If it lasts, last week’s plunge in oil prices could hit the Texas economy in ways that make it much harder for state and local governments to help the state’s residents.
It’s part of a double whammy on the state economy that started with the pandemic-driven dive in hospitality and retail that, in turn, will be reflected in much lower-than-expected sales tax revenues to local and state governments.
Property values follow the economy and can be expected to fall in parts of the state where energy plays an outsized role. The two biggest sources of revenue for local governments are property taxes and sales taxes; they’ll get hit in the same way their residents are hit, and at a time demand for government services — because of the downturn — could rise.
School districts depend mostly on property taxes and state funding. If property tax revenue drops, the state is on the hook to make up the difference, if it can. The state’s public schools aren’t dependent directly on sales taxes, but the state that sends them money counts that as its largest single source of revenue.
In his latest biennial revenue estimate, the state comptroller said 54.5% of the state’s general revenue during the current two-year period would come from sales taxes.
That’s the biggest source, but taxes on oil and gas make up a significant part of the state’s general revenue. Oil production taxes would account for 6.1%, and natural gas production taxes would bring in another 2.7%. Those severance taxes were expected to bring $2.86 billion this year and next into each of two big accounts — the State Highway Fund and the Economic Stabilization Fund (which is also known as the rainy day fund).
Taxes on motor fuel make up 1.7% of the state’s general revenue, but more of the money — more than $5 billion — is dedicated to transportation and public education. Those motor fuel taxes are based on volume and not price; for gasoline, for instance, it’s 20 cents per gallon, no matter what you’re paying for a gallon of gas.
Comptroller Glenn Hegar’s revenue estimate includes a paragraph of caution — the kind of thing many people read past when they’re looking for numbers — that lands with a thud in the current environment: “This forecast envisions continued, but moderating, economic growth in the nation and in the state. It does not incorporate the possible impacts of unanticipated one-time or unusual events that could impact economic performance and revenue collections. Several items must be watched, including oil and natural gas prices, which remain volatile.”
Prescient as that might sound, the state’s overall economic outlook before the pandemic was pretty good: “In summary, although there are numerous potential concerns, the comptroller’s Texas economic forecast is based on an expectation of moderate, though slowing, economic growth from fiscal 2019 through 2021, tempered with a cautious interpretation of the available economic indicators.”
But as March lurched into April, Hegar began telling state leaders and legislators to buckle up for a rough ride. He said to them and later said publicly that he will be cutting billions of dollars from his revenue estimate in midsummer. That revenue estimate is budget writers’ guide to how much money is available to spend. Hegar is telling them they won’t have enough to cover the spending plan they approved at the end of their 2019 legislative session.
The sales tax is the state’s biggest source of money, and Hegar is waiting to see exactly how much sales have dropped before he changes his forecast. Businesses filed their March sales tax returns last week, and the numbers are expected to fall sharply from the previous month. But they’re expected to be even worse next month; as bad as March was, the economic effect of the pandemic was concentrated in the last half of the month. April sales, which will show up in May reports, will be the first hard look at a full month of the state’s pandemic economy.
Last week’s drop in oil prices illustrates the problem of forecasting. The price for May delivery of a barrel of West Texas Intermediate crude closed at -$37.63 last Monday. Compare that with this series of NYMEX per-barrel oil prices in the state comptroller’s fall 2019 forecast summary: 2019, $58; 2020, $56; 2021, $54; 2022, $59; and 2023, $63.
Oil isn’t everything, or the only thing, in the state economy. It’s not the only thing keeping local and state governments working. But when energy is in trouble in Texas, Texas is in trouble, too.
Especially when its economy is already reeling from a coronavirus pandemic that has closed many of the state’s businesses and left millions of Texans unemployed.