The 79th Legislature will have an estimated $64.7 billion available for general purpose spending in the 2006-07 biennium.
This figure represents the sum of the 2004-05 ending balance, 2006-07 tax revenue, and 2006-07 non-tax receipts, less estimated transfers to the Economic Stabilization Fund and adjustments to general revenue-dedicated account balances. (See Table 2.)
General Revenue-Related Funds by Source
Revenue in Millions Percent Change 2004-05 2006-07 Tax Collections Sales and Use Taxes $ 31,350 $ 33,911 8.2 % Motor Vehicle Sales and Rental Taxes 5,432 5,726 5.4 Motor Fuels Taxes 1,600 1,676 4.7 Franchise Tax 3,645 3,788 3.9 Insurance Taxes 2,348 2,491 6.1 Natural Gas Tax 2,928 2,371 (19.0) Cigarette and Tobacco Taxes 1,093 1,044 (4.5) Alcoholic Beverage Taxes 1,214 1,270 4.6 Oil Production and Regulation Taxes 1,088 912 (16.1) Inheritance Tax 236 35 (85.2) Utility Taxes 720 754 4.7 Hotel Occupancy Tax 486 525 8.1 Other Taxes 99 105 6.3 Total Tax Collections $ 52,239 $ 54,610 4.5 % Non-Tax Collections Federal Income $ 355 $ 0 (100.0) % Licenses, Fees, Fines, and Penalties 1,907 1,596 (16.3) Interest and Investment Income 1,669 1,468 (12.0) Lottery Proceeds 2,039 2,091 2.5 Sales of Goods & Services 190 186 (2.2) Settlements of Claims 1,011 950 (6.1) Land Income 51 18 (64.6) Contributions to Employee Benefits 365 403 10.2 Other Revenue Sources 2,321 1,956 (15.8) Total Non-Tax Collections $ 9,908 $ 8,666 (12.5) % Total Net Revenue $ 62,148 $ 63,276 1.8 % Balances and Adjustments Beginning Fund 1 Balance $ 46 $ 2,341 Beginning Funds 2 and 3 Balances 42 4 Change in GR-Dedicated Account Balances 424 0 Reserve for Transfers to the ESF (1,341) (878) Total Balances and Adjustments $ (829) $ 1,466 Total General Revenue-Related Funds
Available for Certification
$ 61,318 $ 64,742 5.6 % Note: Totals may not sum because of rounding.
SOURCE: Carole Keeton Strayhorn, Texas Comptroller
The relatively modest increase in available revenue comes about because a number of important factors and significant revenue sources that came into play in 2004-05 will be diminished, or entirely unavailable, in the upcoming biennium. These include: Project Pay-Up, the Spring 2004 tax amnesty program; the final phase-out of the state inheritance tax; the temporary assistance received under the federal fiscal relief program to the states; and the 2004-05 spike in oil and natural gas prices. All told, these and other factors represent $1.8 billion in funds available for 2004-05 but no longer on the table for the upcoming biennium. (See Table 3.)
Structural Revenue Changes in 2006-07
Relative to 2004-05
Description of Revenue Item Amount
Project Pay Up; tax amnesty program* $ 370.0 Net effect of 2004-05 refund limitation, General Appropriation Act 90.0 Inheritance tax, final phase-out 201.1 Sharp upward spike in crude oil and natural gas prices in 2004-05** 220.4 Federal fiscal relief revenue (amount received in 2004-05) 354.5 DPS fee revenue directed away from General Revenue*** 302.1 Decreases in General Revenue related to certain federal programs**** 222.5 Total Net Revenue, General Revenue-Related,
collected in 2004-05 that will not be available in 2006-07
$ 1,760.6 * Revenues available for certification; total for all funds was $379 million
** Net of additional required reserves to the Economic Stabilization Fund
*** Net of new revenue sources assigned to General Revenue
**** The Disproportionate Share and Vendor Drug programs
SOURCE: Carole Keeton Strayhorn, Texas Comptroller
The 2004-05 Ending Balance
The estimated ending certification balance for 2004-05 will be a positive $2.3 billion after setting aside a required $746 million transfer to the Economic Stabilization Fund (ESF).
In June 2003--following the conclusion of the regular session of the 78th Legislature-- the projected ending certification balance for 2004-05 was $98.6 million. Table 4 illustrates how the estimated ending balance has increased to $2.3 billion, primarily attributable to a faster than anticipated economic recovery from the 2002-03 downturn and the ensuing rise in tax revenues.
The Fiscal 2005 Ending Certification Balance:
The Effect of a Recovering Economy
Development of the Fiscal 2005 Ending Balance Projected Ending Balance (millions) Following the conclusion of the 78th Legislature, Regular Session; June 2003 $ 98.6 Following the conclusion of the 78th Legislature, Third Called Session; October 2003 113.5 Projected prior to (and following the conclusion of) the 78th Legislature, Fourth Called Session; May 2004 727.5 Since the Fourth Called Session Additional sales tax revenue 828.6 Decreased motor vehicle sales tax (275.7) Additional insurance premiums tax revenue 206.0 Additional severance tax revenue (net of required reserves for the Economic Stabilization Fund) 619.6 Additional lottery revenue 214.2 Other 24.4 January 2005 $ 2,344.6 SOURCE: Carole Keeton Strayhorn, Texas Comptroller
Transfers to the Economic Stabilization Fund
Transfers from state natural gas tax collections to the ESF should total $1.8 billion over the three-year period 2005-07. 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 $594 million from fiscal 2004 tax collections, this estimate anticipates that an additional $1.2 billion will be transferred to the ESF in 2006-07. After the fiscal 2007 transfer, the ESF balance should reach $2 billion--the largest balance in state history.
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 directly on consumption.
Sales and Use Taxes. The state limited 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 within or brought into the state. Sales and use taxes also include the boat and boat motor sales and use tax, the fireworks tax, and the motor lubricant sales and use tax, the latter of which is dedicated to the State Highway Fund.
In fiscal 2004, Texas sales and use tax receipts totaled $15.4 billion, up 7.9 percent from 2003. Following the 2002-03 collection declines, the 2004 rebound was largely driven by upturns in several major sectors of the Texas economy. Sales and use tax collections in the retail sector--representing 54.4 percent of all taxable transactions--rose 8.8 percent. Other sectors, such as services, with a 7.7 percent increase; communications, with a 6.6 percent increase; and wholesale trade, with a 6.4 percent increase, also posted strong gains.
Despite the strong recovery in the above economic sectors, overall sales tax revenue growth relative to 2004-05 should be moderated in the upcoming biennium by an economy slowing down slightly from its 2004 pace and the lack of tax amnesty revenue. General revenue sales and use tax collections are expected to rise to $33.9 billion in 2006-07, an 8.2 percent increase above the $31.3 billion expected in 2004-05.
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, are subject to the franchise tax. A firm's franchise tax liability is calculated with reference to two tax bases: taxable capital (net worth) and earned surplus. Earned surplus is essentially a company's modified federal taxable income apportioned to Texas. The current tax rates are 0.25 percent for taxable capital and 4.5 percent for earned surplus. However, the earned surplus tax is paid only 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.
Corporations may earn franchise tax credits for creating new jobs, making new capital investments, or undertaking research and development activities. These credits allow corporations to offset some or all of their franchise tax liability. All of the credits have provisions for carrying forward credit amounts that could not be used in the period in which they were earned.
Through 2003, corporations used credits earned to offset approximately $90 million in tax liabilities. However, many credits that were earned in the preceding years could not be used because there was little or no franchise tax liability to offset because corporate earnings were so anemic: the unused credits were carried forward instead. With the recent uptick in corporate earnings, some of the "banked" credits are certain to be used to reduce current and near-future tax liabilities, consequently restraining franchise tax revenue growth.
Another factor working to restrain franchise tax revenue growth is the use of organizational restructuring to reduce or 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 $3.8 billion in 2006-07, a 3.9 percent increase over the $3.6 billion estimated for 2004-05.
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 $5.7 billion to state revenue in 2006-07, up 5.4 percent from the $5.4 billion expected for 2004-05. The largest of these taxes, the motor vehicle sales and use tax, levied at 6.25 percent, should generate $5.2 billion in the upcoming biennium.
After declining 8.8 percent in fiscal 2003, motor vehicle sales tax collections recovered slightly in 2004. Fiscal 2005 collections, however, have proved disappointing, and it is expected that 2005 collections will fall 1.2 percent below 2004 collections. While the average manufacturer's suggested retail price of a new vehicle is expected to rise, incentives are projected to increase at a slightly slower rate, meaning that the average transaction price paid should continue to climb.
In a move that should stimulate sales, Congress recently restored the itemized deduction of sales taxes, including motor vehicle sales taxes, for two years. Thus, a vehicle sold at the average transaction price of $23,300 could qualify for a $1,456 federal tax deduction. Because, under current law, the deduction will be available only for tax (calendar) years 2004 and 2005, potential motor vehicle buyers will have an added incentive to purchase a vehicle from now through December 2005.
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.
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 360 million barrels in 2003. Beginning in 2002, the taxable oil price took on an upward path, rising from $17 to a high of more than $48 per barrel in October 2004. Persistent threats of foreign supply disruptions in concert with tight supply and stronger than expected demands from China and at home helped pushed the fiscal 2004 taxable price to $32.49, second highest in history. In turn, oil production and regulation tax revenues increased to a twelve-year high of $496 million in 2004.
Because of continuing production declines and expected lower prices, oil production and regulation taxes are anticipated to generate only $912 million in revenue for 2006-07, compared to $1.1 billion in 2004-05, a 16.1 percent decline.
Compared to the $2.9 billion in collections estimated for 2004-05, the natural gas tax is expected to generate $2.4 billion in the upcoming biennium, a decline of 19.0 percent. Taxable gas prices in 2005 are expected to exceed 2004 levels but decline thereafter, following the oil market.
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. Seventy-five percent of insurance premium tax collections go into the General Revenue Fund; the remainder is constitutionally dedicated to The Foundation School Fund Account. 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.
Total insurance tax revenues for 2006-07 are expected to come in at $2.5 billion, 6.1 percent above the $2.3 billion collected in 2004-05. Although insurance premiums are expected to increase moderately in 2006-07, net insurance tax revenues are expected to exhibit less momentum, largely because of a small expected decline in tax revenues in fiscal 2005. The modest decline 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 2005 through 2007, net revenue collections in 2005 are expected to drop 1.8 percent below the amount collected in 2004 because the settle-up amount collected in March 2005 is not expected to be quite as large as the amount collected in March 2004.
Tobacco and Alcoholic Beverage Taxes. Compared to the $1.1 billion estimated for 2004-05, cigarette and cigar/tobacco products tax collections are expected to fall 4.5 percent to $1.0 billion in 2006-07.
Cigarettes, which account for the great majority of tobacco tax revenue, are taxed at the rate of $0.41 per pack of 20 cigarettes. Cigarette consumption is expected to continue declining in response to health concerns, legal restrictions on smoking, and the higher prices imposed by the major tobacco companies that are making 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, although the fiscal 2003 change was under 2 percent and there was no increase in fiscal 2004. More price hikes--and ensuing declines in consumption--are expected in 2006-07.
Texas imposes several alcohol taxes. The mixed beverage tax, levied at 14 percent of gross receipts, is by far the largest, accounting for almost three-quarters of all alcoholic beverage tax receipts. Mixed beverage tax collections should continue to rise through the forecast period, generating $925 million in 2006-07--an increase of 5.5 percent over the current biennium.
Unlike the value-based mixed beverage tax, all other alcohol taxes are based on the volume or quantity sold. Collections from the beer, liquor, wine, and malt liquor (ale) taxes are expected to increase moderately in 2006-07. As a group, all alcoholic beverage taxes are expected to generate $1.3 billion in 2006-07, up 4.6 percent from $1.2 billion in 2004-05.
Motor Fuels Taxes. Motor fuels taxes consist of the gasoline tax, the diesel fuel tax, and the liquefied gas tax. Gasoline and diesel fuel are taxed at $0.20 per gallon, while liquefied gas is taxed at $0.15 per gallon.
After deducting for transfers to the State Highway Fund, motor fuels tax revenues are expected to produce $1.7 billion in 2006-07, a 4.7 percent increase above the $1.6 billion collected in 2004-05. Assuming adequate supplies, diesel fuel consumption should contribute significantly to the growth rate.
Utility Taxes. Investor-owned utilities pay several taxes on their gross receipts. Total utility tax revenues are expected to increase by 12.6 percent to $720 million in 2004-05 due in large part to higher costs paid by consumers for natural gas, or for electricity generated by natural gas and fuel oil. In response to population gains, usage increases, and falling natural gas and crude oil prices, utility tax revenues should exhibit more moderate future growth in the upcoming biennium--on the order of 4.7 percent--to $754 million in 2006-07.
The gas, electric, and water utility tax is the largest of the state's utility taxes. The electric utility market remains extremely competitive, but high natural gas and crude oil prices have raised production costs, which ultimately show up in taxable receipts. Revenues from this source are estimated at $658 million for 2006-07, 5.3 percent above the $625 million estimated for 2004-05.
Public utility gross receipts assessments, which are paid by electric and telecommunications utilities, are expected to rise moderately in 2006-07, in contrast to the relatively sluggish growth experienced over the previous biennium. Finally, gas utility pipeline tax revenues are expected to remain stable over 2006-07 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. After two years of decreases, collections started to rise in 2004, due to a surge in business travel and increased tourism. In 2006-07, hotel tax revenues are expected reach $525 million, 8.1 percent above the $486 million estimated in 2004-05.
Inheritance Tax. As a result of Congressional action, the state inheritance tax is being phased out. 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.
Pursuant to a 2001 change in federal law, the first $1.5 million of a decedent's estate is exempt from inheritance taxes for deaths occurring in calendar 2004 and 2005. The exemption increases to $2 million in calendar 2006, rising to $3.5 million in calendar 2009. In addition, the amount of the "pick-up" that states can collect was reduced by 25 percent each year beginning with deaths occurring in calendar 2002, meaning that the tax will be eliminated in calendar 2005 and thereafter.
In fiscal 2002, the last full year of revenue before the phase-out began, Texas collected $334 million in inheritance taxes. In fiscal 2004, Texas collected $151 million. Due primarily to the above changes in federal law, inheritance tax collections are expected to total only $35 million in the upcoming biennium.
In addition to the $54.6 billion in tax revenue estimated for the 2006-07 biennium, the state's general revenue-related funds are expected to collect $8.7 billion in non-tax revenue. This represents a 12.5 percent decline from the $9.9 billion in non-tax receipts estimated for 2004-05. Non-tax revenue comes from the total return distribution from the Permanent School Fund (PSF) to the Available School Fund (ASF), state lottery proceeds, fees, and other sources.
Interest and Investment Income. Interest and investment income are expected to generate $1.5 billion in 2006-07, down 12.0 percent from the $1.7 billion collected in 2004-05. Most of these funds come from the total return distribution to the ASF from the PSF.
Lottery Proceeds. In fiscal 2004, Texas lottery ticket sales rose for the fifth consecutive year and registered an 11.4 percent increase--the first double-digit growth rate since 1996. Major factors behind the increase included a 9 percent rise in the sale of instant tickets, the introduction of the multi-state MegaMillions game in December 2003, and an unusual number of high-dollar jackpots in the Texas Lotto and MegaMillions games. Instant tickets accounted for two-thirds of the dollar volume of ticket sales in fiscal 2004.
Lottery deposits to the Foundation School Fund Account are projected to total $2.1 billion in 2006-07, up 2.5 percent from the $2.0 billion expected in 2004-05.
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 embraces a disparate group of revenues including 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. Total revenues in this category are estimated to decrease by 17.6 percent to $5.1 billion in 2006-07, from $6.2 billion in 2004-05.
In fiscal 1999, Texas began receiving regularly scheduled court settlement payments from the major American cigarette manufacturers. Beginning with the 2000-01 biennium, payments were adjusted for changes in the general consumer price index, the volume of those manufacturers' domestic cigarette sales, and the manufacturers' operating profits on their domestic cigarette sales. Texas' tobacco settlement receipts are expected to total $980 million in 2004-05, falling to $937 million in 2006-07.
Future tobacco settlement payments may be affected by two factors. Because many other state and local governments have raised cigarette tax rates to fund their operations in recent years, the national decline in consumption is likely to accelerate, reducing the sales volume of the settling cigarette manufacturers and thereby causing lower settlement payments. In calendar 2002, 21 states raised their tax rates, followed by 17 states in 2003 and, to date, eight states in 2004.
With respect to federal payments, revenues from the federal disproportionate share program, which helps pay for indigent care at state and local hospitals, are expected to fall in 2006-07 by $131 million, or 17.9 percent, as the state share of the program declines while the local share increases. Vendor drug rebates from major pharmaceutical manufacturers are expected to decline by $91 million, or 18.5 percent, as Medicare rather than Medicaid assumes responsibility for paying for prescription drugs for low-income senior citizens. Finally, due to one-time audit gains in fiscal 2004, premium credits on the historical difference between state Medicaid premium payments and the cost of patient care are projected to fall by $47 million, or 100 percent, during this period.