Texas Comptroller Glenn Hegar is out with his estimate of the amount of money that will be available to the Texas Legislature for the next budget cycle, and the news is not terrible (we have seen much worse in the past), but is also not good. At a time when the population continues to grow and there are major issues that need to be dealt with, revenues are falling short. In fact, they’re about $5 billion below the level needed to keep services where they are, which leaves us far short of extra money needed for solving some big problems. On top of that, there is some support for lowering certain taxes; we all like to pay less, but practicality should limit this option.
The Comptroller’s Biennial Revenue Estimate projects that revenue available for general purpose spending will only be $104.9 billion for the 2018-2019 biennium, a 2.7% decrease from the $113.0 billion estimated for the 2016-2017 biennium. The revenue estimate sets a limit on spending from the state’s general fund, which is the portion of the budget that legislators have the most control over. (It’s only half of the state’s total budget, which also includes federal funds and other revenue sources.)
The general revenue estimate is calculated by adding the beginning balance left over from the previous biennium with the estimated general revenue-related collections, which comes from state sales tax and other revenue sources. Then, transfers to dedicated funds are subtracted, leaving the general revenue estimate.
The lower estimate this year is due in part to a lower beginning balance. Only $1.5 billion was left over from the 2016-2017 biennium, compared to the $7.5 billion lawmakers started with two years ago. Less was left over because tax collections in 2016 were lower than expected. Two years ago, the Comptroller’s office estimated that the Texas economy, specifically real gross product, would grow 3.2% in the 2016 fiscal year. However, real gross product only grew by 0.2% this past fiscal year.
The lower beginning balance and higher previously dedicated funds explain the lower estimate; in fact, state revenue is projected to increase over the next biennium. The Comptroller’s office estimates that State sales tax collections will be $62.0 billion, with another $49.2 billion from other sources. The total for general revenue-related collections will be $111.2 billion, an increase over the $110.4 billion estimated (though ultimately not collected due to lower-than-expected sales taxes) for the 2016-2017 biennium.
By way of a little context around these numbers, overall State revenue comes from two primary sources: taxes and transfers from the federal government. During fiscal year 2016, about $48.5 billion in taxes were collected and the state received $39.5 billion from the federal government. The next category (licenses, fees, permits, fines, and penalties) was a distant third at $11.6 billion. Looking more closely at taxes, the primary source of income is the sales tax, with $28.2 billion in fiscal 2016, followed by motor vehicle sales taxes and rental fees with $4.6 billion.
A clear reason for the lower growth and tax revenue collections in 2016 is oil and the fallout from the recent lower price levels. Oil production taxes were only $1.7 billion of the total tax collections, but direct taxes are only a small part of the influence of the industry on the economy and, therefore, tax collections. The energy segment is a cornerstone of the economy as well as the most important export industry. The Texas economy has shown remarkable resilience since the end of the oil surge, but has been clearly affected, and slower growth means lower tax collections.
Lawmakers are also facing larger dedicated funds for the 2018-2019 biennium. In 2015, a constitutional provision was passed to dedicate up to $5 billion in sales tax revenue to the State Highway Fund (SHF) every two years, starting this biennium. Therefore, an extra $4.7 billion will automatically be transferred to the SHF, in addition to the $3.1 billion that was already dedicated to the Economic Stabilization Fund (ESF) and the SHF. While $5 billion total was transferred to the ESF and SHF in the 2016-2017 biennium, the larger dedication to the SHF (coupled with the lower beginning balance) leaves lawmakers with a lot less money to work with.
While the Comptroller is still projecting growth for this fiscal year and beyond, it is at a more conservative pace than expectations two years ago. Given the shortfall, difficult choices are inevitable. The largest category of net expenditures is public assistance payments, which totaled $47.2 billion in fiscal 2016. It is likely that given the sheer dollars involved, there will be calls to reduce these payments to some of the most vulnerable Texans. Other large expense areas will doubtless also be called into question, including public education.
While it is crucial to spend taxpayer dollars wisely and efficiently, that does not always mean spending the least possible amount. In fact, in many cases, spending too little in the short term can lead to larger and more expensive problems down the road. We have analyzed a number of situations where investments more than pay for themselves. For example, we found that money spent fixing foster care and child protection or expanding Medicaid is more than returned in the form of higher tax receipts and lower spending for social services (not to mention the immeasurable benefits in human terms). Similarly, eroding the quality of Texas public education through chronic underfunding is a sure way to curtail future economic growth.
Texas is well positioned for healthy economic growth. We have the raw materials: a young and growing workforce, natural resources, land, and a relatively healthy climate for business. However, there is a clear danger that budget constraints could lead to band-aid solutions to pressing problems or, even worse, no solutions at all. Our future prosperity depends on sound fiscal management with an eye to long-term consequences. With fewer dollars to work with, the challenge has become more difficult.
M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.