When the economic damage from the coronavirus and Texas’ shutdown is finally calculated, state, city and county budgets will be listed as casualties.
Texas Comptroller Glenn Hegar plans to update the state’s revenue forecast by July, and he’s signaled that he’ll lower his estimate by several billion dollars. And since no one knows how quickly businesses and consumer spending will rebound, it is clear that tough times are ahead for the state. As Gov. Greg Abbott takes the next steps to reopen the Texas economy, he must also begin a frank, public conversation about the state’s looming budget challenges.
Even when Texans are back to work, public budgets will be upside down, with more demands for services than money to pay for them. The next legislative session is expected to be especially austere. Lawmakers will be tasked with filling a sizable hole in the current state budget before they even begin planning for the next two fiscal years.
Just a few months ago, the Texas economy was growing at rates that outpaced those nationally. Lawmakers last session approved a quarter-trillion-dollar budget, and state income was projected to grow faster than previously expected. The comptroller’s office even estimated that lawmakers would have about $2.9 billion in hand upon their return to session. And that would be an important head start for lawmakers who would need to find new sources of state revenue to support the state’s increased commitment to funding public schools, among other things.
The virus, however, effectively wiped out that $2.9 billion surplus and then some. The choice now is pretty basic: Find new revenue or make significant cuts in basic state services. House Speaker Dennis Bonnen recently suggested that all state agencies cut their budgets by 5% now, rather than wait closer to the start of the next session when budget cuts could be draconian, less strategic and made under greater duress. This echoes Hegar, who has advised agencies to cut spending before lawmakers start deciding what will stay and what will go.
This is wise. The dramatic decline in sales tax revenue, the lifeblood of their budgets, is staggering. The state had collected about $20.4 billion in sales taxes in the current fiscal year, up roughly 4.9%. As more Texans stayed at home or lost their jobs, restaurants, retailers, hotels and many other businesses had fewer or no customers, trimming the size of sales taxes that those businesses would remit. In addition to sales taxes, the downturn will hit motor fuel sales, franchise tax receipts and virtually every revenue line in the state budget.
The overall downturn in economic activity also is having an impact on the state’s Economic Stabilization Fund, Texas’ emergency bank account commonly known as the rainy day fund. The comptroller’s office had projected that lawmakers would have about $8.9 billion in the fund upon their return to Austin. The new estimate is closer to $8.5 billion.
The comptroller has the power to move cash around, and that may be sufficient to cover revenue shortfalls or short-term cash-flow issues if needed. Lawmakers most likely will need rainy day dollars to balance the budget next session, too.
However, everything in the world of budgets has a domino effect. The crude oil and natural gas production taxes are a major revenue source for the fund, and a portion of those dollars supports certain transportation projects. With the world awash in oil and consumer energy demand down, Texas can’t count on a rebound of energy prices to provide budget relief. Already, some energy experts predict that the state’s take of energy-related taxes has fallen by at least $1 billion since January.
Unlike the federal government, state and local governments don’t have the luxury of running deficits. State and local governments must balance their budgets, and when less money comes in, something has to be cut. Money from various federal stimulus packages to local governments and relief to unemployed workers and struggling Texas businesses will take some pressure off of the state. But it is not enough to forestall some cold budget decisions.
This is why we urge a serious discussion of these financial realities now. Improvement in the Texas economy most likely will be gradual, measured in months and years. State and local governments have tough decisions about what to fund and what to cut — decisions that affect us all in some way.
Time is not a friend.The financial hole is deep, but until economic activity comes alive, the hole will get deeper. And potentially unpopular options need time to be vetted.
The coronavirus’ destructive economic impact is being felt all across Texas. A new economic reality is looming, and we all must brace for it.
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