Schnurman: Why Texas won’t get busted again by low oil prices

Wednesday, January 21, 2015

The Dallas Morning News

January 19, 2015

This time is different, and not by accident.

Oil prices have fallen by more than half since last summer, prompting cuts in energy jobs and rig counts. That is stoking fears of a deep downturn in the state’s economy.

But Texas is less vulnerable to the kind of oil shock that derailed the state in the 1980s, and that’s by design.

Almost 30 years ago, when the oil industry collapse put the state in a fiscal crisis, political and business leaders set out to diversify the economy and its tax base.

They launched economic development programs and recruited a wide range of employers, an aggressive approach that’s been refined and copied elsewhere. They expanded the sales tax base to more products and business services. Licenses, fees and the lottery became more important contributors.

A rainy day fund was created to siphon off future gains from oil and gas and provide a safety net for the next emergency. Now, the fund has $8.5 billion, and the comptroller projects it will grow to $11 billion in two years.

All these initiatives helped diversify the Texas economy and make it less dependent on oil. In 1982, taxes on oil and gas production accounted for almost 18 percent of state revenue. Last year, the share was 5.5 percent.

The share is smaller even as production has boomed from the shale revolution. In 2014, Texas collected almost $5.8 billion from taxes on oil and natural gas production. That’s $3.4 billion more than in ’82, an increase of about 143 percent.

It wasn’t a straight-line rise, not with the industry’s boom-and-bust cycles. But it seems impressive enough — until it’s compared with gains in other taxes.

Sales tax revenue, which generates over half the state’s collections, was almost eight times higher than in ’82.

In ’82, sales tax provided about $1 billion more than oil and gas in state revenue; last year, sales tax provided almost $22 billion more than oil and gas.

The franchise tax also grew faster than energy, as did taxes on vehicle sales and rentals. The lottery, which began in 1992, adds almost $2 billion annually to state coffers.

“No, we will not become the next Detroit,” economist Stuart Greenfield wrote in an op-ed this month in response to news articles about Texas being at risk.

Greenfield, who previously worked as an analyst for three Texas comptrollers, said the decline in oil prices would have an adverse effect on the economy and state tax collections.

“But the impact will be minimal,” he wrote in the Quorum Report, reducing the growth rate of the Texas economy “by a few tenths of a percent.”

While prices may be lower, companies will keep pumping oil and gas and paying taxes, he said in a phone interview.

But Dale Craymer, chief revenue estimator for the Texas comptroller in the 1980s, said low oil will take a toll on the economy and state treasury.

“Severance taxes don’t tell the whole story,” said Craymer, president of the Texas Taxpayers and Research Association.

Every oil and gas worker supports 2.3 additional jobs, from finance to fast food. That’s almost twice the ripple effect of a lawyer or accountant.

The industry also spends heavily on materials and other items, such as pipe, tools and trucks. Oil and gas drillers accounted for almost $2 billion of Texas’ sales tax collections last year, Craymer said. They paid $1.5 billion in school taxes and a big chunk of the franchise tax.

Low gasoline prices will boost consumer spending, which adds to state collections. But the gains won’t be enough to cover the hit from energy, Craymer said.

If oil and gas drilling declines by a third, Texas will have $1 billion less to spend annually, he estimated.

“We’re certainly in a better position than in the ’80s,” Craymer said, citing the state’s cash on hand and the rainy day fund. “But we’re still going to feel this.”

Last week, the comptroller projected 3 percent growth for 2015. That’s down from a 3.7 percent gain in real gross state product last year. He cited the decline in oil prices and possibility of a slowdown in global growth.

While the energy business is under pressure, other sectors are growing fast. Local governments, which lost workers for almost two years, have been adding teachers, cops and firefighters at a rapid clip.

By 2017, oil and gas taxes still won’t be back to 2014 levels, the comptroller projects. But total tax collections for Texas will be 10 percent higher and economic growth will top last year’s rate, according to his estimate.

If he’s right, the state economy will roll on, even as the oil and gas industry pulls back. Decades ago, that’s exactly how Texas leaders envisioned it.

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