Client & Advisor Update - June 14, 2010

Adding to Texas' already grim budget situation, the state's second-largest source of revenue could come in $500 million short of projections this year.

The revised business tax so far has generated $3.6 billion as of the May payment deadline, according to figures released Wednesday by the office of state Comptroller Susan Combs.

The current two-year budget estimates that the total collection for the 2010 fiscal year would be $4.3 billion.

Additional business tax revenue will continue to roll in through August, but the experience during the past two years indicates that about 95 percent of the total collection comes in during the first round of payments.

If that past experience holds, Texas would be down $500 million in revenue for the current budget.

"We may be finding out that the business tax mirrors the economy pretty well, unfortunately," said Dale Craymer , president of the business-backed Texas Taxpayers and Research Association .

The current tax collections reflect business revenue in 2009, when economic conditions were horrendous, Craymer said.

The state's most important source of income, the sales tax, also tracks the economy's ups and downs. It is now $1.5 billion below budget projections with only a few months left in the fiscal year, which ends Aug. 31.

Sales tax revenue was budgeted at $21 billion this year and pays for more than half of the state's general fund expenses, such as education, health and human services and prisons.

These lagging revenue sources prompted state leaders recently to pull the trigger on cutting $1.2 billion from the current, $87 billion budget, which covers 2010-2011.

Last week, state agencies were told to prepare for perhaps another 10 percent reduction in the 2012-13 budget where there could be a shortfall as big as $18 billion.

The revised business tax was part of the 2006 tax package designed to pay for much of the court-ordered school property tax rate reductions. The Texas Supreme Court had ruled the state's school finance system unconstitutional because it had effectively established a statewide property tax.

But the rejiggered tax has never lived up to expectations.

The state estimated that the new business tax would raise almost $12 billion in the 2008-09 budget. It actually brought in $8.7 billion in its first two years.

And this year the tax was expected to bring in the same amount as it did last year but so far is about 10 percent below the projection.

Still, there appears to be little appetite for revamping the tax once again given the other challenges legislators will face next year when they return to write the next budget.

When legislators tackled the tax last year, they exempted 40,000 small businesses from paying it at a cost of $172 million.