96-463 Tax Exemption & Tax Incidence

Glenn Hegar Texas Comptroller of Public Accounts

December 2020

Tax Exemptions & Tax Incidence

A Report to the Governor and the 86th Legislature

Glenn Hegar Texas Comptroller of Public Accounts

December 4, 2020

The Honorable Greg Abbott, Governor The Honorable Dan Patrick, Lieutenant Governor The Honorable Dennis Bonnen, Speaker of the House Members of the 86th Legislature

Ladies and Gentlemen:

As required by Section 403.014, Texas Government Code, this report estimates the value of each exemption, exclusion, discount, deduction, special accounting method, credit, refund and special appraisal available to payers of Texas' sales, motor vehicle sales, franchise and oil production taxes, as well as property taxes levied by Texas school districts.

Like the publication of the 2018 Tax Exemptions & Tax Incidence report, we are providing the estimates in advance of the start of the Regular Session of the 87th Legislature. As a result, the estimates in this report are based on revenue projections derived from the revised Certification Revenue Estimate of July 2020.

For fiscal 2021, aggregate exemptions for the revenue sources included in this report will total an estimated $58.6 billion. Of this amount, the exemptions related to state taxes will account for $44.5 billion; school property tax exemptions will account for the remaining $14.1 billion.

I would note, however, that a significant share of total exemptions ? $14.3 billion of the estimated fiscal 2021 amounts ? is accounted for by exemptions to the sales tax for items that are taxable under other law. Included among the items taxed under other law are insurance premiums, motor vehicle sales and motor fuels; their consequent exemptions from the sales tax are estimated to be worth $7.6 billion, $3.7 billion and $2.5 billion, respectively.

Other exemptions from the sales tax include $7.2 billion in raw materials used in manufacturing, $3.3 billion in food for home consumption (essentially, groceries) and $1 billion worth of over-the-counter drugs and prescription medicine and devices.

This report also presents the results of the analysis prepared in accordance with Section 403.0141, Texas Government Code, which directs the Comptroller of Public Accounts to report on the incidence of certain taxes and exemptions.

The material in this report is provided for informational purposes only. This report makes no recommendations for retaining, eliminating or amending any provisions of the law.

Sincerely,

Glenn Hegar

Comptroller. P.O. Box 13528 Austin, Texas 78711-3528

512 - 4 6 3- 4 4 4 4 Toll Free: 1-800-531-5441 ext: 3-4444 Fax: 512-463-4902

Table of Contents

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

About the Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

Limited Sales and Use Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

Classifying Sales Tax Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

Sales Tax: Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

Franchise Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

How the Franchise Tax Is Computed . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

Origin of Franchise Tax Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

Nonprofit vs. Exempted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18

Classifying Franchise Tax Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . .

18

Deductions and Exclusions Special Accounting Rules,

and Credits and Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25

Motor Vehicle Sales and Use Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29

Oil Production Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31

School Property Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33

The Nature of Tax Incidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41

Texas Tax Incidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43

Tax Exemptions & Tax Incidence December 2020

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