Texas Taxpayers and Research Association Statement of Policy Principles and Positions

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1 General Fiscal and Tax Policy Texas state and local governments should operate under a fiscal system that appropriately balances the needs of people and businesses against the costs of providing them. Taxes and fees are an acceptable method of raising revenue for government; however, they cause economic harm by adding to the cost of doing business or living. That harm is offset and justified if those funds are used prudently to support cost-effective public services necessary to create a positive foundation for long term economic and social prosperity. The harm is magnified if those funds are used for inefficient programs or those of marginal need. Texans benefit from both fiscal restraint and the lack of a personal income tax, but Texas disproportionate reliance on property and sales taxes places an excessive burden on Texas businesses particularly capital intensive or goods-related businesses. With Texas facing a substantial surplus of available funds in 2015, priority should be given to business tax relief in a manner that will improve our potential for growth; as well as additional spending for critically needed infrastructure, such as water and transportation, that will enhance the efficiency of the Texas economy. The state s needs in 2015 can be met without net new taxes. In times of fiscal duress, tax increases should only be considered after all other options have been exhausted and it is determined that higher taxes would cause fewer undesirable economic or social consequences than other alternatives. The term tax increases means a change in law or rule which creates a net increase in tax revenues by: raising tax rates, or expanding existing tax bases by eliminating or deferring exemptions, deductions, credits, or refunds. The overall tax system should: be economically neutral, placing similarly-situated taxpayers on a level playing field and not causing disadvantage relative to their competitors domestically or internationally; be composed of elements that function well together as a logical system, without undue pyramiding; be balanced in a manner that reflects the participation and interests of ALL Texans and does not divide taxpayers into competing groups; not discourage investment in Texas relative to other states; be administered fairly, efficiently, and impartially based on a clearly-stated system of compliance that does not unduly burden those who pay, collect or remit tax; Page 1 of 7

2 extract revenue in a predictable manner, providing funds for the operation of government without frequent changes that inject uncertainty into individual and business decision-making; and reflect real world, as opposed to purely academic or theoretical, considerations. Each tax that is a part of that system should: be equal and uniform, and apply in a manner that does not create a disadvantage for any taxpayer versus its competitors, be explicit, simple, and understandable, be administered professionally and consistently with clear rules and guidance minimizing compliance costs for taxpayers and the state alike and allowing taxpayers to make informed financial decisions; not be unreasonably punitive to a particular industry or group of taxpayers; and generally be broad in application, but include appropriate exemptions and exclusions, such as raw materials, intermediate transactions and the means of production, in order to minimize economic distortions and encourage economic investment and growth. Taxpayers should be informed of all issues relating to a tax assessment and have a reasonable opportunity to respond and to contest it. Taxpayers should have access to an impartial review of disputed liabilities without having to make costly payments of amounts in dispute that may ultimately be adjudicated in their favor. Penalties should apply to tax amounts intentionally unpaid or under-paid; however, the interest rate on overdue taxes should only reflect the time value of money an equal rate for taxpayers and taxing jurisdictions. Taxpayers should have reasonable and adequate time to respond to administrative requests without jeopardizing their rights to a refund of taxes overpaid. Comparatively high taxes on business are a hindrance to new investment in Texas; consequently, judiciously-applied tax incentives are valuable and recognized tools to attract new businesses to the state and to encourage those that are here to continue to invest in the state s economy. Budget Policy Texas state and local governments exist in part to provide basic services to the public that are not available from the private sector. The expenditure of every public dollar should be scrutinized to ensure that it is necessary and that it is spent appropriately, efficiently, and effectively. Programs should be periodically reviewed to ensure that they are effective in meeting their original purposes, and that those purposes remain necessary. Funding for new programs should be based on whether an imperative public need exists, and not simply whether money is available. Page 2 of 7

3 The assets most critical to the long-term prosperity of the state, and those that should be given priority in the budget in 2015, are: an educated workforce, safe communities, and quality public infrastructure. Schools should operate efficiently and with adequate and equitable financial resources so that all students may achieve their full potential and be fully prepared to effectively participate in and meet the needs of a modern economy. Protection of the people and the assets of this state is necessary for Texans to feel safe in their communities and for businesses to have the confidence to invest here. Texas must meet its critical infrastructure needs if the state is going to continue to be a worldwide economic success story particularly those for transportation and water. But, these needs should not be solved with a blank check. Infrastructure projects must be carefully planned, built, and maintained, and subjected to the same rigorous fiscal and operational considerations as all other state and local government activities. Debt is an acceptable method of financing infrastructure needs, but should be used carefully and sparingly. Texas should evaluate its capacity to issue debt based on appropriate measures of its economic ability to retire the debt. As excess funds become available, the early retirement of public debt is a positive policy consideration. Lawmakers should be cognizant of the longer term implications of their budget priorities and decisions, including the methods used to balance desired expenditures with the resources to finance them. Rainy Day Fund moneys should be used judiciously and for extraordinary purposes as those needs arise. History has demonstrated the wisdom of Texas fiscal conservatism; however, there is room for improvement. The Constitutional limit on state spending is needlessly complex and should be simplified and its calculation made more conspicuous. Property Taxation Texas property tax burdens are among the highest across the 50 states posing a significant barrier to new investment and property ownership. With Texas likely to enjoy a substantial excess of state revenues, lawmakers should place a priority on broad-based and balanced property tax relief, so that we may encourage new investment in Texas and create a solid foundation for future growth. Page 3 of 7

4 Our system of property tax administration is generally positive compared to other states. In 1979 Texas lawmakers proposed and Texas voters approved a far reaching set of administrative reforms which put in place the essential components of today s well-founded system: a single market value for all taxable property, professionally qualified appraisals, readily accessible, impartial valuation appeals, and an open, understandable process for adopting tax rates. The provisions of the state Constitution which guarantee that taxation be equal and uniform and that property be taxed in proportion to its value are inviolate bedrock principles of Texas tax policy and ensure that all property is fairly valued and owners are on a level playing field with an equivalent interest in financing our public needs. TTARA opposes any attempts to split the roll, or otherwise treat various types of real property differently from others, pitting taxpayers against one another. Such an inherently inequitable approach does nothing to promote fiscal restraint or provide real net tax relief. Real property tax relief can only be achieved by limiting property tax revenue increases. While both homeowners and business owners are subject to high tax rates, business owners must also pay tax on their tangible personal property. While several states exempt business personal property, almost all exempt inventories. TTARA believes the state s investment climate would benefit from exempting business personalty from the property tax, and specifically supports using a portion of the state s excess revenues to eliminate the property tax on business inventories. Prior to the reforms of 1979, locally-elected officials were responsible for the appraisal of property in Texas. The result was a politicized system characterized by unequal appraisals, preferential treatment of certain types of property or taxpayers, and a constitutionally flawed school finance system. TTARA opposes proposals that turn the clock back and politicize the appraisal process. TTARA supports strengthening state oversight of appraisal district methods and procedures and making appraisal district operations more uniform and efficient, as well as the consolidation of appraisal functions and administration. TTARA supports a fair, impartial, and accessible valuation appeals process, as well as unfettered access to the court system to redress unfair and unconstitutional treatment, including the ability to recover reasonable attorney s fees if the taxpayer prevails. TTARA opposes the expansion of appraisal district authority which would allow access to sensitive taxpayer personal and financial information (such as unabrogated mandatory sales price disclosure or rendition audits) prior to the filing of a protest. These provisions can be all too often abused, imposing a substantial barrier to taxpayers seeking a fair hearing. TTARA believes the best way to constrain property tax burdens is to require an open and understandable process for local governments to adopt their budgets and tax rates so that Page 4 of 7

5 taxpayers can meaningfully participate in those decisions. Current petition requirements allowing voters to roll back proposed local property tax increases (other than schools) may be more cumbersome than effective, and TTARA supports requiring direct voter approval of property tax increases above a certain level. Sales and Use Tax The sales and use tax accounts for over half of Texas state tax revenue and is a key source of local government revenue. Originally enacted in 1961 at a rate of 2.0 percent, today s state rate of 6.25 percent with additional local taxes commonly adding another 2.0 percent, puts Texas with one of the nation s highest sales tax rates. TTARA opposes any legislation which would increase the 2 percent cap on the aggregate rate of local taxes. This high tax rate creates an incentive for Texans to purchase items from out of state sellers while failing to remit lawfully due use tax. TTARA supports the extension of the state s authority to require remote sellers to collect tax to the full extent allowable under federal law, so that brick-and-mortar retailers with strong connections to our local communities are not subject to competitive disadvantage. Commonly thought of as a consumer tax, businesses actually pay nearly 45 percent of the sales tax today. Taxation of business inputs harms the economy by imposing barriers to business activity. TTARA supports exempting sales of goods and services other than to the final consumer, in order to encourage economic activity and alleviate pyramiding of taxes on top of one another. Currently over 600,000 Texas businesses are required to act as the state s sales tax collector. This responsibility places costly burdens on Texas businesses, and TTARA supports the current timely filer discount as a way of partially offsetting the sales tax collection mandate. TTARA opposes legislation that would add complexity to the sales and use tax collection and remittance process. Changes in the sales and use tax rate, base, exemptions, or administration should be evaluated not only on the burdens placed on those who pay the tax but also on the businesses that collect it on behalf of the state and local entities. Local option sales and use taxes imposed by more than 1,500 jurisdictions across the state have greatly added to the complexity of the sales tax. TTARA believes that the sales and use tax base should be the same for local taxes as it is for state taxes. To maintain that uniformity and minimize compliance burdens, administration of the sales and use tax must remain the exclusive province of state government. Granting duplicate audit authority to local taxing jurisdictions would only add complexity and cost to taxpayers. While a broad-based consumption tax may offer academic interest as an alternative to the local property tax, any proposal must explicitly state how the tax would apply in practical situations. Page 5 of 7

6 Any proposal must be carefully evaluated based upon its impact on the economy, state competitiveness, and state and local finances. Franchise Tax The franchise tax, commonly referred to as the margin tax is Texas general business tax. Revised in 2006, the tax is designed to apply to a business s total revenues, less the greater of cost of goods sold, compensation, or 30 percent of total revenues. Though the 2006 reforms allow the tax to better mirror the Texas economy of today, there remains substantial room for improvement. The margin tax calculation is complex, and TTARA generally supports simplifying the tax, provided those changes reflect good tax policy, are equitable, and do not put one set of taxpayers at a disadvantage to others. TTARA believes the 2006 revisions to the franchise tax improved the fairness of the tax by broadening its application to most forms of business. TTARA does support a reasonable small business exemption; however, raising the exemption from the current level does nothing to simplify the tax and instead makes it less equitable. The implementation of the revised franchise tax has been characterized by confusion, lack of clarity and limited guidance. Taxpayers have a right to reasonable and understandable rules and guidance so that they may have some certainty in financial planning. TTARA encourages the Comptroller s Office to be sparing in the assessment of tax, penalties and interest concerning issues for which agency guidance has been lacking. Given the fiscal health of the state, TTARA supports retaining or lowering the rates of the tax from the 0.95 percent and percent rates effective in Texas is a vibrant location for business headquarters, and TTARA opposes changes to the tax and its apportionment, allocation, or sourcing provisions which may penalize businesses for locating here. School Finance and Education For Texas to continue as an economic leader, Texans must have the skills and knowledge to achieve their greatest economic potential. Texas schools should have relatively equal access to funds that are adequate to provide a quality level of measurable academic achievement through an efficiently-managed system of education. School districts must be accountable to taxpayers and their communities for the manner in which public funds are used, and for the level of achievement they provide for their students. Page 6 of 7

7 School districts should offer a curriculum that benefits the diverse needs of our students and society. Students that desire to pursue higher education at a four year college or university after high school graduation should have available to them rigorous, advanced courses necessary for college admission and academic success. Students that prefer to enter the workforce or attend a community college to obtain certification in a skill or trade following high school graduation should have access to quality workforce development courses and programs relevant to the needs of today s workplace. The state should maintain an accountability system that measures the academic success of students in each school district. In addition, the state should maintain a rigorous financial accountability system to ensure that taxpayer dollars are used responsibly by school districts. The state should reward districts with successful achievement, while offering immediate and meaningful assistance to schools and districts with low levels of achievement. A quality pre-kindergarten program is a key component for future student success. Studies by the High/Scope Educational Research Foundation and other groups have shown that quality pre-kindergarten programs have a substantial impact on whether or not a student is successful in later grades. Our school finance system should reflect the conditions and needs of today s Texas and should provide stable, reliable and sustainable funding to Texas school districts by addressing the needs of students, educators and employers in the 21 st century. Most of the adjustments and weights in the school finance formulas have not been updated in years. If the current formula elements are retained to calculate school funding, they should be re-evaluated and updated. School districts must be judicious in their tax decisions while encouraging community awareness and involvement. School districts rely heavily on the property tax, and Texas high property tax burdens are a hindrance to economic growth. The requirement that a school district hold a Tax Ratification Election if the school board adopts a tax rate that exceeds the rollback rate should be maintained. The requirement for voter approval has necessitated that school boards and administrative officials reach out to residents of the district in order to educate them about budget issues, resulting in a more informed and involved citizenry, and a better system of local schools. School districts should be good stewards of taxpayer funds and strive to replicate best practices employed successfully by other districts to effectively allocate resources. Districts should seek out administrative savings that can be realized through the use of purchasing co-ops, shared services, and standard facility planning when possible. Page 7 of 7