“Revenues are higher than anticipated this summer, and the estimates are not as negative as from July,” Hegar stated. Last summer, he projected a $4.6 billion budget shortfall but that outlook improved significantly in the months since.
He added that difficult decisions must be made this session, but the fiscal tumult is “nowhere near” what the state faced in 2003 or 2011.
Senate Finance Committee Chair Sen. Jane Nelson (R-Flower Mound) responded to the report, stating, “This revenue estimate highlights the resiliency of our Texas economy. Tough decisions remain, but I am confident we can pass a budget that meets our essential needs, maintains our commitment to education and follows the principles of fiscal responsibility that put us in a stronger position than other states to withstand this unprecedented pandemic.”
Presumptive speaker of the Texas House, Rep. Dade Phelan (R-Beaumont), told the Texas Tribune on Monday, “We have to look at everything,” concerning potential spending cuts. He added, “I don’t see new taxes or fees being acceptable to the legislature.”
The state had $4.8 billion in general spending funds available at the beginning of this biennium. That $5.8 billion drop stems from the pandemic’s impact on state tax revenues.
Sales tax collections have waned substantially in 2020, still down from 2019 levels. Sales taxes account for roughly 60 percent of the state’s revenues. Looking forward, Hegar highlighted the broad uncertainty that could culminate in a consumer spending surge once the pandemic subsides or a continued depression of commerce.
Part of the consumption pitfall was caused by natural consumer reactions to the pandemic, but was also augmented by state and local shutdown orders.
A fiscal bright spot, Hegar mentioned, came in online sales tax collections. Taxes on such transactions were prohibited until the Supreme Court’s 2018 South Dakota v. Wayfair decision that opened the door for states to collect sales taxes from businesses without a physical presence in the given state.
So far, Texas has collected $1.3 billion in sales taxes from this medium — something Hegar indicated has provided a substantial fiscal cushion during this tumultuous year.
In response to the pandemic, state leaders mandated a five percent budget cut from agencies. While those cuts have not substantially materialized yet, based on listed exemptions, those cuts will not apply to 60 percent of the state’s 2020-2021 budget.
Nonetheless, Hegar indicated those cuts will be a necessary aspect of passing a constitutionally-mandated balanced budget this session.
Texas’ oil and gas sector’s year has been one of dramatic plunges and slow recovery. Still lower than its pre-pandemic highs, West Texas Intermediate’s price has climbed above $50 per barrel. Despite that, the state’s severance tax collections remain far lower than those in 2019.
A continued slide will impact the state’s Economic Stabilization Fund (ESF) — colloquially known as the “Rainy Day Fund” — as severance taxes fund a substantial portion of the savings account.
Last session, the state pulled $6.2 billion from the ESF to finance a portion of the $11.6 billion school finance injection and property tax buydown. Hegar stated Monday that conversations with legislators tell him those commitments will be fulfilled despite the economic turmoil.
About whether the 87th Legislature will again pull from the ESF to supplement the budget, Hegar told The Texan, “It’s on the table … but it doesn’t look like they’ll have to use a substantial portion of the ESF during this cycle.” Not ruling out a remittance of some type, it appears there are no plans of issuing a payment similar to the one in 2019.
“There are a wide range of fiscal outcomes by the end of 2023, but it’ll depend largely on the direction of the economy,” Hegar further stated. The comptroller estimates $112.5 billion in general purpose spending revenues available to the legislature for the next biennium.
Biennial revenue estimates are projections based on momentary snapshots in time of economic factors and are subject to nudges one way or another, whether from the invisible hand or governmental dictate.
View the comptroller’s full presentation here.