Earlier this week, State Comptroller Glenn Hegar discussed COVID-19’s impact on the Texas economy and what that means for the 2020-2021 state budget. Commenting on a wide range of state and fiscal challenges, the Comptroller shared insights based on the expertise gained from his role as the state’s revenue estimator, tax collector, and bookkeeper, as well as his past experience as a member of the state House and Senate. How these challenges get resolved in the months ahead will affect millions of Texans’ access to education, health care, and economic opportunity for years to come.
Overall, the Comptroller talked about cost-cutting and how the recession is affecting Texas state and local revenue, as well as increasing the demand for public services. At CPPP we believe, as national experts are saying, that a revenue problem requires revenue solutions. In fact, even before COVID-19 triggered a recession, one challenge for the 2021 legislative session was to identify new sources of state revenue to sustain the state’s stepped-up role in paying for public schools. Now, new revenue may be needed just to prevent significant cuts in basic state services during a recession.
One major area discussed by the Comptroller is how soon lawmakers would have to act in response to 2020-2021 state revenue shortfalls. Comptroller Hegar said he will update the Texas revenue outlook by July 2020, saying, “Be forewarned that it is probably going to be a revised downward adjustment of several billion dollars.” However, he then repeated what he has been telling legislators: At this time, he does not see the need for a special legislative session. Even without a special session, some state agencies can reduce their 2020 and 2021 spending. In addition, budget execution authority means that “leadership can move money around” before the next regular session, subject to approval by the Governor and Legislative Budget Board officials. Cash-flow management tools and billions in federal aid should also provide enough wiggle room for now.
After describing “belt-tightening” that his own office has already implemented (such as a hiring freeze, no pay raises, technology projects put on hold), Comptroller Hegar acknowledged that some state services will have to expand to respond to the pandemic. State officials are already tracking increased spending due to COVID-19 separately. Budget officials will also account separately for state support for the Foundation School Program, Medicaid, and the Children’s Health Insurance Program (CHIP). These areas account for almost 60% of General Revenue spending in 2020-2021 and have traditionally been “off the table” for interim budget cuts, though health care provider rate cuts have been made in past revenue downturns.
In terms of future Congressional action in response to the COVID-19 pandemic, Comptroller Hegar said an extension of the improved match rate for Medicaid-supported health services would be most helpful for the Texas budget. This would ideally work via an economic-related trigger such as the unemployment rate. Texas and other states have already been offered a 6.2% increase for the duration of the federally declared public health emergency. For two quarters of a fiscal year, that translates into an additional $1 billion for Texas, an alternative to having to use our own declining tax revenue to cover Medicaid costs.
The conversation also touched on the revenue options that lawmakers should consider when responding to COVID-19 – specifically, using the Economic Stabilization Fund and enacting new revenue options.
First and foremost, Comptroller Hegar is making sure lawmakers understand that the Economic Stabilization Fund was “set in place for downturns in the economy” – the exact situation now facing Texas. The ESF is one of the largest such savings accounts in the nation and will most likely have a significantly large balance of $8.5 billion (7% of the General Revenue budget) available to cover revenue shortfalls or cash-flow transfer needs through fiscal 2021.
In answer to a question about a “list somewhere” of new sources of state revenue, Comptroller Hegar said his office regularly updates the Tax Exemptions & Incidence report. He cautioned, though, that some options are not as easy as they might seem at first glance. For example, some tax exemptions exist because they prevent double-taxation.
A related area of questions involved efforts to provide help on the tax side of the equation to people and businesses affected by the widespread COVID-19 closures. As the state’s chief tax collector, the Comptroller is helping lawmakers understand what he can and cannot do under current law for businesses hurt by the pandemic. He has also had many conversations with state and local officials about the property tax appraisal and appraisal protest processes and how those can continue in areas of the state that do not have an on-line protest system.
Finally, a recurring theme throughout the interview was the lack of enough good data to make any reliable predictions on what will happen to state revenue in the near future. While the impacts of the 2008-09 Great Recession and 9/11 on state/local sales and hotel taxes offer some clues, much of what our communities are currently experiencing is unprecedented.
CPPP Policy Recommendations
- CPPP recommends that state officials take full advantage of new federal legislation and funding for health care services to battle COVID-19 and save more lives.
- CPPP also urges lawmakers to use the Economic Stabilization Fund as intended: a safeguard against harmful cuts to state services.
- CPPP will also be revising its state revenue proposals and providing further analysis as more budget and tax data become available. It will not be long before the budget-writing process for the 2022-2023 biennium shifts into high gear.