Weekly Round-Up: The Potential Impact of Declining Oil Prices on the Budget in Texas

In this week’s issue of Bloomberg BNA’s Weekly State Tax Report, Paul Stinson, Bloomberg BNA's correspondent in Austin, Texas, interviewed Texas Senator-Elect Paul Bettencourt (R) about the fundamental problems with the property tax in Texas, and the chances for margin tax reform in the upcoming legislative session.

In the following excerpt from the interview, Bettencourt discusses the extent to which the recent decline in oil prices could impact the state's discretionary spending in the coming biennium.

BLOOMBERG BNA: Given the state of flux as it relates to the price of oil, at what point will the legislature have to take a step back and say “ok, it's March and we're going to have to base our attitude toward tax legislation based on what we think is going to be this per barrel price” …how do you thread that needle in terms of basing legislation on a specific per barrel cost, it's a bit of a moving target and I understand that you're saying that price could have a substantial impact on how the legislature proceeds. At what point do you have to make a decision?

BETTENCOURT: There's really two main points. You've got an initial comptroller's estimate that comes out and clearly, if you look at a $30 per barrel oil drop in price that automatically takes a billion dollars out of the budget. Now while a billion is not much of a $210-12 billion total funds budget, when you look at the fact that you've got so much of the budget is …health and human services and you've got public and higher education, you get down to what the discretionary money that you control around on tax relief for example, you know several billion makes a big difference.

So you do have two points. You've got a point where you've got an initial comptroller's estimate and more importantly the real question is: “how long is oil going to stay down?” –that's the real question. The fact that it's already down and you can look at the production capacity of Saudi Arabia and others, it's continuing. Tells me you could have an extended period of time that you have oil around $70 a barrel. That impacts projects in the oil and gas business, impacts sales tax growth, so there's a lot of other spinoffs. But more importantly, my guess is that the new comptroller will come in with a more conservative budget that will say: “oil is going to be $60-$65, $70 per barrel for 18 months or maybe for the next full biennium.” That would be my interpretation of it, and of course the farther that goes on, that has more budgetary impact in the second year than it does in the first year.

BLOOMBERG BNA: Is there a way in which lower oil prices means potentially lower tax relief?

BETTENCOURT: Could be. Because … you got two things, first off when you have lower gas prices, which is what's happening now, you do get people spending more, running out and buying more—they've got more disposable income. However, over time, the job creation engine slows and so therefore your net effect slows down the sales tax side of the curve.

If you look at the figures … you see a really strong hockey stick-growth in production in Texas on oil. It really looks like an inverted hockey stick. You may have an average production over the last year of 2.2 million barrels a day, but we've already hit 3 million in the last daily run, so you've got an enormous explosion in production. So you have to take into account not only the per barrel pricing, but also what your value of production is.

I believe that between what's happening with the existing healthy state of the Rainy Day Fund [state fund derived from oil and gas taxes, tapped in 2013 and 2014 to fund water and road infrastructure, respectively following voter approval] and the fact that sales tax growth has been good and the budget will get trimmed off a little bit because the price of oil has come down. But there's also a lot more extra production, but there will be money available for property tax relief and probably some state franchise work as well.

Access the complete interview by signing up for a free trial of the Weekly State Tax Report

Some notable developments from the State Tax Developments Tracker – Bloomberg BNA’s new tool for monitoring important developments in all the states:

California Franchise Tax Board Releases January 2015 Tax News

Maine Revenue Services Publishes Tax Alert on Conformity With The Tax Increase Prevention Act of 2014 for Tax Year 2014

Illinois Department of Revenue Issues Informational Bulletin on Illinois Income Tax Rate Decrease

In other developments… 

Taxplainer: The State and Local Tax Impact of the Keystone Pipeline, by the Tax Foundation

Pennsylvania - Department adopts sales factor sourcing guidance, by PwC

Morrison & Foerster LLP issues its January 2015 issue of New York Tax Insights, which contains a look back at the top ten New York tax highlights of 2014

Compiled by Priya D. Nair

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