Michael Wood, Manager, Education & Workforce
Texans should expect a less-than-rosy outlook when the state releases its updated revenue forecast for the upcoming biennium, said Texas Comptroller of Public Accounts Glenn Hegar during the Dallas Regional Chamber’s Legislative Speakers Series event moderated by Gromer Jeffers of The Dallas Morning News.
In part, the optimism comes in light of surprisingly strong sales tax collections, which make up a substantial portion of the state’s revenue stream. April’s collections (for purchases made in March) were down 9% compared to the previous year. In May, collections were down 13% (for purchases made in April, during the entirety of which many businesses were completely shut down). While steep, that decline was not as dramatic as anticipated. Hegar credits purchases related to work-from-home set-ups, home improvement projects, and the federal government’s stimulus checks for the better-than-expected collections.
Still, other important sources of state revenue have taken big hits. The motor vehicle sales tax was down 38% in May compared to the previous year, a slight improvement from its 45% decline in April. Hotel receipts, down 63% in April, fell further to 86% in May. The oil and gas industry has also suffered. Prior to the crisis, Texas operated 50% of all oil rigs in North America. Today, that number is down to 41%. Respectively, these declines set records unseen in Texas since 1983, 1982, and 1968.
In terms of actual dollars, Hegar anticipates severance tax collections for the biennium – estimated to be $1.6 billion prior to the crisis – to fall by $600 million. Collections from taxes on motor vehicle fuel could be down $400 million-$500 million from a projected $1.7 billion.
These shortfalls put the state legislature in a tight position entering the next legislative session. State leadership has already instructed state agencies to reduce their budgets by 5%, with exemptions for public school districts, health services, and state law enforcement, among others. While the exempted agencies make up a majority of the state’s budget, the cuts will still result in a savings of $1.2 billion. However, Hegar anticipates that agencies will be asked to trim their budgets even further as the revenue estimate becomes more clear.
Developing that estimate has been a challenge for Hegar and his team given the unprecedented nature of the current economic downturn. Unlike previous recessions, the impact of COVID-19 on the state economy has been immediate. The financial crisis of 2007-08, for example, did not result in negative sales tax collections in Texas for six months, at which point collections remained down by an average of 9.5% for 14 months. The current downturn differs in both scale and speed. Whereas recessions traditionally impact specific sectors of the economy and impacts are felt over the course of months or years, the present situation has impacted nearly every industry and materialized virtually overnight as social distancing guidelines were enacted throughout the state.
The estimate has been further complicated as Hegar’s office has enabled businesses, on a case-by-case basis, to defer certain tax payments to the state. This move, designed to help employers keep their operations running and staff on the payroll, has given the comptroller less real-time data with which to work. Without this data and neat comparisons to previous downturns, Hegar has instructed his staff to report on nontraditional metrics such as restaurant reservations, plane and hotel occupancy, and even movie theater attendance to better understand the impact on state revenue.
While these numbers, among others, are moving in the right direction, Hegar cautions that the path to economic recovery will be a long one, unlikely to be “V-shaped” as many initially hoped.
“We are seeing a recovery right now, but it takes a while before you get back to where you were,” said Hegar. “I don’t want to be an alarmist, but I want to manage expectations realistically. The recovery doesn’t just happen overnight.”
Even so, the comptroller is confident Texas is prepared to weather the storm. Compared to other states, Texas has a strong economic base on which to rely, with a $10.2 billion balance in the Economic Stabilization Fund, the state’s savings account. A favorable tax and regulation climate, which has long enabled the state to outpace the national average for economic growth, should also help Texas rebound from the crisis.
“Though this downturn obviously is impactful to Texas, just like the rest of the nation, Texas will once again start outpacing the national average when we get on the backend of this unfortunate downturn,” said Hegar.