As one of six states that relies on sales tax for more than half of their revenue, Texas expects to suffer a sharp economic blow for the first half of the year.
Although the full impact of the COVID-19 pandemic will probably not be quantifiable until July, Texas Comptroller Glenn Hegar said that it will be measured in billions of dollars.
“The question is, we don’t know how many billions of dollars,” Hegar said.
With no income tax, Texas gets about 57% of its revenue from sales tax. The other major sources: motor sales and rental taxes, motor fuels tax and tax on production of oil and gas, are also expected to fall sharply with so much economic activity in the state halted amid restrictions to slow the spread of the coronavirus.
The other states that get half of their revenues from sales tax are Florida, Nevada, South Dakota, Tennessee, and Washington. They also don't levy income taxes.
Historically, sales taxes have provided a relatively stable source of revenue for states in recessions, helping to smooth out the swings in taxes collected from more volatile economic activities such as capital gains, corporate income, or oil extraction.
“This crisis is different in that the state is in lockdown and people are barred from leaving the house,” a report from Citi noted. “If and when restrictions are lifted, normal business activity will not resume to normal immediately as people will still be afraid to venture out. As a result, sales taxes are expected to fall much more this time around as compared to previous recessions.”
With consumer spending severely limited by social distancing and orders for people to stay at home, sales tax revenue is likely to plummet, creating deep holes in state budgets, according to a
A review of tax revenue volatility data over the past two decades shows that sales taxes have been a more stable source of revenue than several other taxes in all but four states where they are levied, per Pew.
Nationwide, the U.S. Census Bureau reported April 15 that retail sales fell a seasonally adjusted 8.7% in March from February, the largest monthly decline on record.
“To be sure, sales taxes weren’t immune from steep declines in the last recession,” said the Pew report written by director Jeff Chapman and officer Mike Maciag.
Purchases of goods and services subject to Washington state’s sales tax decreased by 4% in 2008 before dropping another nearly 12% when the economy bottomed out in 2009. By 2010, they had fallen a total of more than 15% from their prior peak, Pew noted.
“However, loss of sales tax revenue in that period was largely concentrated in specific areas of the economy,” the writers said. “As the housing bubble burst nationwide, related spending fell dramatically.”
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Complicating comparisons, several industries now subject to state-mandated closures or restrictions because of the spread of the novel coronavirus managed to avoid major losses during the Great Recession.
In Washington, restaurants and bars, hotels, general merchandise stores, and other types of retail establishments recorded at least slight gains in total taxable sales from 2007 to 2010. These businesses find themselves confronting far greater challenges in the current economic climate.
A broader hit to sales taxes — an increasingly likely scenario given all the restrictions in place to mitigate the outbreak — would pose even greater financial hurdles for states than those faced a decade ago.
After the last oil price slump that began in mid-2014, Texas has enjoyed 31 consecutive months of record revenue, peaking at $3.18 billion last November.
A projected 30% drop in global oil demand in April dwarfs the decline of 2% in the global financial crisis of 2008. Some analysts are comparing the current crisis to the oil price collapse of 1986 that wiped out Texas-based banks. On Monday, the contract price for West Texas oil for May delivery dropped below zero to negative numbers, Bloomberg News reported.
"It's probably the most challenged economic environment the state has seen since the '80s," said muni bond analyst Joseph Krist. "In the long run Texas will be fine, but the current conditions of economic downturn and the potential additions to the state's expense budget."
Texas economist Ray Perryman anticipates losses of a million jobs and $101 billion in gross state product from the combined oil shock and COVID-19 economic freeze.
“The numbers will likely be terrible, but temporary,” Perryman wrote in a March report. “Once the worst of the virus subsides and social distancing is relaxed, venues will reopen and tens of millions of jobs will quickly be restored.”
Texas has about $22.9 billion in tax-exempt debt and $5.1 billion in taxable debt. The state’s Permanent School Fund guarantees $93.7 billion in tax-exempt debt and $4.2 billion in taxable debt.
Texas bonds are rated triple-A by four ratings agencies and as such are considered some of the safest bonds that investors can own. Its tax-exempt bonds did not witness the same widening as compared other credits, according to Citi.
Texas’s Economic Stabilization Fund, commonly known as the rainy day fund, draws from growth in oil and natural gas severance taxes. The Constitution requires that one-half of 75% of oil and natural gas production tax revenues in excess of fiscal year 1987 collections be transferred to the ESF. The other half is transferred to State Highway Fund.
Texas has about $10 billion remaining in the ESF after $3 billion was appropriated in the 2019 session to aid school funding and ease property tax increases.
The state can tap the fund into to deal with shortfalls caused by the COVID-19 response, according to the Texas Public Policy Foundation. But the legislature must be called into special session to appropriate the money.
The legislature meets regularly only in odd-numbered years.
Texas Gov. Greg Abbott on Friday announced executive orders that will help reopen Texas's economy.
The first order was forming a statewide task force, made up of government officials, doctors, and business leaders. The strike force that was created will advise Abbott on how to strategically reopen the state.
