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Chapter 11

Finance and Fiscal Policy

Brown/Langenegger/Garcia/Biles/Rynbrandt/Reyna/Huerta, Practicing Texas Politics, 17th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Policy

Public Policy - an intentional course of action or inaction that the government follows when dealing with a problem or an issue of concern.

Fiscal policy: Public policy that concerns taxing, government spending, public debt, and management of government money.

Types of Tax

Regressive tax: A tax in which the effective tax rate decreases as the tax base (such as individual income or corporate profits) increases.

Progressive tax: A tax in which the effective tax rate increases as the tax base (such as individual income or corporate profits) increases.

Regressive taxes favor the rich and put the burden on the poor.

Texas Taxing Policy

Prefer regressive taxes

Sales tax among highest in nation

Regressive system seen as unfair

Figure 11.1 Percent of Average Annual Family Income Paid in Sales Tax in Taxes (FY2018)

Source: Glenn Hegar, Tax Exemptions and Tax Incidence: A Report to the Governor and the 85th Texas Legislature (Austin: Texas Comptroller of Public Accounts, November 2018), https://comptroller.texas.gov/transparency/reports/tax-exemptions-and-incidence.

Figure 11.1

Critical Thinking: What are the benefits and problems of a regressive tax system?

Budget and Spending Policy

Budget Policy

Balanced budget

General Revenue Fund - unrestricted

Dedicated funds – restricted for a designated purpose

Spending Policy

Ranks 47th–50th in state spending per capita

Little support for social services

Revenue Source – Sales Tax

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 taxes, miscellaneous

Sources of State Revenue, Fiscal Year 2018

Source: Glenn Hegar, “Revenue by Source for Fiscal Year 2018,” Texas Transparency, https://comptroller.texas.gov/transparency/reports/revenue-by-source.

Revenue Sources - Business Taxes

General Business Taxes— assessed against a wide range of businesses

Sales tax; Franchise tax; Unemployment compensation payroll tax

Selective Business Taxes—levied on businesses in a specific activity

Oil and gas production

Insurance company gross premiums

Public utilities gross receipts

Severance tax (natural resource as it leaves the ground)

The Politics of Taxation

Texas tax burden is low - In 2012, when state taxes alone were considered, the Lone Star State’s tax burden ranked 46th among the 50 states.

Tax collection

Comptroller is chief tax collector

Revenue Sources - Gambling

Revenue from Gambling

Conflict due to opposition from social conservatives and religious groups

Sources include:

Horse and dog races are taxed

Lottery - profits go to public education

Bingo - can benefit charities

Revenue Sources – Nontax Revenue

Grants-in-Aid from federal government provide more revenue to Texas than any single tax levied by the state. Primarily used for:

Health and human services

Business and economic development

Education

Land Revenues

Includes oil and natural gas leases

The Tobacco Suit Windfall

Lawsuit pays Texas $18 billion in damages from tobacco industry

Federal Grants to Texas by Biennium (FY2020–FY2021) (in billions)

Source: Developed from information available from Comptroller of Public Accounts, “Texas Net Revenue by Source 19 73–2017,” “Revenue by Source for Fiscal Year 2018,” and “Biennial Revenue Estimate 2020–2021.”

Figure 11.3 Federal Grants to Texas by Biennium (FY2004–2017) (in billions)

Sources: Developed from information available from Comptroller of Public Accounts, ‘‘Texas Net Revenue by Source, 1973–2017,’’ ‘‘Texas Net Revenue by Source, Fiscal Year 2018,’’ and ‘‘Biennial Revenue Estimate 2020-2021.”

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

Revenue Sources – Public Debt

The Public Debt

Bonded indebtedness—restricted by voters

General obligation bond – repaid from General Revenue Fund

Revenue bond – repaid from a specific revenue source

Bond review

Economic stabilization fund

Rainy Day Fund - : A fund used like a savings account for stabilizing state finance

Politics in Plain Sight – Pumping Gas

As you view the video, individually make a list of problems that the government identified that needed to be addressed.

As a group:

Complete the group reporting sheet.

Discuss any shortcomings or consequences you see about these policies.

https://mediaplayer.pearsoncmg.com/assets/_video.true/mypoliscilab-2018-oconnor13e_0135176646-PHPS_GasPump

Budgeting Procedure

Budget: a plan of financial operation

Covers two fiscal years

Biennial legislature

Legislative Budget Board

Ten members from House and Senate

Governor’s Office of Budget and Policy

Prepares and presents budget to legislature

Budget Preparation

Begins with governor’s mission statement

Dual budgeting system - The compilation of separate budgets by the legislative branch and the executive branch.

Legislative chambers review

Committees “markup” appropriations bill and submit for vote

Once approved, bill goes to the governor for signing

Governor can use a line-item veto

Budgeting and Fiscal Management (3 of 4)

Budget Expenditures

Functional

Services purchased by government

Objective

How money was spent

Funds Appropriations by Function for FY 16-17 (in millions)

Source: Legislative Budget Board Staff, Fiscal Size-Up 2018–19 Biennium (Austin: Legislative Budget Board, September 2018), http://www.lbb.state.tx.us/Documents/Publications/FiscalSizeUp/FiscalSizeUp.pdf.

Future Demand – K-12 Public Education

Public Education

Multiple funds provide state portion of public school funding

Funding equalization

“Robin Hood” plan

Are all students entitled to same quality of education?

Closing the Gaps initiative

5.3 million students enrolled in Texas schools in 2016 -2017.

3.1 million were classified as economically disadvantaged

Texas ranks in the bottom third of states for expenditures

Future Demands Public Higher Education

Public Higher Education

2018 fewer than 50% of students graduating from high school were career or college-ready

Tuition deregulation 2003

Public educational institutions were now allowed to raise tuition

Since 2003, tuition has been raised more than 170%

Public Higher Education

Community college funding

Combination of student tuition and fees, state funds, local taxpayers, the federal government, and private donations

Legislature has reduced funding to community colleges at a greater percentage than university funding

University funding

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

Future Demands (5 of 6)

Infrastructure Needs

Transportation

Toll roads increasing

Oil and gas taxes now diverted to State Highway Fund

Water

State Water Plan

“Conservation is not enough”

Future Demands (6 of 6)

Public Assistance

Children’s Health Insurance Program for low-income families

In 2014, the state had the largest number of uninsured children in the nation: more than 852,000. Some observers suggest that up to one-half of uninsured children qualify for Medicaid or CHIP.

Medicaid-State officials refuse to expand Medicaid coverage to adults

Cost and care burden for the uninsured has shifted to local governments, hospitals, and the insured

Discussion Question

Discussion: How would you evaluate the fairness of Texas’s budgeting and taxing policies to its low-income residents?