The Oil Effect: What Makes Houston Different From Texas by James McClister December 14, 2015

States that rely heavily on oil and gas production are losing billions in tax revenues as the low price of oil continues to prompt companies to cut budgets, shrink workforces and, in some cases, file bankruptcy. Because of its unique tax structure and diversified economy, Texas has been one of the few oil-producing states able to avoid tremendously detrimental losses. Its biggest metro, however, has not been so lucky.

In 2014, Texas tax revenues totaled $55 billion, according to Moody’s Investor Services, but because the state only gets about 10 cents of every tax dollar from oil and gas production, the potentially affected revenue from the falling price of crude was only $6 billion. Because of this and the state’s diverse economy, Moody’s analysts determined the lost revenues from energy production will be “blunted.”

Houston doesn’t operate the same way.

As Roger Widmeyer, director of communications for the city’s controller’s office, explained to Houston Agent magazine, oil and gas production is a significant source of revenue for the city, coming by way of sales tax. Of the state’s 8.25 percent sales tax, Houston gets 1 percent – and of that, oil and gas production is part of the business-to-busines side of the tax. Since May, he said, the controller’s office has noticed a downward trend in the city’s sales tax.

“In August, we projected $679 [million] in sales tax,” he said. “We’ve recently revised that to $629 million. That’s a significant difference.”

He explained that while the mayor’s office maintains the $679 million projection, the numbers don’t support it.

“We’re facing some real challenges here,” he said.

Steeper, Deeper Declines

In a report issued by University of Houston’s Dr. Robert Gilmer – the same report the controller’s office uses to help set its projections – he outlines the seriousness of oil price declines relative to the Houston economy, and particularly sales tax.

“The likelihood continues to grow that declines in oil-field activity will be steeper, deeper and last longer than could be anticipated at this time last year – or even as late as this summer,” he wrote. “Sales tax revenue will follow closely on the heels of this downturn in oil.”

A dip in sales tax, especially one to the tune of $50 million, is of particular concern, because the revenue collected through the tax is filtered into Houston’s “General Fund,” which supports expenditures for city departments such as the police, fire, streets, drainage, parks and municipal courts, among others. Without the appropriate capital, those departments could see significant cutbacks.

Not Houston’s First Oil Bust

In his report, Gilmer reminds us that this is not the first oil downturn Houston has faced, so there is some precedent as to where the economy might be headed – possibly not a recession.

“We have had oil busts in the past with no recession in Houston,” he wrote. “We have not had an oil bust without a substantial decline in City sales tax revenues.”

A potential silver lining on an otherwise bleak outlook is that property taxes have not suffered the same drop as sales tax. That’s significant because property taxes account for nearly double the amount of tax revenue as collected from sales. According to Widmeyer, current projections for property taxes are $1.3 billion.

Moving into 2016 and beyond, few are predicting crude values to climb substantially, and both Widmeyer and Gilmer agree any sort of recovery in the energy sector – at least in regards to oil and gas – is a ways off.

Gilmer reported that baseline expectations for major investment houses like Raymond Jones and Goldman Sachs see no improvement in the rig count before 2017, and don’t project the price of oil to top $60 before Dec. 2021.

Avoiding specific projections, of Houston’s situation Widmeyer simply said, “It doesn’t look like it’s going to get much better soon.”