A historic revenue outlook: 5 quick takeaways
This afternoon, the Comptroller announced a record-breaking biennial revenue estimate of $188.23 billion available for general purpose spending. This estimate, which will serve as funding parameters for Texas House and Senate budget writers, is the largest revenue projection in state history.
Here are five key takeaways from today’s announcement:
#1: Revenue growth fueled by unprecedented sales tax collections
The record general revenue fund balance expected at the end of fiscal year 2023 expands by $5.7 billion from $27 billion to $32.7 billion. While the Comptroller signaled that this number would grow, this continued growth reflects an unprecedented expansion of sales tax collections that has continued since last summer’s revenue update and that he now expects to continue through the end of the fiscal year.
#2: Predictions are subject to change
This initial estimate represents a 67% increase over the previous biennium’s initial BRE, the largest percentage increase in at least the last 20 years, including the 40.4% increase between the 2011 and 2013 starting BRE’s. The BRE, while informed by thousands of data points and work hours by subject matter experts, is still a predicted estimate. History has often shown reality to turn out differently — but this informed estimate is critical for providing the best framework for legislators as they write the budget.
#3: An economic cooldown is expected
The $188.2 billion estimate builds in the Comptroller’s expectation that sales tax collections slightly slow their inflation-charged growth. Many economists as well as the Comptroller have anticipated an economic slowdown due to this recent period of acute inflation accompanied by the Federal Reserve’s efforts to increase interest rates to bring inflation down to a more sustainable trajectory.
#4: Caution could be warranted given the uncertain outlook
Especially with concerns around economic slowdown, Texas 2036 recommends budget writers exercise caution in this current slowing-but-still-high inflation economy. The Dallas Federal Reserve recently warned that in the event of a recession, Texas may not be able to depend on record local property tax collections to ease the state’s school finance obligations. Additionally, the federal government could curtail aid or even make it unavailable given the level of federal debt issued already to finance COVID-19 aid packages.
Unless lawmakers vote to break through multiple spending limits, it is not likely the Legislature will come close to exhausting its entire fund balance. This, along with the Economic Stabilization Fund, will be critical to ensuring fiscal stability in the event of a more prolonged or acute economic downturn than expected.
#5: The opportunity for one-time, generational investments
Budget writers can theoretically allocate up to a combined $18.2 billion headroom for new spending between the current fiscal biennium and the next, without voting to exceed the current, most restrictive spending limit.
This presents tremendous opportunities for one-time, generational investments in critical infrastructure areas, such as water, broadband and cybersecurity, as well as targeted investment in areas like community college finance and reducing long-term pension liabilities — all priorities that have clear economic benefits that last decades.
There are a handful of additional recurring expenses that can be funded on a sustainable basis by budget writers, including those related to retaining talent in our state employee workforce or increased investment in our out-of-date state IT systems — both examples of areas where money that is spent ensures better government operation and return on taxpayer dollars.
Finally, it is interesting to note that this year’s initial BRE has increased by almost 67% over the BRE issued before the 2015 legislative session. The state’s population grew by “just” 11.4% over the same period. Stated another way, this year’s BRE is nearly 248% over the BRE issued before the 2003 legislative session, with population growing 38.4% over the same interval. Inflation plays a role, but this level of revenue increase over eight and 20 years is noteworthy and reflective of Texas’ steady long-term economic growth.
Sources: Texas Comptroller of Public Accounts, U.S. Census Bureau’s population estimates from July 2002, July 2014, and July 2022