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How Will Falling Oil Prices Affect the State Budget?

Lawmakers will find out this morning how much money they’ll have to work with as they craft the state’s next two-year budget. They’re expected to have plenty of wiggle room, but rapidly dropping oil prices have raised some concerns. Oil and gas prices could affect those numbers.

At the end of 2013, former Texas Comptroller Susan Combs said the state could have about $2.6 billion dollars in unspent revenue from the current budget. Some believe that surplus will be even larger when current Comptroller Glenn Hegar delivers his revenue estimate this morning. And that money could be a big help, considering the state's economic future might not be as rosy thanks to falling oil prices.

"From a peak of $134 in the summer of 2008, I think we can all remember when gasoline was up over $4 a gallon. It dropped to less than $40, quite rapidly, and then rebounded with equal rapidity," said John Heleman, the chief revenue estimator under Comptroller Combs.

He was lamenting oil's slide to lawmakers during the December meeting of the Legislative Budget Board. The price drop affects a lot of things, not all negatively. Cheaper gas does mean more money left in your pocket after you fill up your car. But when considering the budget, there really aren't any positive outcomes.

Billy Hamilton was Deputy Comptroller for 16 years. He recalls his time as revenue estimator during the oil bust back in the ‘80s.

"Basically we had been experiencing the beginnings of problems for several months. I was just too green to realize it. And in January, sales tax was horribly under estimate. And that was really the beginning of the problem as far as I was concerned,” Hamilton said.

That kind of doom and gloom probably isn't on the horizon again for Texas for a number of reasons. At the top of the list, Texas isn't just an oil and cattle state like it was back in the 80's.

"I mean the oil and gas severance taxes were about 20 percent of all taxes. Where now they’re less than 10 percent," he said.

And the boom and bust time revenues, which could have lead to boom and bust time budgets, have been smoothed out with the creation of the Rainy Day Fund in the late ‘80s. That account is projected to have $8 billion in it for 2015. And there is one final thing in the state's favor: conservative oil price estimates.

"You know you have some of the other states that are major oil producers who were predicting $103 - $109 a barrel on average in 2015. And Texas it seems to me was down around $60 or something like that,” Hamilton said.

The low estimate means the state wasn't expecting billions more in oil revenue – revenue that lower oil prices would have erased.

The Texas estimate is still high compared to current market prices of around $50 a barrel. But Hamilton says consider the trouble other states like Alaska are in after budgeting with the assumption of oil at $100 a barrel.

"Alaska's up 100 feet and now has to drop to the ground. And Texas is up 20 feet and has to drop to the ground. It's like no matter how you cut it, the damage will be less,” Hamilton said.

Back on the ground here in Texas, the drop in prices will have a fairly rapid effect on sales taxes. Equipment sales and payrolls in the oil and gas sector are already getting hit. But it will take a bit longer before low prices affect collection on taxes paid on the oil coming out of the ground – taxes that pump billions into the state's budget and Rainy Day Fund. That's because for now, the oil rigs are still pumping.

"The number of operating rigs in our state remains high. It does not appear as though we have had nearly enough time for, whatever change these prices may bring these declines in oil prices, we haven’t had nearly enough time for that to work through to be represented by fewer rotary rigs operating in our state,” Heleman said.

And for now, the decline in oil prices hasn't dampened the hopes of newly elected leaders like Governor-Elect Greg Abbott and Lieutenant Governor-Elect Dan Patrick. Patrick made a point of saying his plans for tax cuts and transportation funding are still a go during a press conference last week.

“Whenever we have a fallback in the economy and revenues, we always hear about, well we have to protect this program or that program or what are we going to do. I say we have to protect the people first,” he said.

We'll see just how much protecting they need later this morning when the budget revenue estimate is released. 

Ben Philpott is the Managing Editor for KUT. Got a tip? Email him at Follow him on Twitter @BenPhilpottKUT.
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