Texas Comptroller of Public Accounts

Texas Comptroller of Public Accounts, Glenn Hegar

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Revenue Estimate Press Conference
January 8, 2007

Comptroller Combs:
Good Afternoon. As it is my constitutional duty, under Article 3, Section 49A, I am delivering my estimate of the 2008 and 2009 revenue to the Legislature and the Governor today. Let me give you a brief overview, first. The general revenue related funds that are available for certification for the 2008-2009 general-purpose appropriations, are 82.5 billion dollars. Now, of importance to note is that the 2006-2007 budget as finally amended this past summer is approximately 68.2 billion, so the State of Texas on this graphic has new money of 14.3 billion, which is the difference between the today's announced 2008-2009 available revenue of 82.5 billion and the current budget.

And, how did we get to this 82.5 billion available revenue estimate? Well, this number is derived from, first, 7.0 billion in 2006-7, ending GR balance or surplus. Now, this is the largest ending balance on record, and it is a product really of vigorous revenue growth during the current biennium. Now, by contrast, just to go back 4 years ago, the 7 billion dollar number you have today was only 88 million back then, and that period ended a second year slow economic performance in Texas and the second year in a row that sales tax collection declined. So, you start with approximately 7 billion dollars and to that, you add 77.5 billion in revenues with sales tax being the largest tax source, but that tax, you should note, is slowing from its red-hot 2006 pace and still fast 2007 pace. Now, from that surplus and the revenues, you then subtract 2.0 billion in Oil and Gas Production Tax Revenue, which must be set aside or reserved for transfer to the Rain Day Fund, and that is how you get to the 82.5 billion in available revenues for the 08-09 biennium.

Well, now, what about the economy? The Texas economy like the U.S. economy, has been hitting on all cylinders in the years following the state and national slow down in the early part of the decade. But, I want you to look at this graph over here. The Texas economy is expected to cool from the rapid pace of 2006 and the still brisk pace of fiscal 2007. And, there is really three reasons: there is a cooling housing market, stabilizing oil and gas prices, and reduced growth in consumer spending. These are expected during the coming biennium. And, all three of these areas have been prime contributors to the recent surge in tax collections. Overall, the Texas economy while slowing is expected to exhibit moderate growth during the upcoming budget cycle. And, let me take these three economic sectors one by one.

The housing sector, nationwide the housing boom of the past two years, you can take a look, is rapidly slowing, and although, not over priced, the Texas housing market will soon feel the slow down currently impacting the east coast and of course the west coast, etc. And, already new home permits, which reflected in the housing permit numbers seen on the graph, as the black line turned around from being up 20.7 percent one year ago to down 12.4 percent last October, which is a dramatic shift.

The oil and gas sector, which is in the graph next to it, the prices continued a rapid climb in fiscal 2006, to finish at a yearly taxable price of $61.12, this is for oil, about $67.90 in market price, where as natural gas similarly finished fiscal 2006 at a taxable price of $7.06 MCF or about $8.20 for the market. These prices, in the future, are expected to recede from such high levels, and as they do, it is expected that the level of exploration will also decrease somewhat.

What about consumer spending? Consumer spending, the third piece, as been nothing, if not vigorous, in Texas since we rebounded from the early part of the decade economic slow down, but now driving this has been partially, at least, the vibrant housing market. People feel wealthier as their homes appreciate in value, this is the so-called wealth effect, and then they tend to spend more freely in that knowledge. Now, more practically speaking, if you'll look at that graph over there, low interest rates made financing or refinancing of mortgages very attractive, and a lot of times, what you've got here is the chart called Net Equity Extraction or Cash Out. So, there was a very sharp peak and now a sharp drop in cashing out of home equity for the funds to be spent by consumers. And, this is a pretty dramatic down turn.

Shifting gears a bit, let me talk a little about several of the state's larger revenue sources. Eighty-seven percent of the revenue will come from taxes, and the remaining 13 percent will come from non-tax sources such as fees, interest earnings, and lottery.

Let's talk about the very first category of tax, the largest, which is sales tax. The expected 2008-2009 sales tax collections, we expect them to be about 41.5 billion dollars, will be about 61 percent of all GR tax revenue and 55 percent of all GR revenues, which is about the same percent as its been for the past several biennium. But, the average annual growth rate for 2008-9, will be approximately 4.2 percent, and that is down considerably from fiscal 06's 12 percent, and fiscal 07's anticipated 7 percent. So, you got, in 06 you had 12 percent, in 07 we're expecting 7 percent, and going forward we're looking at 4.2 percent. To some extent, the same factors that drove the high growth rates of the past two years are the same ones expected to cool off during 08-09, and all three of those impact sales tax. For example, I do expect to see taxable purchases of building materials to drop, as the number of new homes being built drops. And, as oil and gas prices recede and it becomes somewhat less attractive to explore for or drill new wells, consequently there will be less taxable equipment needs to be purchased. And, I do expect consumer spending to slow, not stop, not reverse, but slow in 2008 and 2009.

Second major category is franchise tax, and with the enactment of House Bill 3, this tax becomes the second largest tax, and the third largest GR tax source, and of course, it takes effect January 1, 2008. Now, it is often called, going forward, the Margins Tax. And, the new Margins Tax should generate about 11.93 billion dollars, but that sum will be split between two funds, two state funds. The Legislature was determined to keep GR held harmless in essence, however much money that made before they wanted to assure they made it again. So, $5.84 billion of that number, is dedicated to GR, because it is equal to what the old franchise tax would of generated, and so it gets deposited to GR. The balance, which is about 6.1 billion dollars, is dedicated to the new Property Tax Relief Fund.

Third tax category is the oil and natural gas sector. Now, the Natural Gas Production Tax is expected to bring in about 3.52 billion in the next biennium, where as, Oil Production Taxes are expected to generate about $1.42 billion. Together, the two of these will generate taxes of about 4.94 billion. Now, of this 4.94 billion, 2.01 billion will be reserved, constitutionally, for transfer to the Rainy Day Fund. And, as I kind of mentioned earlier, both oil and gas taxes are expected to show a moderate decline over the biennium. All told then, from both tax and non-tax sources, the 08-09 biennium will see the 77.5 billion in revenue to GR.

The news that I have for Texas today is good. But, there are some indications of cooling in our economy, if you look at these graphs, back to the economic growth, housing indicators, and I would point out, look at number of sales and number of listings, which are the green and yellow energy and equity extraction, and we should be considering those as we look forward.

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