Texas faces $1B deficit but revenue picture improves ahead of session

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The 87th Session of the Texas Legislature will open Tuesday with $112.5 billion in revenue available for general purpose spending, but also a $1 billion revenue shortfall from what was projected for this fiscal year.

The Biennial Revenue Estimate is 0.4% below projections but an improvement from an anticipated $4.6 billion deficit in July, state Comptroller Glenn Hegar said.

The Biennial Revenue Estimate precedes the opening of the Texas Legislature, which meets only in odd-numbered years to produce a budget for the following two fiscal years.

The revenue available for the next biennium is about $44 million below that used in the current two-year budget period, which began Sept. 1, 2019 and ends Aug. 31.

When revenues fall below projections, state leaders must make adjustments. The upcoming session will pass a budget for fiscal 2022 and 2023.

The COVID-19 pandemic, a decline in oil markets and other economic factors make the upcoming forecast difficult, Hegar said. The projected shortfall does not account for state agencies’ 5% spending reductions ordered last year, he said. Nor does it count federal funds provided as pandemic-related assistance for some expenditures.

Official action on either of those items could eliminate the projected shortfall, which must be made whole by the 87th Legislature, Hegar said.

"As a result, there is a wide range of possible outcomes for state revenue through the end of fiscal 2023, with the possibility of revenue falling short of this forecast but also a chance revenue could exceed it, perhaps substantially,” he said.

“In any case, the Legislature will again face some difficult choices to balance the budget. While savings from agency spending cuts and federal funding could help erase the projected shortfall for this biennium, a substantial supplemental appropriations bill could increase it, thereby reducing revenue available for the next biennium.”

The $112.5 billion available for general-purpose spending includes 2022 to 2023 collections of $119.6 billion in general revenue-related funds. Those collections will be offset by an expected 2020 to 2021 ending balance of negative $946 million. In addition, $5.8 billion must be reserved from oil and natural gas taxes for 2022 to 2023 transfers to the Economic Stabilization Fund or Rainy Day Fund, and the State Highway Fund.

Another $271 million must be set aside to cover a shortfall in the state’s original prepaid college tuition plan, the Texas Tomorrow Fund.

Sales tax collections make up 62% of general revenues in 2022 to 2023. The revenue estimate projects sales tax revenues will increase by 5.1% from the 2020 to 2021 biennium, reaching $64.1 billion for the 2022 to 2023 biennium after $5 billion is allocated to the state highway fund.

Motor vehicle-related taxes, including sales, rental and manufactured housing taxes, which are expected to reach $10.1 billion, up 5.1% from 2020 to 2021.

Oil production tax collections are projected to generate $6.5 billion, up 10.1% from the previous two years.

Natural gas tax collections are expected to raise $3.5 billion, up 66.9%.

Franchise tax collections on businesses in the state, are projected to generate $6.3 billion, up 5.1% from the years prior.

The state’s Rainy Day Fund of about $10.5 billion is expected to total $11.6 billion at the end of 2022 to 2023. Despite the economic downturn, the state has not had to tap the fund so far.

State revenue from all sources and for all purposes is expected to reach $270.5 billion for the new biennium, including about $98.2 billion in federal receipts, along with other income and revenues dedicated for specific purposes and therefore unavailable for general-purpose spending.

“We must keep an eye on several things that could impact this forecast, including the spread of the COVID-19 virus and the possibility of renewed reduction in customer-facing economic activity,” Hegar said. “In addition, we must carefully monitor the nascent recovery in energy markets as further shocks on either the demand or supply side could threaten recent positive developments for prices and production.”

Hegar noted that household savings have increased as credit card debt has fallen.

“This could support increased consumer spending once people feel safe to return to pre-pandemic activities,” he said. “So, while there are numerous potential concerns, my economic forecast assumes a further moderate decline in economic activity in fiscal 2021, followed by a return to growth in the 2022-23 biennium at rates somewhat higher than those experienced during the last decade.”

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