Texas Slashes Deficit, Sees Stable Revenue for Upcoming Budget

Texas slashed the size of its projected budget shortfall and expects revenue to come in virtually unchanged from the last cycle despite the shutdowns prompted by the coronavirus pandemic.

The state now projects it will have $112.5 billion in revenue available for general-purpose spending during the biennium that begins in September, according to a Monday estimate from Comptroller Glenn Hegar. Still, that revenue estimate is about 0.4% down from what was available in the last budget cycle. Heger estimates Texas will face a nearly $1 billion deficit at the end of the current fiscal year, a fraction of the size that was anticipated in July.

“Revenues into the state treasury principally from sales tax collections have not been as negative than we anticipated,” Hegar said in a briefing.

The revenue report shows spending on items like building materials, home furnishings and sporting goods helped bolster tax revenue, as did the ability to collect revenues from online retailers, which offset sharp drop offs in other areas like hotel taxes and those on alcoholic beverage sales. The state collected $1.3 billion of sales taxes from online retailers.

“As consumer behavior shifted during the pandemic, Texas benefited from the U.S. Supreme Court’s decision in the Wayfair case,” Hegar said, referencing the 2018 ruling that allowed states to charge tax on purchases made from out-of-state sellers even if they don’t have a physical presence in the taxing state. “Monthly sales tax collections have been down compared to the prior year in 8 of the last 9 months but if not for the tax collections for online sellers, they would have been down a lot more.”

Texas is the latest in a number of states that have reported better than expected fiscal outcomes. California Governor Gavin Newsom recently unveiled a budget that included a $15 billion windfall and Connecticut’s budget gap shrank as sales- and corporate-tax revenue exceeded targets.

“The better trend for collections have not only been here in Texas, but most states have been pleasant surprised that while they’ve continued to be negative, collections have not been as negative as anticipated back last summer,” Hegar said.

Tom Kozlik, head of municipal strategy and credit at Dallas-based HilltopSecurities Inc. said that while the forecast is better than expected, “it is not clear to me that there are going to be better and not worse days ahead for state and local budgets.”

“There is still a lot of uncertainty about the path of the virus and what will happen to economic activity and government revenues in the next six to twelve months,” Kozlik said in an email.

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