Despite sluggish oil and gas prices, the Texas economy is still growing and state revenue is increasing, which should be good news for lawmakers returning to the Capitol on Tuesday. But there will actually be less money to spend over the next two years, thanks in large part to fiscal decisions made last legislative session.
Texas Comptroller Glenn Hegar made the long-expected bad news official Monday when he unveiled a $104.9 billion biennial revenue estimate, which determines how much money lawmakers can spend in the 2018-19 budget. That’s 2.6 percent below the revenue estimate for the current two-year budget.
Hegar said growth is offset by two factors: a smaller-than-expected cash balance to start the session and a state constitutional amendment that will set aside billions of dollars in sales tax revenue for highway spending.
The bleak budget outlook and the GOP-controlled Legislature’s aversion to tax increases mean lawmakers probably will have to make cuts and will have less flexibility if they attempt to bolster distressed programs such as Child Protective Services and the foster care system or increase funding for public education.
State Rep. Drew Darby, R-San Angelo, said the state would need $5 billion to $6 billion more in discretionary funds to avoid making cuts. Asked if he wished the tightfisted budgeting measures adopted in recent sessions had been less aggressive, Darby said, “They are what they are.
“We made decisions based upon facts we had available at that time. We satisfied some priorities that we had in the last cycle,” said Darby, who sits on the House Appropriations Committee. “Obviously, there’s going to be cuts in the budget, and we’re going to have to talk about where those cuts can come.”
To calculate his revenue estimate, Hegar predicted that oil prices will be $55 per barrel in the 2018 fiscal year and $59 per barrel the next year. After peaking at more than $100 per barrel in 2014 and falling to around $30 in 2015, a barrel of the benchmark West Texas intermediate crude was trading for about $52 Monday.
Low fossil fuel prices slow drilling and spending by energy companies in Texas, directly cutting into the state’s oil and gas production taxes and indirectly dragging on the sales tax, the state’s largest revenue source.
The comptroller’s revenue estimate deals only with money over which lawmakers have discretionary control. The total amount of available revenue, including federal funds that pass through the state and other dedicated revenue streams, will be $224.8 billion for 2018-19, Hegar’s report said.
One big reason that the discretionary budget is not keeping pace with the state’s economy is Proposition 7, a state constitutional amendment lawmakers and voters approved in 2015 that will divert $4.7 billion in 2018-19 from discretionary revenue to the State Highway Fund.
Additionally, the last Legislature cut the franchise tax on businesses by 25 percent. That cut will result in the tax yielding $7.8 billion in the 2018-19 budget, a 2.4 percent decrease.
Eva DeLuna Castro, budget analyst for the left-leaning Center for Public Policy Priorities, said the state should avoid cuts by tapping its Economic Stabilization Fund, the so-called rainy day fund, which conservative lawmakers are loath to use except in emergencies. Hegar on Monday said the fund has $10.2 billion and will grow to $11.9 billion by the end of the 2018-19 budget if left untouched.
“Texas ranks 46th in state spending per resident, so we do not have a lot of room to keep cutting. … You can’t cut what’s not even there to begin with,” Castro said. “What’s that saying? ‘If you’re in a hole, stop digging.’ That’s exactly the case here.”
Gov. Greg Abbott, Lt. Gov. Dan Patrick and House Speaker Joe Straus, all Republicans, in June instructed state agencies to prepare for 4 percent budget cuts. They exempted several programs, including CPS and border security.
On Monday, Abbott issued a statement vowing to support a budget “that funds our most vital services without growing faster than the growth of population and inflation.”
“Texans expect their government to live within its means, and I fully expect to sign a budget that does just that,” Abbott said. “As fiscal conservatives, we must treat our state budget the way families do — by funding our priorities, while constraining the size and growth of government.”
State revenue for discretionary spending
January 2015 revenue estimate for 2016-17 budget: $113 billion
Most recent revised revenue estimate for 2016-17 budget: $107.7 billion
January 2017 revenue estimate for 2018-19 budget: $104.9 billion
Oil prices, per barrel of crude
Jan. 9, 2014: $91.66
Jan. 9, 2015: $48.36
Jan. 8, 2016: $33.16
Jan. 9, 2017: $51.91