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The 2018-19 Certification Revenue EstimateOverview

The state of Texas will have an estimated $107.24 billion available for general-purpose spending in the 2018-19 biennium, 1.2 percent less than in 2016-17. This figure represents the sum of the 2016-17 ending balance and tax and non-tax revenue collections in 2018-19, less revenue set aside for transfers to the Economic Stabilization Fund (ESF) and State Highway Fund (SHF) and adjustments to General Revenue-dedicated account balances. In all, the state is expected to collect $224.55 billion for all state funds in 2018-19.

The state’s tax system is the main source of General Revenue-related (GR-R) funding. Tax collections in 2018-19 will generate $94.76 billion, while non-tax revenue sources will produce an additional $13.83 billion. Factoring in the estimated $883 million ending balance carried forward from 2016-17, these three sources will total $109.48 billion. Against this amount, $3.38 billion must be placed in reserve for future transfers to the ESF and the SHF and $1.13 billion must be added for various adjustments to General Revenue-dedicated account balances (Table 1).

GR-R spending is expected to total $107.23 billion in the 2018-19 biennium (Table 2). Subtracting this amount from the projected $107.24 billion available for general-purpose spending leaves an estimated 2018-19 ending balance of $6 million (Table 3).

Texas Economic Outlook

The Texas economy added 298,600 nonfarm jobs in fiscal 2017, an increase of 2.5 percent, to reach a total of 12,333,900 in August 2017. Texas added more new jobs than any other state in that year. Private-sector employment rose by 2.7 percent while government employment (federal, state and local) grew by 1.4 percent. The state’s rate of job growth was second-highest among the 10 most populous states and sixth-highest among all states. Employment growth is expected to be 2.1 percent in fiscal 2018 and 2.0 percent in 2019 (Table 4).

Texas real gross state product (GSP), after increasing by just 0.3 percent in fiscal 2016, rose by an estimated 3.0 percent in 2017, led by increases in the mining and logging, professional and business services and trade, transportation and utilities industries. Real GSP is expected to rise by 3.7 percent in 2018 and 3.2 percent in 2019.

Texas nominal (current dollar) GSP declined by 1.1 percent in fiscal 2016, the first year-over-year decline since the Great Recession and only the second in the past 30 years. The decline was of relatively short duration, however; nominal GSP growth in 2017 was an estimated 6.1 percent, higher than the 5.6 percent average growth rate during the past 20 years. Nominal GSP is expected to grow by 6.6 percent in 2018 and by 5.6 in 2019.

Texas personal income rose by an estimated 3.7 percent in fiscal 2017 following 2.7 percent growth in 2016. Personal income is projected to grow by 5.7 percent in 2018 and 6.0 percent in 2019.

           

The Texas unemployment rate remained relatively constant during fiscal 2017, averaging 4.7 percent and ranging from a low of 4.2 percent in August 2017 to a high of 5.0 percent in March and April 2017. Further improvement is expected over the next two years, with an estimated average of 4.4 percent in 2018 and 4.1 percent in 2019.

In sum, after the sharp declines in the growth rates for GSP, personal income and employment in fiscal 2016, we expect the Texas economy to return to growth at a rate faster than the nation’s. Texas employment growth outpaced that of the U.S. in fiscal 2017, while Texas personal income and GSP growth for the first two quarters of fiscal 2017 (the latest available) were higher than the nation’s as well. For the 2018-19 biennium, Texas’ GSP, personal income and employment growth rates are projected to be moderately higher than those of the U.S, although not as a high as the rates of growth seen from 2010 through 2015. The Texas unemployment rate is not expected to vary significantly from that of the nation.

The 2017-18 Ending Balance

The ending GR-R certification balance for 2016-17 was $883 million, after setting aside $1.47 billion for constitutionally required transfers to the ESF and SHF from fiscal 2017 oil and natural gas severance tax collections. The ending balance, in addition to estimated net revenue collections in the 2018-19 biennium, will be used to fund 2018-19 appropriations (Table 3).

Transfers to the Economic Stabilization Fund and State Highway Fund

The constitutionally required transfers of fiscal 2017 oil and natural gas production tax collections reserved for deposit to the ESF and the SHF in fiscal 2018 will total $1.47 billion, an amount that will be divided equally between the two funds. These transfer amounts have been deducted from revenues and balances available for the 2018-19 biennium.

In fiscal 2019, the two funds will receive equal shares from an estimated $1.55 billion reserved from oil and natural gas production taxes collected in fiscal 2018. An estimated $1.82 billion will be reserved from those tax collections in fiscal 2019 for transfers to the two funds in fiscal 2020, in the next biennium.

Beginning in fiscal 2019, the SHF also will receive transfers of state sales tax revenue,. Article VIII, Section 7-c of the Texas Constitution provides that annual state sales tax revenue in excess of $28 billion, up to a maximum of $2.5 billion, is dedicated for public roadways other than toll roads. For 2018, the amount dedicated for the SHF is estimated at $2.31 billion; as the $28 billion threshold is not forecast to be reached until after August 1, 2018, the amount due to the SHF for that year will be transferred in September 2018, the first month of fiscal 2019. Another $920 million is forecast to be transferred in August 2019, after the $28 billion threshold for fiscal 2019 is reached in July 2019, bringing total transfers of sales tax revenue to the SHF in fiscal 2019 to $3.23 billion.

After the fiscal 2019 transfers, and accounting for interest and other investment earnings, the total ESF balance — cash and the invested balance — should reach $11.20 billion at the end of the 2018-19 biennium, absent any additional appropriations from the fund. The constitutional limit on the ESF balance, estimated at $16.87 billion during the 2018-19 biennium, will not be reached.

Tax Revenue

The state’s tax system is the main source of GR-R funding. Tax collections in the 2018-19 biennium are expected to total $94.76 billion, a 6.3 percent increase from 2016-17 collections of $89.13 billion. In 2018-19, tax collections will be 87 percent of total net general revenues (Table 1).

Since 1988, state sales tax revenues have accounted for more than half of all state GR-R tax collections. In the 2018-19 biennium, sales tax collections are expected to be $59.08 billion, accounting for 62 percent of all GR-R tax collections. The motor vehicle sales and rental taxes, at $9.85 billion, and the franchise tax, at $5.80 billion, are the next largest sources of GR-R revenue for 2018-19.

Sales and Use Taxes: GR-R collections from the state sales tax (at a rate of 6.25 percent) were $56.93 billion in the 2016-17 biennium, an increase of 1.6 percent from 2014-15 collections of $56.06 billion. This meager growth in sales tax revenue, well below the biennial rate of growth in personal income and gross state product, was due largely to depressed spending on well development by oil and natural gas exploration and production companies. Tax collections from retail trade also exhibited only modest growth, as larger shares of household income were claimed by housing costs and health care spending.

The outlook is for faster growth in sales tax revenue in the 2018-19 biennium, as recent increases in taxable spending for oil and natural gas production are sustained and expansion in the broader economy continues. GR-R sales tax revenue, before adjustment for transfers to the State Highway Fund (SHF), is forecast to grow by 9.4 percent for the biennium, to $62.31 billion. Transfers of $3.23 billion of sales tax revenue to the SHF in fiscal 2019 will leave $59.08 billion available for the support of GR-R spending.

Franchise Tax: The 2016-17 biennium was the first to reflect the tax rate reductions passed by the 84th Legislature (in H.B. 32). The changes include a 25 percent reduction in the standard rates and a 42 percent reduction in the rate for taxpayers electing to use the EZ calculation. H.B. 32 also expanded the group of taxpayers eligible to use the EZ calculation from those with total revenue of no more than $10 million to those with no more than $20 million. Franchise tax collections for all funds in the 2016-17 biennium were $7.12 billion, 24.1 percent below 2014-15 collections. Note that in 2014-15 the Tax Code included small, temporary franchise tax rate reductions.

The revenue outlook for the 2018-19 biennium is for growth of 3.5 percent, to $7.37 billion. Revenue growth during that biennium will be affected by a provision contained in the legislation that modified the franchise tax in 2006 (H.B. 3), now in Section 171.111 of the Tax Code, regarding the temporary credit on taxable margin. Beginning with reports due on or after January 1, 2018, the calculation of this credit changes from what existed for the first 10 years of the modified franchise tax, potentially tripling the amount of tax credits available to taxable entities eligible for the credit. The estimated fiscal impact of the change is a reduction in tax collections of $160 million for 2018-19. The provisions for the credit will expire on September 1, 2027.

Franchise tax collections are allocated to the General Revenue Fund and the Property Tax Relief Fund (PTRF). The GR amount is based on the Comptroller’s estimate of the amount of revenue that would have accrued if the tax as it existed in fiscal 2007 had remained in effect. Any collections exceeding the estimate for the old tax are credited to the PTRF and used to fund the Foundation School Program. For the 2018-19 biennium, the estimated GR amount will be $5.80 billion, a 4.0 percent increase from 2016-17 collections of $5.58 billion. The estimated PTRF amount in 2018-19 will be $1.57 billion.

Motor Vehicle Sales and Rental Taxes: The Texas motor vehicle sales and use tax (including seller-financed sales) applies to the retail sales of new and used motor vehicles at a rate of 6.25 percent of the sale’s total consideration. Also included in this group of related taxes are the motor vehicle rental tax (10 percent of gross receipts on rentals of 30 days or less, or 6.25 percent of gross receipts on rentals of 31 to 180 days) and the manufactured housing sales and use tax (5 percent of 65 percent of the sales price of a new manufactured home). Together, the GR-R collections from this entire group of motor vehicle-related taxes are expected to reach $9.85 billion in the 2018-19 biennium, an increase of 8.6 percent from 2016-17 collections of $9.07 billion. An additional $80 million will be deposited to the PTRF and the Emissions Reduction Plan Account from 2018-19 collections.

Hurricane Harvey will affect future tax revenue collections from motor vehicle sales and rentals. Texas motor vehicle sales fell sharply in late August 2017, but are expected to surge in the first few months of fiscal 2018 as insurance claims are paid and lost vehicles are replaced. Some replacements will be vehicles that otherwise would have been replaced in fiscal 2019, meaning that fiscal 2019 tax collections will be lower than they otherwise would have been. The expected net fiscal impact for the biennium, however, is an increase in motor vehicle sales tax collections. Collections from the rental tax also are expected to increase during early fiscal 2018.

Oil and Natural Gas Production Taxes: The taxes in this group consist of the oil production tax, levied at 4.6 percent of market value, and the natural gas production tax, levied at 7.5 percent of market value. Condensate from natural gas production is taxed at the oil tax rate, with the resulting tax receipts included in natural gas tax revenues.

During fiscal 2017, oil prices recovered and remained relatively stable compared to 2016, when prices briefly fell below $30 at the end of a long decline caused by a market imbalance. The 2017 average NYMEX market price was $48.77 per barrel, 18 percent above the 2016 average of $41.40. Taxable production also increased and consequently 2017 oil tax collections deposited to GR, $2.11 billion, were 23.6 percent higher than 2016 collections of $1.70 billion. Texas oil production is expected to increase in 2018 and continue growing through 2019 as drilling activity in the state continues apace. Market prices are expected to rise to an average $50.00 in 2018 and $53.00 in 2019, as supply and demand return to balance. In turn, oil tax collections are expected to generate $4.94 billion in the 2018-19 biennium, compared to $3.81 billion in 2016-17, an increase of 29.7 percent.

Natural gas production in Texas hit peak levels in fiscal 2015, modestly declined in 2016, and leveled off in 2017. Production is expected to continue at current levels in 2018 and increase slightly in 2019 due to recent growth in drilling activity. The NYMEX market price for natural gas averaged $3.00 per million BTUs in 2017, 30 percent above the $2.30 average in 2016. This was largely a result of natural gas inventories returning to average levels after remaining unusually high throughout 2016. Prices are expected to average $3.00 in 2018 and $2.90 in 2019. Natural gas tax collections in the 2018-19 biennium are expected to be $1.82 billion, 16.4 percent above 2016-17 collections of $1.56 billion.

Although Hurricane Harvey temporarily halted some oil and natural gas drilling and production activity in the South Texas Eagle Ford Shale region, coastal bays and the Gulf of Mexico, oil and natural gas infrastructure was left largely unscathed and these activities resumed after minimal production losses.

Insurance Taxes: GR-R insurance tax revenue collections are projected at $5.28 billion in the 2018-19 biennium, up 14.7 percent from the $4.60 billion collected in 2016-17. The tax base is expected to display modest growth throughout the biennium due to increases in population, property values and real estate sales, as well as by rate increases related to recent catastrophic flooding and other damage caused by Hurricane Harvey. In addition, the continuing expansion of Medicaid managed care (which is subject to the insurance premium and maintenance taxes, while Medicaid on a fee-for-service basis is not) is expected to result in a significant increase in associated insurance tax collections.

Tobacco and Alcoholic Beverage Taxes: Collections to all funds in the 2018-19 biennium from the taxes on cigarettes (at a tax rate of $1.41 per pack), cigars (from 1 cent per 10 cigars to $15 per 1,000 cigars) and other tobacco products ($1.22 per ounce for snuff, chewing tobacco, roll-your-own tobacco and pipe tobacco) are expected to decline by 1.0 percent to $2.88 billion from 2016-17 collections of $2.91 billion, a trend consistent with recent fiscal periods. Of 2018-19 collections, $1.20 billion will be deposited to GR and $1.69 billion will be credited to the PTRF.

Texas levies six alcoholic beverage taxes: the mixed beverage gross receipts tax (6.7 percent of the vendor’s gross receipts); the mixed beverage sales tax (8.25 percent of the consumer’s payment); and excise taxes on liquor ($2.40 per gallon), beer ($6 per barrel or 19.4 cents per gallon), wine (from 20.4 to 51.6 cents per gallon) and ale (19.8 cents per gallon). Alcoholic beverage tax collections are deposited to GR. In 2018-19, collections are expected to rise by 8.9 percent to $2.61 billion, compared to $2.40 billion in 2016-17.

Motor Fuel Taxes: Taxes on motor fuels are levied at 20 cents per gallon for gasoline and diesel fuel and 15 cents per gallon on liquefied and compressed natural gas. Approximately 75 percent of collections from these taxes are deposited to the State Highway Fund, with the remaining 25 percent deposited to GR-R funds. GR-R collections from these taxes are estimated at $1.97 billion in the 2018-19 biennium, an increase of 4.2 percent from 2016-17 collections of $1.89 billion. This expected revenue growth is primarily due to continued population increases and a stable and growing economy.

Hotel Occupancy Tax: The hotel occupancy tax is imposed on a person who pays for a room in a hotel, motel or similar facility at a state tax rate of 6 percent of the room’s price. All collections from this tax are deposited to GR. Fiscal 2017 saw modest growth in hotel tax collections, reaching $531 million, 1.8 percent above 2016’s total. For the 2016-17 biennium, collections were $1.05 billion, 4.0 percent above 2014-15. In 2018-19, collections are expected to reach $1.09 billion, a 3.9 percent increase from 2016-17. Local taxing authorities are authorized to impose and collect an additional, local hotel tax for their own purposes.

Utility Taxes: The utility taxes group has three separate taxes: the gas, electric and water utility tax, which accounted for 83 percent of the group’s tax collections in fiscal 2017; the public utility gross receipts assessment; and the gas utility pipeline tax. Collections from the utility taxes are deposited to GR. In the 2016-17 biennium, total collections were $874 million, 8.9 percent less than in 2014-15. The decline was due to strong El Niño conditions in 2016 that reduced electricity and natural gas usage — and therefore lowered taxable gross receipts — for cooling and heating, as well as ongoing improvements in energy efficiency. In the 2018-19 biennium, revenue collections are expected to rise by 2.4 percent, to $895 million.

Other Taxes: This category includes the taxes on oil well services, coin-operated amusement machines, cement and combative sports admissions, as well as tax refunds to employers of certain welfare recipients. Total GR-R collections for the category are estimated to be $230 million in the 2018-19 biennium, 29.5 percent above 2016-17 collections of $178 million.

Oil well services tax collections were 77 percent of this category’s total revenue in 2016-17. In line with improving Texas oil and natural gas activity in 2018-19, collections from this tax are expected to rise by 39 percent during the biennium, to $191 million.

Non-Tax Revenue

In the 2018-19 biennium, the state’s GR-R funds are expected to receive $13.83 billion in non-tax revenue, 0.7 percent less than the $13.96 billion collected in 2016-17. The major revenue sources are interest and investment income; licenses, fees, fines and penalties; state health service fees and rebates; net lottery proceeds; escheated estates; and settlements of claims.

Interest and Investment Income: GR-R interest and investment income for the 2018-19 biennium is expected total $2.78 billion, an increase of 28.0 percent from the $2.17 billion collected in 2016-17. The Permanent School Fund (PSF) traditionally produces most of the investment income accruing to GR-R funds. The substantial increase in category revenue is due to a larger PSF corpus balance; a higher distribution rate from the PSF to the Available School Fund (ASF) adopted by the State Board of Education for 2018-19; and the release of an additional $300 million from the Real Estate Special Fund Account to the ASF in fiscal 2019. This revenue category also includes interest earnings on state deposits.

Licenses, Fees, Fines and Penalties: Texas collects revenue from charges levied on a wide variety of business and personal activities. Examples include transportation (vehicle registrations and inspections and driver’s licenses); business regulation (securities fees and professional licenses); natural resources (environmental permits); parks and wildlife (parks fees and fishing/hunting licenses); education (university tuition); and court charges. GR-R collections in the 2018-19 biennium are expected to reach $2.64 billion, 8.3 percent less than the $2.88 billion collected in 2016-17.

State Health Service Fees and Rebates: For 2018-19, GR-R collections in this category are expected to be $2.54 billion, 4.3 percent less than the $2.65 billion received in 2016-17. Most of the category’s revenue comes from the federally mandated and state-supplemental Medicaid vendor drug programs that consist of rebates the state collects from manufacturers of drugs that are covered by state Medicaid programs. Based on estimates provided by the Texas Health and Human Services Commission and the Legislative Budget Board, in 2018-19 the GR portion of these rebates is expected to total $2.08 billion, 5.6 percent more than the $1.97 billion received in 2016-17.

Net Lottery Proceeds: This category is primarily comprised of revenue received from the sale of all Texas lottery games, less prize payouts administered by lottery retailers, a 5 percent retailer commission and other items. Approximately 60 percent of net lottery proceeds are transferred to the Foundation School Account in GR to support public education in Texas. In the 2018-19 biennium, these transfers are expected to total $2.47 billion, 1.3 percent less than the $2.51 billion transferred in 2016-17. The estimate assumes average jackpot levels in 2018-19 and continued growth in scratch-off games. While large jackpots on multi-state draw games (i.e., games in which customers select numbers for play such as Powerball and Mega Millions) can result in substantially increased game sales and transfers for public education, their occurrence is random and unpredictable.

Escheated Estates: For this revenue category, which includes unclaimed property submitted to the state, GR-R collections are expected to be $1.39 billion in the 2018-19 biennium, 9.1 percent less than 2016-17 collections of $1.53 billion. The apparent 2018-19 decline is due to a fiscal 2017 sale of abandoned stock with a $375 million value, which raised 2016-17 revenue to above-average levels. The category’s revenues are the proceeds from abandoned personal property such as checking accounts, savings accounts, certificates of deposit, safe deposit boxes, stocks, bonds, mutual funds, mineral proceeds and other types of property.

Settlements of Claims: : In the 2018-19 biennium, the state will receive an estimated $995 million from settlements of all claims, a decline of 9.4 percent from 2016-17 collections of $1.10 billion. More than 90 percent of the 2018-19 amount is from the tobacco lawsuit settlement, from which Texas has received regularly scheduled payments from tobacco product manufacturers since 1999. Those payments will continue indefinitely. In 2018-19, Texas collections from this settlement are expected to be $917 million, a decrease of 5.2 percent from 2016-17 collections of $966 million that reflects the declining trend in national cigarette consumption.

Revenue to All Funds

Revenue collections deposited to all funds are expected to total $224.55 billion in the 2018-19 biennium, 0.9 percent more than the $222.48 billion collected in 2016-17. In 2018-19, GR-R receipts will total $108.60 billion, 5.4 percent above the 2016-17 total of $103.07 billion.

Dedicated federal income in 2018-19 will account for $74.91 billion, 3.8 percent less than the $77.84 billion received in 2016-17. Most federal funds received will be used for health and human services, highway construction and maintenance and public education.

In 2018-19, Texas state agencies will receive Hurricane Harvey-related federal funds for humanitarian assistance and the rebuilding of homes, businesses and public infrastructure. This revenue estimate includes an increase in federal funds based on estimates provided by certain state agencies as of October 1, 2017, which amounts to $1.77 billion in fiscal 2018 alone. This does not represent a complete accounting of funding the state can expect, as some agencies were unable to provide projections prior to publication of this Certification Revenue Estimate.

A second large source of all-funds revenue is the SHF share of motor fuel tax revenues; this fund is constitutionally dedicated to activities associated with the state highway system.

Total estimated revenues do not include certain local funds appropriated but not deposited into the State Treasury, but do include certain revenues deposited in the State Treasury but not appropriated, such as royalties deposited to the PSF.