April 17, 2006
The Honorable Rick Perry, Governor
The Honorable David Dewhurst, Lieutenant Governor
The Honorable Thomas R. Craddick, Speaker of the House
Members of the 79th Legislature
In accordance with Texas Constitution Article III, Section 49a, I present herewith my revenue estimate for the remainder of the 2006-07 biennium.
This estimate is based on my just-completed economic forecast, which indicates that, although the Texas economy still continues to outperform the national economy as a whole, statewide economic growth can be expected to begin cooling down as we enter fiscal 2007.
For 2006-07, the state will have $71.9 billion in funds available for general-purpose spending. The balance on hand at the close of the 2006-07 biennium—after setting aside $2.5 billion for the required transfer to the Economic Stabilization Fund—is expected to be $5.9 billion, absent any legislative action subsequent to this date.
General revenue-related tax and fee collections in 2006-07 are expected to reach $70.5 billion. On the order of 86 percent of these funds will be provided by tax revenue collected during the 2006-07 biennium. The state sales tax will provide 60 percent of all tax revenue. Severance taxes will account for 9 percent, and the franchise tax, 8 percent.
In addition to the general-revenue related funds, the state will collect $68.7 billion in federal receipts and other revenues dedicated for specific purposes and therefore unavailable for general-purpose spending. State revenue collections from all sources and for all purposes will total $139.2 billion.
Turning to the new economic forecast, even though the U.S. economy as a whole began to cool off early in fiscal 2005, reflecting a slowdown in consumer spending and business investment, the Texas economy has continued to prosper. This cannot continue much longer. Beginning in fiscal 2007, the state economy should bear the adverse effects of the national slowdown in two stages: first as Texas-based businesses experience slowing national sales; then, more directly, as Texas households bear increased financial pressures from higher interest rates and debt levels.
The Honorable Rick Perry, Governor The Honorable David Dewhurst, Lieutenant Governor The Honorable Thomas R. Craddick, Speaker of the House Members of the 79th Legislature April 17, 2006 Page Two
After jumping by 4.9 percent in fiscal 2006, Texas GSP is expected to decelerate throughout 2007, posting a 4.0 percent annual growth rate. Even so, when compared to the national economy as a whole, our state economy can be expected to lead national growth by almost one and one-half percentage points annually in both 2006 and 2007.
Given the vigorous revenue growth that the state has enjoyed over the last two years, and given the uncertain future that we face as our economy begins to cool off, I can think of no better time than now to make a commitment to Texas’ future security and stability by using a portion of the state’s “surplus” funds to replenish the Rainy Day Fund to a prudent balance of at least $3 billion.
I will continue to monitor the Texas economy and revenue collections and keep you informed of any substantive changes in the state’s fiscal condition.
Carole Keeton Strayhorn
c: John O’Brien, Deputy Director, Legislative Budget Board