 4.0 percent biennium-to-biennium increase.
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 taxable capital (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 and 4.5 percent for earned surplus.
The factor expected to exert the greatest influence on franchise tax revenues in 2004-05 is corporate profits. At the national level, corporate profits peaked in calendar 1997 and then began to fall; by the end of calendar 2001, they had fallen 12.3 percent. Because fiscal year franchise tax collections tend to lag changes in corporate profits by one to two years, the peak year for franchise tax revenue was fiscal 1999, when collections totaled just under $2.1 billion. By fiscal 2002, tax revenue had fallen 6.8 percent below 1999 collections. Franchise tax revenues declined less than profits in part because the capital component of the tax provides a floor to revenues, regardless of profit levels. In addition, several key sectors of the Texas economy, including energy, maintained relatively strong profits through 2001.
At the national level, corporate profits began to recover in calendar 2002, and this recovery is expected to continue into 2005. Texas franchise tax revenues, however, will not match the national corporate profit growth rate. Because of the aforementioned lag, fiscal 2003 tax revenues will reflect the weak profits recorded in calendar 2001. In addition, energy sector profits, which proved stronger than average in calendar 2001, are expected to come in weaker than average in calendar 2002 and 2003.
In addition to low corporate profits, franchise tax credits and exemptions are expected to provide a second slowing effect. Enacted by the 76th Legislature, franchise tax credits for research and development, capital investment, job creation, and child-care had a relatively small effect on net revenues in fiscal 2001 and 2002. But as the economy slowly improves, growth in the taxable base should allow more corporations to use the credits that they earned in 2001 and 2002 and carried forward.
A third factor working to reduce franchise tax revenues is the increasing popularity of organizational restructuring to reduce or totally eliminate franchise tax liability. Although this stratagem had been available in the past, some acceleration in the use of restructuring has been detected in more recent years.
Franchise tax collections are expected to total $3,687 million in 2004-05, a 1.1 percent drop from the $3,728 million estimated for 2002-03.
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 should contribute $5,687 million to state revenue in 2004-05, up 0.1 percent from the $5,679 million expected in 2002-03. The largest of these taxes, the motor vehicle sales and use tax, levied at 6.25 percent, is estimated at $5.2 billion in 2004-05.
Compared with the strong growth in the preceding biennium, auto sales in 2002-03, while still increasing, showed clear signs of slowing down, propped up by low interest rates and dealer incentives. While the consumer shift towards trucks, sport utility vehicles, and luxury vehicles is expected to continue, a substantial braking force on tax revenue is expected to be applied by manufacturer rebates, lower used car prices, and the depletion of the additional funds made available to homeowners from refinanced mortgages.
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. Texas oil production peaked more than a quarter century ago, in 1972, when it reached 1.2 billion barrels. Since then, oil production continued its downward trend to 353 million barrels in 2001. Although taxable oil prices were above $24 per barrel in 2000 and through September 2001, the taxable oil price dropped to $20 per barrel the following month and fell again in November to $17 as the economy faltered in the wake of 9/11.
Although geopolitical conflicts in the Middle East and a concerted effort by major foreign producers to restrain output helped push oil prices back above $24 by April 2002, the fiscal 2002 average taxable oil price dropped to $21.80, down $5.95 from $27.75 for fiscal 2001. In turn, fiscal 2002 oil production and regulation tax revenues declined to $339 million from the eight-year high of $443 million collected in fiscal 2001.
Because of continuing production declines, however, oil production and regulation taxes are expected to generate only $557 million in revenue for the 2004-05 biennium, compared with $687 million in 2002-03, for a 19.0 percent decline.
Due to a payment "speed-up" enacted in 1983, odd-numbered fiscal years received 13 months of natural gas tax payments while even-numbered years received 11 months of payments. This provision was repealed in 1999, and fiscal 2002 was the last eleven-month fiscal year for natural gas tax collections. After adjusting fiscal 2001 and 2002 to include 12 months of revenue, fiscal 2002 natural gas tax revenue dropped 53 percent from fiscal 2001 collections. Taxable natural gas prices averaged $2.43/Mcf in fiscal 2002 --a 47.5 percent decline from the $4.63 average price in fiscal 2001. The national economic slowdown and record high natural gas storage inventory levels after the mild winter of 2001-02 contributed to the steep price decline.
Natural gas tax revenues are expected to increase 2.7 percent in 2004-05 over fiscal 2002-2003 revenue. This increase, however, is somewhat deceptive, owing to the eleven-month fiscal year for 2002, as alluded to above. Because fiscal 2002 revenues will only reflect eleven months, and fiscal 2003, twelve, the 2002-03 biennium will record only 23 months of collections, while the 2004-05 biennium will show 24 months.
For 2004-05, total natural gas tax collections for the 24-month reporting period are estimated at $1,445 million. Actual, 23-month tax collections for 2002-03 are estimated at $1,408 million. However, after adding back $82.7 million to fiscal 2002 to adjust those collections to a "24-month biennium," collections for 2002-2003 would total $1,491 million. Thus, once adjusted for shorter collection period in 2002-03, total collections are expected to decrease by 3.1 percent in 2004-05.
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 annually 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 (P&C) insurance is taxed at a 1.6 percent rate, and title insurance is taxed at 1.35 percent. The rate for life, accident, and health (LA&H) insurance is 1.75 percent, which also applies to HMO gross revenues.
From the mid-1980s into the mid-1990s, insurance premium tax revenues were volatile, reflecting turbulence in the workers' compensation insurance market, the application of premium tax credits for past guaranty fund assessments to cover a number of large insurer insolvencies, and legislative changes in the payment schedule. Moving into the late 1990s, these factors had largely played out, and the tax base grew more stable.
With the rising stock market in the 1990s, P&C insurers reduced premiums and expanded their markets to generate premium volume, and, hence, investment capital. As a result, P&C markets became extremely competitive, or "soft." When the stock market went into decline, insurers reversed course, became more selective in writing new policies and renewing existing policies, and started raising premiums. Rising claim costs, particularly among the workers' compensation and automobile (medical care liability) and homeowner (mold and water-related damage) lines exacerbated this cyclical "hardening" of the market. Workers' compensation insurance was hit with a double-whammy: not only had medical care costs risen, but the layoffs caused by the general economic downturn triggered a jump in new workers' compensation claims, in line with the long-established historical correlation between layoffs and claims.
Likewise, low investment revenues and higher claims costs have also exerted upward rate pressure for HMO coverage as well as traditional accident and health insurance. Similarly affected by poor investment returns, title and life insurance are expected to exhibit relatively flat growth, the pressure to raise rates attenuated by a slowing housing market for the former and competition from alternate long-term investment stratagems for the latter.
Total insurance tax revenues for 2002-03 are expected to show a 21.5 percent jump to $1,964 million over the $1,617 million collected in 2000-01, driven in large part by fiscal 2002's 27.5 percent increase over 2001. Although insurance premiums are expected to increase again in 2004-05, net insurance tax revenues are expected to fall by 3.6 percent to $1,892 million. This apparent inconsistency is attributable to the premium tax prepayment schedule, which requires insurers to prepay each year their estimated tax liability for the next fiscal year based on their tax base for the previous year. Thus, if premiums rise gradually for several years and then make a large jump, the next year would see a large "settle-up" of tax liability because of the underage of prepayments collected in the previous year, plus significantly higher prepayments for the next year's tax liability.
Thus, while premiums are still expected to increase in fiscal 2003 through 2005, net revenue collections in 2003 should fall below the amount collected in 2002 because the settle-up amount collected in March 2003 is not expected to be nearly as large as the amount collected in March 2002.
Tobacco and Alcoholic Beverage Taxes. In 2004-05, combined cigarette and tobacco tax collections--$1,060 million--are expected to drop by 3.9 percent relative to the $1,103 million in estimated 2002-03 receipts.
Cigarettes, which account for the great majority of tobacco use, are taxed at a basic rate of $0.41 per pack of 20. Cigarette consumption is expected to continue to decline in response to health concerns, legal restrictions on smoking, and the higher prices imposed by tobacco companies to make tobacco settlement payments to the states. In fiscal 1999, the manufacturer price for a pack of premium cigarettes jumped 46 percent above the price in the previous year. Over the next three years, manufacturer prices increased by an average of 12 percent per year. More price hikes--and ensuing declines in consumption--are expected in 2004-05. When compared to the $999 million estimated for 2002-03, cigarette tax collections in 2004-05 are expected to decline by 5.1 percent, to $948 million.
Texas imposes several alcohol taxes. The mixed beverage tax, levied at 14 percent of gross receipts, is by far the largest, accounting for three-quarters of all alcohol tax receipts. Mixed beverage tax collections are expected to continue rising through the forecast period, bringing in $817 million in 2004-05--an increase of 2.2 percent over the preceding biennium. Unlike the value-based mixed beverage tax, all other taxes on alcohol are based on the volume or quantity sold. Collections from the beer, wine, and airline/passenger train taxes are expected to increase moderately in 2004-05. In contrast, the malt liquor (ale) and liquor tax collections will likely decline. As a group, all alcoholic beverage taxes are expected to generate $1,148 million in 2004-05, up 1.9 percent from $1,127 million in 2002-03.
Motor Fuels Taxes. After deducting for transfers to the State Highway Fund, motor fuels tax revenues will grow by 2.3 percent in 2004-05 to $1,544 million, compared to $1,509 million in 2002-03. Collections have benefited from implementation of a new fraud elimination system adopted by the 76th Legislature.
Utility Taxes. Total utility tax revenues are expected to increase by 3.1 percent to $623 million in 2002-03. In response to population gains and usage increases, utility tax revenues are expected to show continued moderate growth--on the order of 3.0 percent--to $641 million in 2004-05.
The gas, electric, and water utility tax is the largest of the state's utility taxes. While the electric deregulation legislation enacted in 1999 had mandated a 6 percent reduction in rates, tax revenue from this source registered a 7.8 percent decline in fiscal 2002, largely because of lower natural gas prices. Tax revenue growth in fiscal 2003 is expected to stay relatively flat, and revenue growth in the next several years is expected to be only moderate. Estimated collections for 2004-05 are $541 million, 3.0 percent above the $525 million estimated for 2002-03.
Public utility gross receipts assessments, which are paid by electric and telecommunications utilities, are expected to rise moderately in 2004-05, in contrast to the relatively sluggish growth experienced over the previous biennium. Again, deregulation and the resulting competition for consumers has moderated revenue growth in the electric utilities and telecommunications industries.
Gas utility pipeline tax revenues are expected remain stable over 2004-05 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 growth from the hotel occupancy tax has dropped as a result of decreased tourism and business travel consequent to the slowdown in the state and national economies. Hotel revenues through fiscal 2005 are expected to remain relatively flat, with 2004-05 tax revenues rising by only 2.4 percent to $475 million for the biennium, compared with the $464 million in collections for 2002-03.
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 2001 change in federal law, the first $1 million of a decedent's estate is exempt from inheritance taxes for deaths occurring in calendar 2002 and 2003. The estate exemption will increase to $1.5 million for deaths occurring in calendar 2004 and 2005. The exemption increases again in calendar 2006 to $2 million and in calendar 2009 to $3.5 million. In addition, the amount of the "pick-up" that states can collect will be reduced by 25 percent for deaths occurring in calendar 2002. This reduction will increase by 25 percent each year until it is eliminated in calendar 2005 and thereafter.
In fiscal 2002 alone, Texas collected $334 million in inheritance taxes. Due primarily to changes in federal law, the inheritance tax is expected to total only $165 million for the two-year period 2004-05. Compared with the $546 expected in the 2002-03 biennium, the estimate for 2004-05 represents a 69.7 percent decrease.
Non-Tax Receipts
In addition to the $48.6 billion in tax revenue estimated for the 2004-05 biennium, the state's general revenue-related funds are expected to collect $7.8 billion in non-tax revenue. Non-tax revenue comes from the interest and dividend earnings of the Permanent School Fund (PSF), state lottery proceeds, fees, and other sources. This represents a 5.8 percent decline from the $8.3 billion in non-tax receipts collected in 2002-03.
Interest and Interest Income. Interest and investment income is expected to generate $1.5 billion in 2004-05, down 4.1 percent from the $1.6 billion collected in 2002-03. Most interest and dividend income accruing to general revenue-related funds is produced by the $17 billion corpus in the Permanent School Fund (PSF). Current income produced by the PSF is expected to decline slightly largely because of extremely low bond interest rates. Sharply lower interest rates will also cause earnings on state deposits to the General Revenue Fund to decline.
Lottery Proceeds. In fiscal 2002, almost all state lotteries, including the Texas lottery, drew more sales than the year before. This was mainly attributable to a 12.6 percent increase in the sale of scratch-off games, which now account for more than 65 percent of total Texas lottery sales. Sales in the six-number Lotto game saw a decline of 14.6 percent during the year. Among the other on-line games, Texas Two Step replaced Texas Million in fiscal 2001; and in fiscal 2002, Cash 5 underwent a change that reduced the number of balls in the drawing pool to 37 from 39. Both changes increased the interest in these games, and, thus, overall sales in the smaller on-line games increased 6.4 percent. In aggregate, Texas lottery sales are totaling nearly $3 billion per year.
Reflecting a pattern of declining per capita sales over time, lottery transfers to the state are projected to total $1.6 billion in 2004-05, down 7.3 percent from the $1.7 billion expected in 2002-03.
Fees and Other Revenues. In addition to the long-established and ever-increasing variety of fees for transportation and the conduct of certain professions and businesses, this category includes a disparate group of revenues related to 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 in this category will decrease by 5.9 percent to $4.8 billion in 2004-05, from $5.0 billion in 2002-03.
Since September 1, 1995, the telecommunications infrastructure assessment has generated a total of $1.2 billion for the state; and it will meet the legislatively-mandated cap of $1.5 billion by fiscal 2004.
In 2001, the 77th Legislature created the System Benefit Trust Fund and the dedicated GR Account--Telecommunications Infrastructure. The same legislation moved the revenue generated by the non-bypassable utility fee, which previously had been considered as undedicated general revenue, into the newly-created trust fund. The legislation also reclassified telecommunications infrastructure assessment revenues as dedicated general revenue.
In fiscal 1999, Texas began receiving regularly scheduled court settlement payments from tobacco product manufacturers. Beginning with the 2000-01 biennium, payments were adjusted for changes in the general consumer price index, the volume of domestic cigarette sales, and manufacturers' domestic operating profits. In 2002-03, Texas tobacco settlement receipts will be approximately $1,011 million; those payments included repayments to the state treasury of $143 million of a "loan" to the sub-state tobacco settlement recipients (counties and hospital districts) in fiscal 1999. Even with declining cigarette sales, Texas' tobacco settlement receipts in 2004-05, at $996 million, will be only slightly lower than receipts in the previous biennium, primarily because scheduled court-ordered payment levels will rise.
Future tobacco settlement payments may be affected by two factors. First, 21 states raised their cigarette tax rates in calendar 2002, with increases ranging from $0.07 to $0.75 per pack. Other states are considering rate hikes. At the sub-state level, New York City increased its tax by $1.42 per pack in 2002; cigarettes purchased in New York City now carry $3.39 in federal, state, and local excise taxes. These price increases, and the resulting change in cigarette consumer behavior, may further reduce tobacco settlement payments. Second, decisions in several recent court cases--most notably in California--have gone against tobacco manufacturers and could thereby reduce their ability to make future settlement payments.
One major Medicaid-related revenue source, the state share of vendor drug rebates and premium credits, however, should continue to grow in 2004-05. General revenues from this source should increase by $42 million, or 14.7 percent, to $325 million. General revenue rebates from major pharmaceutical manufacturers participating in Medicaid's vendor drug program are expected to increase by $59 million--22.3 percent--in 2004-05, as the use of prescription drugs continues to escalate. However, premium credits, based on the historical differential between state Medicaid premium payments and the cost of patient care, are expected to plunge from $18 million in 2002-03 to $0 in 2004-05 as patient care costs continue to escalate.
Finally, the general revenue allocation from Medicaid's 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) is expected to fall by $46 million, or 7.5 percent, to $561 million in 2004-05. This decline reflects past Congressional actions to help balance the national budget by limiting state payments from the program.
