Texas’ budget surplus soars $33B, fueling demand for tax cuts, one-time ‘investments’

AUSTIN — Texas Comptroller Glenn Hegar on Monday added nearly $6 billion to the state’s projected budget surplus, taking it to nearly $33 billion – and likely setting off something of a feeding frenzy on the eve of a new legislative session.

The record-high forecast for how much money will be in the state’s general-revenue accounts come September probably will intensify demands that extra cash be used for one-time “investments.” Drums will beat louder for the Republicans who run the Legislature to plow a lot of the money into decreased school property taxes.

Using words such as “astonishing” and “remarkable,” Hegar attributed the $32.7 billion cushion to Texas’ economic boom in the wake of the COVID-19 pandemic – along with high energy prices and the highest inflation in four decades.

“Many positive forces 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 as he released his biennial revenue estimate. It sets a ceiling on how much lawmakers can spend in the 2024-2025 budget they’re about to write.

Counting federal and other funds, Hegar projected the state will have $342.3 billion of available “all funds” revenue in the next two-year cycle – a staggering 27% increase from the $270.5 billion he guessed in his estimate two years ago.

“I must advise some caution,” though, said Hegar, the state’s chief tax collector and a former legislator.

“Bluntly, don’t count on me announcing another big revenue jump two years from now,” he said. “The revenue increases that we’ve seen have been in many ways unprecedented and we cannot reasonably expect a repeat. We are unlikely to have an opportunity like this again.”

Contributing to Hegar’s caution is his expectation that higher interest rates set by the Federal Reserve to curb inflation will further discourage new housing construction and dampen consumer spending in Texas.

“We expect a mild recession,” he said. “The expected downturn for Texas is relatively shallow and short, but it will not make Texans’ lives easier.”

Among Hegar’s grounds for pessimism: He sees non-farm employment dipping to 13.67 million jobs in fiscal 2024, which begins Sept. 1. That’s down from 13.73 million this year. The number will rebound to 13.74 million in fiscal 2025, the second half of the upcoming cycle, he predicted.

A constitutional spending limit will prevent lawmakers from burning through the entire surplus. Lt. Gov. Dan Patrick has ruled out taking a vote to bust the spending cap, though he’s said lawmakers might reduce the amount of surplus subject to the cap by shifting money to constitutionally dedicated funds, such as for water supplies.

Hegar, who expects inflation to come down to 2.5% a year by fiscal 2025, made his own suggestions for spending the surplus.

“Even with constitutional spending limits and an inflation-influenced new normal, the enormous amount of projected revenue gives the state a remarkable or truly ‘once-in-a-lifetime’ opportunity for historical actions this legislative session,” he said.

Among the “thoughtful options” the comptroller suggested were plowing funds into the electricity grid, broadband connectivity, port and water infrastructure, “salary adjustment for state employees, our teachers and nurses” and additional spending on workforce training. That’s on top of Gov. Greg Abbott’s $4 billion border security push in the current cycle, Hegar noted.

He said Texas “must continue to fill the substantial void left by the federal government.”

Texas Comptroller Glenn Hegar presents his revenue estimate for 2024-25 during a virtual...
Texas Comptroller Glenn Hegar presents his revenue estimate for 2024-25 during a virtual press conference Monday, Jan. 9, 2023.(Screenshot / Staff Photographer)

Hegar also urged lawmakers to “consider meaningful tax reduction to ease the burden of Texans who are grappling with inflation, economic uncertainty and rising housing costs.”

While a buy-down of school districts’ “maintenance and operation” property tax rates would be a recurring obligation, lawmakers could bypass that problem – though they’d limit the amount of the tax cuts – by making them contingent on money set aside in a constitutionally dedicated fund, Hegar suggested.

In other areas, lawmakers should aim for “well-thought-out spending proposals” that have “positive results” but don’t create “demands on general revenue that might be difficult to meet in years to come,” he said.

Underlying Hegar’s forecast is a series of firsts:

  • The ending balance of general revenue-related money for the current cycle – commonly called “the surplus” – is far higher than any in history. That’s even though $3.8 billion of the $26.7 billion is savings of general revenue made possible by substituting federal COVID relief funds for the state discretionary funds lawmakers spent in the 2021 session. It also includes $4.3 billion in reduced costs to the state because real estate values soared, swelling local school districts’ haul from property taxes – and reducing the state’s obligation to the main school aid effort, the Foundation School Program.
  • The fiscal year that ended last Aug. 31 broke all records for year-over-year growth in state tax collections. All funds tax receipts soared by 25.6% over fiscal 2021. The previous record was 13.4% annual growth a decade earlier. Since 1997, the growth rate has exceed the previous fiscal year by double digits only five times – 2006, 2007,
  • 2008, 2012 and 2018. In fiscal 2022, sales tax collections grew by a record 19.3%.
  • The oil production tax is now the state’s second-highest generator of revenue, after the sales tax. In the upcoming two-year cycle, the oil severance tax is expected to yield a whopping $13.3 billion. That will pale against the $87.9 billion of sales tax that’s predicted. But it pushes motor-vehicle sales tax ($12.7 billion) down to third place, followed by the business franchise or “margins” tax. That business tax will yield $12.6 billion, though $3.8 billion of that will be raked off to help pay for property tax cuts passed in 2006.
  • The state’s rainy day fund, which Texas voters approved creating after the savings-and-loan crisis and oil bust of the mid-1980s, is for the first time approaching its constitutionally prescribed cap. In 2024-2025, unless lawmakers decide to spend some of it, the cap will be $26.4 billion and under current law, the flow of expected fund transfers (mostly from energy taxes) will hit that maximum. While oil and natural gas severance taxes “are notably volatile,” Hegar expects $83 a barrel oil in fiscal 2024 and $94 a barrel the following year.

Because of a spending limit that Texas voters enshrined in the state Constitution in 1978, lawmakers will not be able to spend all of the $32.7 billion cushion in general revenue accounts. They could, with a majority vote of both chambers, choose to bust the spending cap. It’s pegged to growth in the state economy, and applies to state tax revenue not dedicated elsewhere in the Constitution.

The 12.33% inflation and population growth rate that GOP leaders chose last month as the yardstick for measuring growth of the Texas economy would allow budget writers to spend only $12.5 billion of the surplus.

Lawmakers could use several billion dollars of the surplus in a “supplemental appropriations bill” that plugs holes – such as a Medicaid shortfall – in the budget passed in the 2021 session, Hegar noted. On the other hand, Texas has about $4 billion more of unspent federal COVID-relief money that it could sub out for state discretionary dollars, he said.

For general revenue, including state taxes and fees that flow to dedicated accounts, Hegar forecast $165.9 billion in revenue in the next cycle. Two years ago, for 2022-2023, he forecast $112.5 billion.

The cash carry-over balance of $32.7 billion goes on top of the $165.9 billion of new revenues, Hegar explained. After required transfers of more than $10 billion of energy-tax money to the highway fund and the rainy day fund, lawmakers will have $188.2 billion of available general revenue, he said.