Impact of Lower Oil Prices to State Revenue

Dick Lavine, Senior Fiscal Analyst at the Center for Public Policy Priorities

The price of oil, which was over $100 per barrel last summer, has lately been selling at half that amount. Drilling new wells has slowed down, so we’re left to wonder: What happens to state revenue if oil and gas tax revenues fall?

Here’s the answer: For every billion dollars that oil and gas production tax collections fall, the Foundation School Fund gets $250 million less, the Highway Fund loses $375 million, and deposits in the Rainy Day Fund are $375 million less.

The state imposes a tax of 4.6 percent on the value of all oil produced and 7.5 percent on the value of natural gas. In fiscal year 2015, the Comptroller expects these taxes to bring in $4.4 billion.

That $4.4 billion is split the following ways:

  • An amount equal to the revenue these taxes generated in 1987 — $1.1 billion — is kept in the General Revenue Fund
  • One quarter of the remainder — $810 million—would go to help support public schools
  • The rest would get split between the Highway Fund and the Rainy Day Fund, giving each $1.2 billion

But with the reduction in oil prices, these taxes could generate significantly less revenue. If these taxes were to bring in only $3.4 billion, then the amounts drop to $560 million for the Foundation School Fund, and $840 million each for the Highway Fund and Rainy Day Fund.

Of course, lower oil and gas prices would have many other effects on the Texas economy, both positive and negative. Less activity means fewer jobs in the oil patch, but lower gas prices put more money in the pockets of consumers. While those effects matter, in this post, we are looking only at the flow of funds within the State Treasury and its potential effect on the state budget.

It’s something to keep your eye on.  The Comptroller’s Biennial Revenue Forecast, which is the basis for writing the state budget, assumes that the taxable price of oil will average $64.52 per barrel in fiscal year 2016 and $69.27 in fiscal year 2017.  The futures markets, which can be used to forecast prices, right now see oil remaining below $60 for the next two years.

Which estimate is right could make a big difference in how much is available to invest in schools, roads, and other public services. And how much—if any—is left over for tax cuts.

Comptroller's BRE 2015

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