On February 11, Comptroller Combs released a report on the cost of state tax exemptions. The results are eye-opening: –Revenue from major taxes (sales, franchise, gasoline, motor vehicle sales) in fiscal 2010: $28.1B. –Estimated value of exemptions from these taxes in fiscal 2011: $32.2 billion. –The exemptions exceed the value of the revenue. The question is, which exemptions could be eliminated, if any? Major exemptions: –Manufacturing materials: $9,573.8B –Manufacturing machinery $536.8M –Packaging for manucturing $296.1M –Gas and electricity used in manufacturing: $512.6M Every industrial state allows these exemptions to encourage manufacturing to locate and expand. Failing to provide these exemptions can render a state noncompetitive for economic development. What about residential gas and electricity ($881.5M)? It’s a big exemption, but there is a big political cost to eliminating it. You’re raising the cost of something that most people think costs too much anyway. This is what happens when you start looking at eliminating exemptions. Every exemption is there for a reason. In the case of residential utilities, the cost is political. Here is one fairly recent exemption I think we could repeal: over-the-counter drugs ($201.6B). The exemption for prescription drugs and certain medical equipment and supplies makes sense. It’s a “sick tax.” Over-the-counter drugs are different. No reason to exempt them. Other products that are exempted: –Newspapers ($9.3M) –Magazines ($8.3M) –Internet acccess fees ($137.3M) — first $25 only is exempted –Boats and boat motors ($42.5M) –Information services and data processing ($27M) This group does not bring in a lot of money. * * * * The next category of non-taxable items is exclusions. The biggest category of exclusions is professional services. By not taxing these services, the state gives up more than a billion dollars: –Physicians ($879.2M) –Dentists ($335.5M) –Other health services ($480.2) Why shouldn’t services be taxed? The answer is that a client can get the same services in another state. A client of a national accounting firm can use the firm’s office in, say, Chicago, without having to pay the 8.5% sales tax (unless the state where the work is done taxes professional services, whichj few states do. In other words, Texas professionals would be at an 8.5% disadvantage. Whenever there is talk of revamping Texas’s tax structure, what you always hear from professional practitioners is that they would prefer an income tax to making services subject to the sales tax. Because of the these exclusion, no services are subject to the sales tax — not  barber and beauty services, funeral services, child care, or the large category of business and professional. The exclusions add up to $5.810.8B. Another category of items that are exempt from taxation includes those things that are taxed outside of the sales tax. These includes crude oil, natural gas, motor vehicles, motor fuels, mixed beverages, aviation fuel, oil well servicing, and insurance premiums. You could put them under the sales tax but they would raise no more money. At any rate, the revenue to the state is the same in the end. Most of the exemptions that I have mentioned to this point exist because they are important to the economy. Aviation fuel (a controversial exemption) is not taxed because Texas wants to encourage airlines to establish hubs and mainteance facilities here. If we started taxing aviation fuel,airlines might move their operations to a nearby state where aviation fuel isn’t taxed. This is an example of what I meant when I said that every exemption exists for a reason. The category of exemptions that really needs a hard look is exemptions from school property taxes. The reason is obvious. These exemptions strangle our local school districts and deprive them of badly needed revenue. “Freeport property” and “cotton stored in warehouses” is an exemption worth (believe it or not) $262.9M. Most of the exemptions, however, are linked to the homestead: –State mandated $15,000 homestead exemption (value unknown) –School tax ceiling frozen at age 65 ($635.9M) –10% limitation on increase in appraised value of residence homestead ($105.2M) –Optional 2nd homestead exemption in some districts (up to 20% of market value). I think this is very wrong. Not all school districts can afford this exemption. It gives homeowners in property-rich districts a big advantage. They get to pay less in taxes than homeowners in poorer school districts. (amount unknown) –And now we get to the most sacred of sacred cows: the special appraisal for agriculture and timber land. For rural landowners who make their living in agriculture, this special appraisal is quite justifiable. For everybody else–the city boy who runs a few cows on a weekend retreat, the land developer who buys rural property and holds it for years while paying very low taxes, the corporation who grazes cattle on its campus in the suburbs, ag values are a scam. When rural landowners sell, they only have to pay higher tax rates for the last five years of ownership. Ag values allow some of the state’s wealthiest individuals and corporations to put a few horses and cattle on their land and avoid paying school taxes. The ag-values appraisals are taking money away from school districts. This is crying out for reform. At the very least, the ag value should be capped. ($2,702.8B) Total value of all exemptions from school property taxes: $5,999.0. Reforming the ag exemption is the place to start putting revenue back in the system instead of giving it away.