COMMENTARY by BILLY HAMILTON
In December 1982, just before the 1983 legislative session, I became chief revenue estimator for Texas Comptroller Bob Bullock, meaning I was responsible for the state’s revenue forecast. Although my predecessor warned me, I was too green to realize that I was blundering into the oil price bust of the 1980s.
No one was prepared for what followed, least of all me.
That was a long time ago, and Texas now faces what some experts believe is a similar situation — a sharp decline in oil prices ahead of a legislative session. We even have a new revenue estimator.
I don’t want to diminish the problems that falling prices present for Texas or the new estimator, but the situation isn’t the same. Not exactly. The Texas economy is more diverse than it was in the early 1980s. On the other hand, Dale Craymer, another former estimator and now the president of the Texas Taxpayers and Research Association, has estimated that between one-third and 40 percent of the economic recovery in Texas since the recession can be attributed to the oil and gas industry. Assuming the rest of the economy performs well in 2015, as is expected, oil industry problems might be a major economic drag, but not a 1980s-style economic calamity.
State finances also are different today. In the 1980s, oil and gas taxes made up a fifth of state taxes, and the industry also had a surprisingly large impact on the state’s most important tax source, the sales tax. Oil and gas taxes now account for less than 10 percent of taxes, and much of their growth goes not to the general fund but to the state’s Rainy Day Fund, which was created because of the problems of the 1980s. Today, the sales tax is an even more important source of revenue than it was in 1983, accounting for more than half of state tax revenue. However, its base is broader than it was then, another product of the 1980s.
Despite the changes, if oil prices stay low for an extended period, it could spell trouble for state finances but, again, not of the magnitude of the 1980s. Although a large percentage of oil and gas taxes go to the Rainy Day Fund, some of the revenue supports general spending. More important is the impact of the industry on the sales tax. Many of the items used in oil and gas production, from drill bits to fluids, are taxed. Oil and gas-related spending doesn’t make up an overwhelming percentage of sales tax collections, but its impact is magnified by the tax’s outsize role in state finances.
So that leaves us with the current state of uncertainty. Worrisome, I admit. But things could be worse. The state’s budget outlook may be dinted by falling prices, but economic diversification — and prudence with oil and gas tax revenues and overall spending — should mean it won’t be upended.
Of course, much depends on how low prices go and how long they stay there. My theory is that the drop will look something like the decline in 2008-09. Prices peaked at $145 per barrel in July 2008. They then nosedived to $37.58 the day after Christmas of that year. However, they climbed back to $70 per barrel by the following August and stayed in the $70-to-80-per-barrel range until early 2011, when they climbed higher, reaching $100 per barrel in March 2011.
A similar trajectory is possible this time around. The problem is that like the other theories being floated these days, mine is just that — a theory. No one really knows. That’s why I got out of revenue estimating. It’s hard on the nerves.
The good news is that the comptroller-elect, Glenn Hegar, is taking steps to give legislators the best estimate he can for the legislative session. He held a meeting of former estimators in December to get their input — which we all enjoyed thoroughly since the problem is his, not ours. If he can dust off the over-the-hill gang, it means he’s looking for answers before deciding. That’s another sign Texas will be much better prepared for 2015 than it was for 1983.
BILLY HAMILTON is the former chief revenue estimator for the Texas comptroller. This commentary was originally published in the Texas Tribune. It is made available here through a news partnership between the Texas Tribune and the San Marcos Mercury.
PHOTO by PAUL LOWRY