finance and fiscal policy

Finance and Fiscal Policy

Chapter

13

Learning Objectives

13.1 Assess the fairness of Texas’s budgeting and taxing policies.

13.2 Describe the sources of Texas’s state revenue.

13.3 Describe the procedure for developing and approving a state budget.

13.4 Evaluate the effectiveness of the state’s financing of public services.

Copyright © 2016 Cengage Learning. All rights reserved.

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Fiscal Policies

� Fiscal policy-public policy that concerns taxing, government spending, public debt, and management of government money

� Tax revenue includes state sales taxes, cigarettes,motor vehicles, gross receipts from businesses

� Revenue other than taxes;include oil and gas royalties

�

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Fiscal Policies

� Taxing Policy

� Remain committed to pay-as-you go spending and low taxes, no matter the strength of the economy

� Balanced budget, low tax rates and low to moderate government spending levels

� Freedom requires limiting narrowly the role of government , private property,

Prefer regressive taxes

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Fiscal Policies

free markets, and voluntary arrangements

�

� Remain committed to pay-as-you go spending and low taxes, no matter the strength of the economy

� Balanced budget, low tax rates and low to moderate government spending levels

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Fiscal Policies

� Prefer regressive taxes

� Relies heavily on sales tax (among nation’s highest) (6.25 and 2.0=8.25)

� Unfair? Fall more heavily on the poor. Under such taxes, the burden decrease as personal income increases .Ex. A greater proportion of the income is affected when compared to someone who makes a higher income (car example)

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Percent of Average Annual Family Income Paid in Local and State Taxes in Texas (2011)


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Critical Thinking Question: What are the benefits

and problems of a regressive tax system?

Fiscal Policies


� Texas does not have progressive taxes, (impact increase as income rises) and have consistently voted against such a tax. Have put it in the constitution that it requires a popular referendum before an income tax can be levied; in other words, must have voter approval

� Some like that everyone is contributing to the state government

� Land- and product-based tax system vs knowledge and service based economy 8

Fiscal Policies


� Service sector-businesses that provide services, such as finance, health care, food service, data processing, or consulting

� Recently some of these services have been taxed (2006). Altered the franchise tax law to require most Texas businesses to pay taxes calculate on their profit margins

� The extension of the franchise tax subjected many service sector entities to taxation

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Fiscal Policies


� Local governments rely heavily on real estate taxes for their revenues

� More than half of the state's general revenue tax collections are sales and use taxes

� Use tax seldom enforced, however

� Texas recognized as one of the “top performers” in the nation in the ability of its tax system to respond to shifts in the economy

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Fiscal Policies


� 2012-2013- Sales tax (50 billion) and franchise tax collections ($9.3 billion ; still reliance on sales tax revenue

� Changes in Texas's economy, without corresponding changes in its tax system are projected to continue to erode the tax base

� Current structure, the part of the economy generating the greatest amount of revenue frequently pays the least amount in taxes (Texans want to encourage job growth)

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Fiscal Policies

� In addition to sales and franchise tax, the state charges special fees and assessments that are not called taxes but they represent money the state's residents pay to government.

� Fee- a charge imposed by an agency upon those subject to its regulation

� Meets the definition of tax if it benefits the general public(attorney legal fee to fund legal assistance). Others not so much: fishing fee

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Fiscal Policies

� Budget Policy

� Balanced budget

� Texas Constitution prohibits debt

� Comptroller of pubic accounts must submit to the legislature in advance of each regular session a sworn statement of cash on hand and revenue anticipated for the succeeding two years.

� Need 4/5 (80%) in both houses votes to ignore the comptroller's predictions or the legislature provides new revenge sources 13

Fiscal Policies� Budget Policy� All Funds Budget includes all sources of

revenue and all spending.(must be balanced each biennium)

� General Revenue Fund-This budget includes the nondedicated portion of the General Reserve Fund. An unrestricted state fund that is available for general appropriations by the legislature plus some of the funds used to finance public education (available school fund)

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Fiscal Policies

� Budget Policy

The General Revenue-Dedicated Funds Budget-includes more than 200 separate funds. Restrictions on use, these accounts are defines as dedicated funds The funds can only be used for their designated purposes, though in some instances money can be diverted to the state's general fund to satisfy the mandate for a balanced budget ( means they haven't been spent but in the account to be used for when needed). Straus limit this practice.

Ex. State Highway Fund (Motor fuel taxes) State to build and maintain infrastructure highway (policing of the highway,maintenance, construction)

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Fiscal Policies

� Budget Policy� Ex. Public School Funds from the oil and gas

severance taxes ( Land Commissioner) to schools

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Fiscal Policies

� Spending Policy

� Texas Constitution restricts increases in spending that exceeds the rate of growth of the state's economy

� Limits in spending that exceeds the rate of growth of the state's economy

� Limits in welfare spending in fiscal year to 1% of total state expenditures

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Fiscal Policies

� Spending Policy

� Historically, Texas have shown little enthusiasm for state spending

� Ranks 48th - 50th in state spending

� Moderate willingness to spend for highways, roads and other public improvements

� Little support for social services and welfare programs 18

Fiscal Policies

� Learning Check

� What are three characteristics of Texas's fiscal policy? Balanced budget, favors low taxes, and spends at low to moderate levels.

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Fiscal Policies

� Learning Check

� High sales tax and no income tax. Regressive or progressive system. Regressive. Sales tax so poor people pay a higher percentage of their income in taxes than do wealthier (Start out with less do percentage greater)

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Revenue Sources

� The Politics of Taxation

� Comes for funding for government services primarily comes from those who pay taxes. The state derives revenue from fees for licenses, sales of assets, investment income, gambling, borrowing, and federal grants

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Revenue Sources

� The Politics of Taxation� When revenue to the state declines you

have two choices: increase taxes or other sources of revenue or decrease services

� Most conflict over financing schools-strive to lower real estate taxes for the state's property owners and replace local funding with additional state-level taxes

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Revenue Sources

� The Politics of Taxation� Business franchise tax expanded 2006

and $1.00 tax on cigarettes, tax on used cars

� But reductions reflect political strength of business owners. Since 2006, reducing the number of businesses subject to the franchise tax and lowering the tax rate

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Revenue Sources


� Sales Tax

� Most important single source of revenue

� General sales tax

� 6.25% statewide

� 8.25% combined state and local

� Some items exempt

� Many services untaxed

� Selective sales tax

� Sin taxes, highway

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Projected Sources of State


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Revenue Sources


- General

� Sales tax-most important single source

� Applies to tangible personal property/Amazon.

� Sales tax on dry cleaning, football tickets, and parking. Accountants, architects, and consultants provide their services tax-free

� Eliminating sales tax exclusion for professional and other services providers 6.5 billion / no effort to change

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Revenue Sources


� - General

� Selective sales tax on sin taxes (cigarettes, alcoholic beverages, and admission to sex-oriented businesses)

� Highway user taxes -fuels for motor vehicles that use public roads and registration fees for the privilege of operating those vehicles.

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Revenue Sources


� Business Taxes - General

� Sales tax-most important single source. Businesses are consumers

� Franchise tax-on the annual receipts of businesses that are organized to limit the personal liability of owner for the privilege of conducting business in the state

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Revenue Sources


� Business Taxes - General

� Franchise tax-on the annual receipts of businesses that are organized to limit the personal liability of owner for the privilege of conducting business in the state

� Unemployment compensation payroll tax (most businesses are also employers) Employer-paid tax levied against a portion of the wages and reprisal of w workers to provide funds for payment of unemployment insurance

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Revenue Sources


� Business Taxes – Select- Tax charged on specific products and services

� Oil and gas production

� Insurance company gross premiums

� Public utilities gross receipts

� Severance tax- An excise tax levied on a natural resource ( such as oil or natural gas) when it is severed (removed ) from the earth

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Revenue Sources


� Inheritance tax stopped in 2005

� Tax burden is low-Ranked 45th among the 50 states. No income tax. Fewer services over higher taxes to balance the state budget

� Some taxpayers commit tax fraud by not paying their full tax liability. Zappers-erase from register's memory

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Revenue Sources


� Tax collection

� Comptroller-chief tax collector, collects more than 90% of state taxes

� Department of Motor Vehicles-motor vehicle registration and certificate-of-title fees through county tax collectors' offices

� State Board of Insurance-insurance taxes/fees

� Department of Public Safety-driver's license, motor vehicle inspection and similar fees

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Revenue Sources

� Revenue from Gambling

� Racing- Pari-mutuel wagers on horse races and dog races are taxed. Want slot machines/Tigua,Kickapoo, and the Alabama -Coushatta ( East Tx)

� Lottery- Tx. Lottery Commission-amount of prizes, overseeing the printing of tickets, advertising ticket sales, and awarding prizes. Almost all profits from the lottery are dedicated to public education spending

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Revenue Sources

� Revenue from Gambling

� Bingo-states law allow bingo operations to benefit charities ( churches, veteran's organizations and service clubs). 5% tax on bingo prizes is divided 50-50 between the state and local governments (Texas Lottery Commission) 2011/705 million

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Revenue Sources

� Less than 50% of all Texas state revenue comes from taxes and gambling operations. Other nontax revenues are important sources of funds. The largest portion of these revenues comes from federal grants

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Revenue Sources

� Other Nontax Revenues

� Federal Grants-in-Aid-money, goods, or services given by one government to another (federal government to state to financing public assistance programs

� State participation in federal grant programs is voluntary

� Participating state must (1) contribute a portion of program costs (10-90%) and (2) meet performance specifications 36

Revenue Sources


� established by federal mandate

� Funds are usually allocated to state on the basis of a formula: lump sums; identical amount to all states receiving funds and (2) uniform sums ( based on items that vary from state to state, such as populations, area, highway, mileage, need, and fiscal ability, cost of service , administrative discretion and special state needs

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Federal Grants to Texas by Biennium (FY2002–2015) (in billions)


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Critical Thinking Question: Is Texas too reliant on federal grants to balance its budget?

Revenue Sources

� Other Nontax Revenues� Federal-grant-in-aid

� Health and human services

� Business and economic development

� Education

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Revenue Sources


� Land Revenues-public land sales, rentals, and royalties Sales of land, sand, shell, and gravel, combined with rentals on grazing lands and prospecting permits (1.1 of state budget( General Land Offices of 20 million acres land and mineral rights)

● Includes oil and natural gas leases

● Leases offshore sites for wind power40

Revenue Sources


� The Tobacco Suit Windfall

� Lawsuit pays Texas $18 billion in damages from American tobacco industry

� Reduced consumption, the comptroller predicted that settlement payments would decline by $45 million in the 2014/2015 period

� Miscellaneous sources

� Fees, permits, and income from investments are major miscellaneous nontax source of revenue

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Revenue Sources



� Fees- motor vehicle inspections, college tuition, student services , state hospital care and certificates of title for mother vehicles, permits, income from investments

� The most significant sources of revenue from permits are those for trucks and automobiles

� Liquor, wine and beer, cigarette stamps

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Revenue Sources



� Texas has billions of dollar on hand, invested in securities or on opposite in interest-bearing accounts. Trust funds constitute the bulk of the money invested by the state ( Texas Teachers Retirement fund; the State Employee Retirement fund; Permanent School Fund)

� Comptroller is responsible for overseeing the investment of most of the state's surplus funds

� Investments in interest bearing negotiable order withdrawal/US treasury bills

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Revenue Sources� Other Nontax Revenues


� The University of Texas Investment Management Company (UTIMCO) invests Permanent University Fund and other endowments for the University of Texas and Texas A&M university Systems. (Remember the State Board of Education and Texas legislature invested the Permanent School Fund)

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Revenue Sources

� The Public Debt

� Bonded indebtedness-Texas Constitution severely limit the authority of state governments to incur indebtedness

� General obligation bond-amount borrowed by the state that is repaid from the General Revenue Fund. Voter approval

� Revenue bond-amount borrowed by the state that is repaid from a specific revenue source. No voter approval/ Ex. college student loan bonds repaid by students who received the funds

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Revenue Sources

� Bond review-Specific projects to be financed with bond money require legislative approval. Also must be approved by the Texas Bond Review Board (Governor, Lt. Gov. Speaker of the House and the Comptroller)

� Economic stabilization fund

� Rainy Day Fund-state faces economic crisis. ½ of any excess monies from oil and natural gas taxes . Medicaid, criminal justice system, public education, Texas Enterprise Fund ( attract new businesses)

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Revenue Sources

� Economic stabilization fund

� November 2014 constitutional amendment approved that required the use of one-half of amount collected from oil and gas taxes( $2.76 billion)for transportation infrastructure needs

� Maximum amount limited to an amount equal to 10% of revenue collection from the previous biennium. When maximum reached, the state suspends transfers and deposits earned interest in the General Revenue Fund. (Drop in oil prices made this option unlikely)

� Many think too much is left in the ESF fund 47

Budgeting and Fiscal

Management� Budgeting Procedure

� Budget: a plan of financial operation. Begins with a statewide vision for Texas government and ends with an audit. Four-year process include development of agency strategic plans, legislative approval of an appropriation bill, and implementation of the budget

� Covers two fiscal years48



� Biennial legislature(every 2 years) Voters have voted an annual budget

� Begins on September 1st and ends on August 31 of the following year. FY 2015 starts with Sept 1, 2014 and ends with August 2015.

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� Legislative Budget Board-10 members from House and Senate

� prepare a biennial current services budget.

� Assist with the preparation of a general appropriation bill at the beginning of a regular legislative session.

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� Also prepares fiscal notes/economic impact of bill/resolution

� Governor’s Office of Budget, Planning and Policy

� Prepares and presents budget to legislature

� Usually policy based. Presents objectives to be attained and a plan for achieving them

� Dual arrangement, two budgets (Legislative/Governor) every 2 years

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Management� Budget Preparation

� Begins with governor’s mission statement

� Dual budgeting system

� Legislative chambers review

� Committees “markup” appropriations bill and submit for vote

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Management� Budget Preparation

� Legislature approves the appropriation bills

� Budget approval does not guarantee that funds will remain available to an agency, including public colleges and universities. Governor, Lt. Governor, and House Speaker Ca to identify a reduction by 5% of their budgets

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Management� Budget Expenditures

� Functional

� Services purchased by government. Public education, human services, highway construction and maintenance, and business and economic development

� Objective

� How money was spent; employees salaries/wages and employment benefits for state employees 55

All Texas State Funds Appropriations by Function for FY 2014-2015 (in millions)


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Nu

mb

ers

are

in

mill

ion

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Critical Thinking Question: On what services do you

believe the state should spend more or less money?


Management� Budget Execution-The Governor's office or

an executive agency responsible to the governor supervises budget execution-implementation of spending plan

� Oversee and modify implementation

� Governor of Texas and the Legislative Budget Board have limited power to prevent an agency from spending part of its appropriations, to transfer money from one agency to another, or to change the purpose for which an appropriation was made

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Management� Purchasing

� Texas Procurement and Support Services. Agency personnel may be required to obtain competitive bids.

� Emphasis on serving state agencies for which it purchases good than on controlling whey they purchase

� Agencies with support administrative

support services (mail/vehicle fleets)58


Management� Purchasing

� Negotiates contracts with airline, rental care agencies, and hotels to obtain lower prices for personnel traveling on state businesses

� Facilities-proper management services for state facilities (including Texas State Cemetery; manage football tailgating on state property in Austin)59


Management� Accounting

� Comptroller uses double-entry system

� Debit account and a credit account are maintained for each transaction

� Dedicated funds-designate revenue to be used for financing identified activities. Earmarked for special purposes, it is not subject to appropriation for any other use by the legislature

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� Comptroller's office

� Writing checks; receipts from various state revenue sources and expenditures in ledgers and other account books

� State accounts are set up on a cash basis rather than accrual basis. Expenditures are entered when the money is actually paid rather than when the obligation in incurred.

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� Comptroller's office

� Complicates the task of fiscal planning by failing to reflect an accurate picture of current finances at any given moment

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Management

� Auditing

� State accounts are audited (examined) under direct supervision of the state auditor. Serves at the will of the Legislative Audit Committee

� Provide elected officials with information to improve accountability in state government

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Management

� Auditing

� Provides random checks of financial records and transactions after expenditures

� Examine each state agency to evaluate the quality of its services/duplication of services

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Management

� Auditing

� Review performance measures that agencies include in their strategic plan to ensure that accurate reporting procedures are in place

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Future Demands

� Public Education

� Sources of public school funding

� Foundation School Fund

� Available School Fund-state taxes and from the Permanent School fund (from land proceeds)

� Texas Lottery

� Property Tax Relief Fund( money appropriated to offset loss of revenue from the local property taxes)

� General Revenue Fund 66

Future Demands

� Public Education

� Funding equalization

� “Robin Hood” plan- a plan for equalizing financial support for school districts by transferring tax money from rich district to poor districts (Edgewood v. Kirby 1991)

� West Orange-Cove v. Neely (2005) most districts to tax at the maximum allowable tax to create a statewide property tax (not permitted by Texas constitution). So they lowered the property tax by establish the property Tax Relief fund at the state level

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Future Demands

� Public Education� Texas Taxpayers and Student Fairness

Coalition, et al. v. Williams

� Is Texas's school funding system “efficient” No, because it does not provide for a “general diffusion of knowledge”

� Increased funding by $3.4 billion in 2013

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Future Demands

� Public Education� Funding equalization

� Are all students entitled??

� Court decisions have granted Texas students the right to equal educational opportunities but do not address the reality that not all students are equally prepared to succeed

� parents of economically disadvantaged students are unable to offer their children the same learning opportunities as those provide by more affluent parents/? 69

Future Demands

� Public Higher Education

� Closing the Gaps initiative

� State aid insufficient

� Income through formula funding

� Outcomes-based funding


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Future Demands


� Community college funding

� Minimum of $500,000 each

� University funding

� General Revenue Fund

� Student fees

� University of Texas and Texas A&M share Permanent University Fund


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Future Demands


� Tuition deregulation

� Forced institutions to raise tuition

� Texas Tomorrow Funds

� Texas Guaranteed Tuition Plan

� Tomorrow’s College Investment Plan

� State Grant and Loan Programs

� TEXAS Grants ProgramCopyright © 2016 Cengage Learning. All rights reserved.

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Average Tuition and Fees

Academic Year 2013-2014


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Critical Thinking Question: Who should pay the costs of a

college education: students or taxpayers?

Source: The College Board, Tuition and Fees by Sector and State over Time

Future Demands

� Public Assistance

� Children's Health Insurance Program

� ChildLINK

� Medicaid

Future Demands

� Infrastructure Needs

� Transportation

� Toll roads increasing

� Oil and gas taxes now diverted to State Highway Fund

� Water

� State Water Plan

Video Discussion Questions

1. Why does prolonged drought affect the overall Texas economy?

2. What other Texas industries have a statewide economic impact?

3. Should the legislature oversee infrastructure issues? Why or why


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finance and fiscal policy

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