Texas budget surplus soars to $33 billion, spurring demand for tax cuts and one-off “investments”

AUSTIN. Texas Comptroller Glenn Hegar on Monday added nearly $6 billion to the state’s projected budget surplus, bringing it up to nearly $33 billion, likely sparking something of a frenzy ahead of a new legislative session.

The record high forecast for how much money will be in government revenue accounts in September is likely to increase demands for additional cash to be used for one-time “investments”. The drums will beat louder to get the Republicans to invest a lot of money in lowering school property taxes.

Using words like “amazing” and “wonderful,” Hegar attributed the $32.7 billion airbag to Texas’ post-COVID-19 economic boom, as well as high energy prices and the highest inflation in four decades. He did not focus on federal stimulus money, which the state is in no hurry to spend. But up to $8 billion of unspent federal aid also played a role.

“Many positive factors have played a role in creating this growth, including our business-friendly policies, conservative budgeting practices, and ambitious Texans whose vision and hard work benefit our state,” he said, posting his two-year earnings estimate. . It sets a ceiling on how much lawmakers can spend in the 2024-25 budget they are about to write. The session opens on Tuesday.

Including federal and other funds, Hegar predicts the state will have $342.3 billion of available “all means” revenue in the next two-year cycle – a staggering 27% increase from the $270.5 billion he assumed in his estimate. two years ago. He predicts $165.9 billion in new government revenue in the next cycle. Two years ago, he predicted $112.5 billion. With a surplus and necessary transfers, total revenue would be $188.2 billion.

“I must advise you to exercise some caution,” warned Hegar, the state’s top tax collector and former legislator.

“Honestly, don’t count on me announcing another revenue spike two years from now,” he said. “The revenue increase we have seen has been unprecedented in many ways and we cannot reasonably expect to repeat. We are unlikely to have that opportunity again.”

Hegar’s caution is fueled by his expectation that higher interest rates set by the Federal Reserve to curb inflation will further discourage new housing development and lower consumer spending in Texas. This is despite the fact that Hegar expects inflation to fall to 2.2% per year by fiscal year 2025.

“We expect a moderate recession,” he said. “The expected downturn for Texas is relatively shallow and short, but it won’t make life easier for Texans.”

One reason for pessimism is jobs. Hegar believes Texas nonfarm payrolls will decline from 13.73 million jobs this fiscal year to 13.67 million for the year beginning Sept. 1. relentless growth in employment in the state.

The constitutional spending cap will prevent lawmakers from burning the entire surplus. Lieutenant Gov. Dan Patrick ruled out a vote to lift the spending cap, though he said lawmakers could reduce the amount of surplus subject to the cap by reallocating money to constitutionally earmarked funds, such as building psychiatric hospitals. The Controller spoke encouragingly of the creation of a new fund for the repair of water pipes.

Hegar made other suggestions for spending the surplus.

“Even with constitutional limits on spending and a new inflation-driven norm, the sheer volume of projected revenue presents the state with a remarkable or truly ‘one-of-a-kind’ opportunity” to advance the state in this session, he said.

Among the “thoughtful options” he suggested were investing in the power grid, broadband connectivity, ports, “wage adjustments for government employees, our teachers and nurses” and additional spending to “develop our skilled workforce.” That’s on top of Gov. Greg Abbott committing $4 billion to border security in the current cycle, said Hegar, who backed the same.

Texas Comptroller Glenn Hegar presents his earnings estimate for 2024-2025 during a virtual press conference on Monday, January 9, 2023.(Screenshot / staff photographer)

Hegar urged lawmakers to “consider making big tax cuts” to help struggling Texans.

Buying school districts property tax rates for maintenance and operation will be an ongoing obligation. Other types of new spending, which will continue in future cycles, are less popular with Hegar and the GOP-controlled Legislature.

Elsewhere, he urged lawmakers to aim for “well-thought-out spending proposals” that “could deliver positive results” without creating “general revenue requirements that may be difficult to meet in the coming years.”

Hegar’s forecast is based on a number of innovations:

  • The ending balance of total income-related money for the current cycle – commonly referred to as “surplus” – is much higher than at any time in history. This is despite $3.8 billion of the $32.7 billion in total revenue savings made possible by replacing federal COVID relief funds with state discretionary funds that lawmakers spent last time, mostly on wages. . It also includes $4.3 billion in state spending cuts as real estate values ​​skyrocketed, resulting in higher property tax revenues for local school districts. This reduces the government’s commitment to the main school assistance program, the Basic School Curriculum.
  • The fiscal year ending August 31 last year broke all records for annual growth in government tax collections. The tax revenue of all funds increased by 25.6% compared to FY 2021. The previous record was 13.4% annual growth ten years earlier. There have been only five years of double-digit growth since 1997. This was supported by a 19.3% increase in sales tax, an 84.4% increase in oil production tax and an 185% increase in natural gas production tax.
  • The oil tax is currently the state’s second largest source of revenue after the sales tax. In the coming two-year cycle, the oil production tax is set to reach a whopping $13.3 billion. This is nothing compared to the $87.9 billion in sales tax that Hegar predicts. But he pushes the auto sales tax ($12.7 billion) to third place, followed by the business privilege or “profit” tax. This business tax will generate $12.6 billion, although $3.8 billion of that will go toward paying for the 2006 property tax cut.
  • The public rainy day fund, approved by Texas voters after the savings and credit crisis and the oil crisis of the mid-1980s, has approached the constitutional limit for the first time. In 2024-25, if lawmakers don’t decide to spend some of it, the flow of transfers to the energy tax fund will reach a cap of $26.4 billion. According to Hegar, he now has $13 billion. While the MET on oil and natural gas is “noticeably volatile,” he expects oil to be $83 a barrel in fiscal 2024 and $94 a barrel next year.

Rahul Srinivasan of Texas 2036, a public policy think tank founded by Dallas lawyer Tom Luce, said the revenue estimate would increase pressure on budget preparers.

“These are all huge numbers and our balance of funds is so large that this is not a no session,” he said. “This is a session in which [lawmakers] it will be difficult for them to deal with all the different issues that are there.”

Because of the constitutional spending cap that Texas voters approved in 1978, lawmakers won’t be able to spend all of the $32.7 billion surplus. With a majority vote in both houses, they can decide to lift the spending ceiling. It is tied to the growth of the state’s economy and applies to state tax revenue not earmarked for other provisions of the Constitution. Last month, key budget planners put the expected growth at 12.33% inflation and population growth. This means they could only spend $12.5 billion of the surplus.

Legislators can reduce the surplus by plugging holes in the current budget, such as covering the pending Medicaid IOU, for example, Hegar said. By helping the ledger, Texas has about $4 billion more of unspent federal COVID relief money that it can replace with state discretionary dollars, he said.

Appearing at a Texas Tribune event on Monday afternoon, Hegar answered a question from high school student Marcus Owen Oppenheimer of Flower Mound whether the operation of Hegar’s office would change if Texas funded school districts based on average student numbers rather than daily attendance, as some schools want. county? Hegar responded that the change would not greatly affect his office, but would make a difference to the Texas Education Agency.

Oppenheimer’s question underlined that government agencies at all levels would consider excess cash for possible relief.

After the event, the 18-year-old Oppenheimer explained that he went to Austin after his second period because he was very interested in politics. Spending the surplus on education was “easy,” he said. “I just really want education to be prioritized.”

To cut property taxes, Texas GOP leaders will have to overcome hurdles

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