Texas Tightens Purse Strings as Revenues Fall

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DALLAS – Texas tax revenues are slowing as the state keeps growing, a situation that is likely to make the upcoming legislative session more contentious.

"Demands for state spending have grown pretty steadily over time, but tax collections aren't nearly as stable," Texas Comptroller Glenn Hegar noted in a recent report. "They can be affected, sometimes quite dramatically, by a host of factors including changes in the state and national economies, energy prices, state and federal legislation and even consumer preferences."

Hegar is scheduled to release his revenue estimate for the next two fiscal years in January in advance of the 2017 legislative session. That estimate will form the basis for the two-year budget that lawmakers adopt when they convene in Austin for the 85th Legislature. The two-year budgeting process is necessary because Texas lawmakers meet only in odd-numbered years.

While the official estimate is always a significant event in the budgeting process, Texas already knows that revenues have declined in the 2016 fiscal year that ended Aug. 31. The trend is expected to continue amid extended oil and gas industry doldrums more than two years after prices fell more than 60%.

Hegar's revenue estimator, Tom Currah, told the Legislative Budget Board on Dec. 1 that receipts were down by 2.3% from a year earlier.

"We had projected a little bit of growth," Currah told the all-Republican LBB. "Instead, we got a decline."

In Hegar's most recent monthly report issued Dec. 2, November sales tax revenue of $2.51 billion fell 2.9% below that of November 2015.

"Continued weakness in the manufacturing and wholesale trade sectors, combined with persistently lower levels of oil and gas drilling activity compared to the same period last year, is exerting ongoing downward pressures on sales tax revenues," Hegar said.

"Receipts from restaurants and retail trade grew modestly," he added. "While those industries are larger individual sources of sales tax revenue, their modest growth was not sufficient to overcome the combined drop in tax collections from manufacturing, wholesale trade, and oil- and gas-related sales tax receipts."

For the first three months of the current fiscal year, total sales tax revenue was down by 2.2% compared with the same period a year ago.

With no state income tax, Texas relies on sales tax as its major source of revenue. Sales tax represents 58% of all tax collections. Other large contributors are revenue motor vehicle sales and rental taxes, motor fuel taxes and oil and natural gas production taxes.

In a sign that the energy economy might be improving, oil and natural gas production tax revenue increased 2.2% in November to $253.5 million, Hegar reported. Year-over-year severance tax revenue had been declining for 22 months, with oil tax revenue declining the last 23 months.

Given the tighter finances in this biennium, the Legislative Budget Board adopted an 8% spending cap, meaning that revenue over the next two years can grow no more than 8% over the previous two years. That compares to a 2015 spending cap of 11.68%, which was about 1 percentage point lower than the previous biennium.

The Constitutional spending limit applies to tax revenue that is not dedicated by the Texas Constitution. The cap is based on the rate of personal income growth in the state over the next two years.

Under the new cap, state spending will grow more slowly than personal income, according to House Speaker Joe Straus, who co-chairs the LBB with Lt. Gov. Dan Patrick, the Senate's presiding officer.

"Today's vote will allow the Legislature to produce a balanced, responsible state budget," Straus said after the meeting. "It will also allow us to make strategic investments in priorities such as education, child protection and mental health care."

Patrick may make lawmakers' tasks more challenging with his support for Senate Bill 2 by Sen. Paul Bettencourt, R-Houston. The bill calls for limits on local property tax levies after tax-cutting measures passed in 2015.

"Texans pay the sixth-highest property tax in the nation," Patrick said, referring to property taxes as a percentage of home value. "Property taxes are driving people out of their homes and hampering business expansion and growth. It's time for this to stop."

Bettencourt, who chairs the Senate Select Committee on Property Tax Reform and Relief, heard pleas for property tax relief in a series of hearings earlier this year.

Complaints arise from the fact that median home property tax appraisals have risen more than 20% over the past two years in major metropolitan areas. In Harris County, which includes Houston, the average residential tax bill has soared 36% in three years.

As property values have risen, local taxing entities have not cut tax rates enough to offset the increases. From 2011 to 2015, city and county levies have increased as much as 52% in Harris County, according to a state report.

"What we see is that values go up, and tax rates don't come down, and tax bills go through the roof," Bettencourt told a news conference in Austin.

The Texas Municipal League, which represents Texas cities in legislative matters, said that S.B. 2 would force cities statewide to cut their budgets in what the group said amounts to "a direct assault on public safety, economic development, and transportation."

The League has complained about the legislature overriding local governments on issues involving taxation, local regulation and other issues.

"Among the first items to be cut from city budgets would be economic development incentives and city funding for state highway projects leading to fewer jobs and more traffic congestion in the future," TML executive director Bennett Sandlin said.

Under the Bettencourt-Patrick proposal, "some average homeowners in some cities in some future year might possibly have the increase in their property tax bill reduced by $2 or $3 per month," Sandlin said.

"Locally elected officials are accountable to voters for taxing and spending decisions every time they run for election," he added. "Politicians in Austin should not impose arbitrary and punitive state restrictions on the ability of locally elected city officials to budget for the needs of their communities, especially when the safety of our citizens is at stake."

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