Texas’ budget surplus soars to $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.

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Texas Comptroller Glenn Hegar presents his revenue estimate for 2024-25 during a virtual press conference Monday, Jan. 9, 2023.

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 Republicans to plow a lot of the money into decreased school property taxes.

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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. He didn’t stress federal stimulus money the state has been slow to spend. But up to $8 billion of unspent federal aid played a role, too.

“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. The session opens Tuesday.

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. He forecast $165.9 billion of fresh state revenue in the next cycle. Two years ago, he forecast $112.5 billion. Accounting for the surplus and required transfers, there will be $188.2 billion of available general revenue.

“I must advise some caution,” warned 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. That’s even though Hegar expects inflation to come down to 2.2% a year by fiscal 2025.

“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.”

One reason for pessimism is jobs. Hegar sees Texas’ nonfarm employment decreasing from 13.73 million jobs this fiscal year to 13.67 million in the year that begins Sept. 1. While the number should rebound to 13.74 million in the following year, fiscal 2025, Hegar forecast at least a temporary pause in the state’s relentless job growth.

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 such as to build mental hospitals. The comptroller spoke encouragingly of creating a new fund to fix water pipes.

Hegar made other 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” to advance the state this session, he said.

Among the “thoughtful options” he suggested were plowing funds into the electricity grid, broadband connectivity, ports, a “salary adjustment for state employees, our teachers and nurses” and additional spending on “development of our skilled trades workforce.” That’s on top of Gov. Greg Abbott’s $4 billion border security push in the current cycle, noted Hegar, who endorsed more of the same.

Hegar urged lawmakers to “consider meaningful tax reduction” to help struggling Texans.

A buy-down of school districts’ “maintenance and operation” property tax rates would be a recurring obligation. Other types of new spending that would be ongoing in future cycles are less popular with Hegar — and the GOP-controlled Legislature.

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

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 $32.7 billion is savings of general revenue made possible by substituting federal COVID relief funds for state discretionary funds lawmakers spent last time, mostly on payroll. 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. That reduces 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, there have been only five years with double-digit growth. Fueling it was 19.3% growth in sales tax, 84.4% growth in oil production tax and 185% growth in natural gas severance tax.
  • The oil tax is now the state’s second-highest generator of revenue, after sales tax. In the upcoming two-year cycle, the oil production tax should yield a whopping $13.3 billion. That’s peanuts next to the $87.9 billion of sales tax Hegar forecasts. 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 2024-25, unless lawmakers decide to spend some of it, the flow of energy tax transfers to the fund will hit a cap of $26.4 billion. It has $13 billion now, Hegar said. While oil and natural gas severance taxes “are notably volatile,” he expects $83 a barrel oil in fiscal 2024 and $94 a barrel the following year.

Rahul Sreenivasan of Texas 2036, a public policy think tank founded by Dallas attorney Tom Luce, said the revenue estimate will ratchet up pressure on budget writers.

“These are all enormous numbers, and our fund balance is so high, this is not a ‘no’ session,” he said. “This is a session where [lawmakers] are going to have a hard time dealing with all the different asks that are there.”

Because of a constitutional spending limit that Texas voters approved in 1978, lawmakers will not be able to spend all of the $32.7 billion surplus. With a majority vote of both chambers, they could 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. Last month, key budget writers defined the expected growth as 12.33% of inflation and population increases. It means they could spend only $12.5 billion of the surplus.

Lawmakers could depress the surplus by plugging holes in the current budget, such as covering an expected Medicaid IOU, Hegar said. Helping the ledger, Texas has about $4 billion more of unspent federal COVID relief money that it could substitute for state discretionary dollars, he said.

Appearing at a Texas Tribune event Monday afternoon, Hegar took a question from Marcus High School student Owen Oppenheimer of Flower Mound: Would Hegar’s office’s work change if Texas funded school districts based on average enrollment instead of daily attendance, as some school districts want? Hegar replied that the change wouldn’t affect his office much, but would be of import to the Texas Education Agency.

Oppenheimer’s question underscored how government entities at all levels will be eyeing the excess cash for possible relief.

After the event, Oppenheimer, 18, explained he drove down to Austin following his second-period class because he is highly interested in politics. Spending the surplus on education was “a no-brainer,” he said. ”I just really want to see a priority placed on education.”

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