by Vance Ginn and Talmadge Heflin
Texas faces multiple economic challenges. These headwinds have slowed economic growth of what would be the world’s 12th-largest economy, potentially leading to the state’s first major recession in 30 years. This has contributed to another possible challenge — a tight state budget in the 2017 legislative session.
Fortunately, Texas’ high level of economic freedom, diversified economy and pro-growth policies help weather these challenges and provide an environment conducive for Texans to prosper.
During the Great Recession and since, Texas has been America’s jobs engine, creating 34 percent of all U.S. civilian jobs during the last eight years in a state with less than 10 percent of the nation’s population. Texas has employed more net nonfarm jobs in 64 of the last 66 months, and created 152,300 private sector jobs during the 12 months ending in March.
Texas certainly faces challenges. There was a combined 95,500 job losses in Texas’ mining industry, primarily oil and gas activity, and manufacturing industry during those 12 months. More job losses and fewer openings were expected as the latest annualized increase in real gross domestic product was only 0.5 percent in the second quarter and 0.1 percent in the third quarter of 2015 — barely avoiding a technical recession.
These challenges would likely have caused a prolonged, severe recession in Texas if the economy looked like it did during the 1980s.
The mining industry is directly related to about 15 percent of the real private economy and less than 3 percent of the labor force today. This is substantially lower than in the 1980s, when it was about 21 percent of the real private economy and 5 percent of the labor force.
The combination of more economic diversification and pro-growth policies have supported a more resilient economy.
Consequently, the sustained steep drop in oil prices hasn’t taken nearly as much of a toll on the Texas economy as it did in 1986 when Texas had its last major recession that lasted two years.
However, increased diversification contributed to Texas being more dependent on the rest of the U.S. economy. Without growth in exports and the oil and gas sector, which fueled much of the U.S. economic expansion since 2009, the national economy stands on a shaky foundation.
With the Federal Reserve having held interest rates too low for too long and (rightly) beginning to tighten credit in December, slower economic growth and lower oil prices are likely, as highly distorted markets correct. In addition to overbearing regulations, including those of Dodd-Frank and others promulgated by the Obama administration, the American Dream is further out of reach for too many Americans.
Of course, Texas’ economic future is unknown, but so far the sky is not falling. Texas has been blessed with a long expansion contributing to great prosperity, but it will one day have another recession.
Texas legislators increased the total state budget by far more than population growth plus inflation in both 2001 and 2009, the previous two recessions.
Excessive spending in 2001 was followed by a $10 billion revenue shortfall in 2003 that was resolved with steep spending cuts without raising taxes. The 2009 Legislature balanced its books by accepting a large short-term “stimulus” payment from the federal government. Two years later, it covered a larger revenue shortfall with accounting gimmicks that were reversed in 2013.
Previous spending excesses that expanded the government’s footprint hurt Texans by forcing them to pay higher taxes and lose government benefits. This cyclical nature of excessive spending has been going on too long in Austin.
The 2015 legislative session started with the state’s coffers overflowing with cash from a robust economy. Instead of discussing how much to spend, state officials discussed how much to cut taxes.
Before the session started that January, Comptroller Glenn Hegar gave his biennial revenue estimate, or BRE, to provide a guidepost of what was available to appropriate given the state’s requirement of a balanced budget. He then released the certification revenue estimate, or CRE, in October after the session ended. The CRE expected slower economic growth and lower oil prices that led to less general revenue-related funds for the 2016-17 budget cycle.
The revenue estimate shows a higher beginning balance, lower tax collections, less funds available for transfers, and a decline in the potential surplus.
Today, the taxable oil price in the CRE looks overestimated, as recent forecasts of the average oil price is about $15 lower in 2016 and 2017. This could lead to slower economic growth that would put pressure on fully funding the current budget and leave a tight budget next session.
Through the first seven months of fiscal year 2016, September through March, sales tax collections were down 2.6 percent.
Hegar recently said, “The modest growth in sales tax collections for March was in line with expectations and comes after five consecutive months of declining sales tax revenues.”
In addition, he highlighted the state’s diversity by “stronger growth in receipts” in other sectors that helped offset lower tax collections from oil and gas-related sectors.
Total tax collections are below the revenue estimate by $3.2 billion during those seven months, but a major portion of that is the franchise tax discrepancy.
Franchise tax collections are $2 billion below the CRE, but historically this tax is primarily collected monthly starting in March through the rest of the fiscal year. For example, there was $249 million net tax collected in March after six months of refunds to businesses that overpaid.
If you exclude this, total tax collections would be about $1.2 billion below the revenue estimate for fiscal year 2016.
With oil prices potentially averaging another $15 lower this year and with about a $1.2 billion decrease in revenue projected in fiscal year 2016, that could translate to $2.1 billion less for the full year. If this pace of total tax collections continues, there’s likely to be dollars available to fund the current budget but little to no potential surplus for the 2017 legislative session.
Advancing the Texas model
The 84th Texas Legislature made great strides last session to weather an economic downturn by passing a conservative budget, and $4 billion in tax and fee relief, leaving billions of dollars unspent, including about $10 billion in the state’s rainy day fund.
Texas faces real, and potentially major, economic and fiscal challenges. However, the proven recipe of a diversified economy and limited government philosophy must be enhanced to continue meeting these challenges and propel Texas toward greater economic prosperity.
The 85th Texas Legislature should provide the best economic environment for Texans to succeed and further cushion the effects of business cycles. This could be done by measures supported by the 13 influential organizations of theConservative Texas Budget Coalition. These include passing another conservative budget, eliminating the business franchise tax, reforming the state’s weak spending limit, adopting a mechanism to reduce the budget, stopping excessive growth in property taxes, and increasing budget transparency.
By advancing economic freedom and individual liberty, Texas will better deal with potentially deep downturns and other economic circumstances. This provides Texas with the best opportunity to remain a place where Americans can achieve their hopes and dreams.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.