Local govt. revenue in TX subject to volatile winds of the oil patch

WASHINGTON—Resources for the Future (RFF) Senior Research Associate Daniel Raimi has spent a lot of time traveling the back roads of the shale revolution across the country, observing the economic impacts affecting those who live with the economic volatility created by oil and gas markets. In a new blog post today, Raimi takes an even closer look at the economic ups and downs of commodity prices in the Texas oil patch—volatility that holds major implications for the quality of public services like schools, roads, and public safety, as well as important tax implications for residents and businesses.

Gonzales County, a major producer in south Texas’s Eagle Ford shale region, is a prime example. Gonzales has experienced growth in property valuations of more than 500 percent from 2011 to 2014, driven entirely by oil and gas development. Because Texas state policies prevent local governments from experiencing such rapid growth in revenue, local officials reduced tax rates by almost 60 percent. But when oil prices fall, as they have in recent years, local officials are left with an unenviable choice: raise tax rates to make up the difference, or cut back on services. Many other counties in the region, along with west Texas’s Permian Basin, have experienced the same dynamic.

In the post—Local Revenue Volatility and Oil and Gas Development in Texas—Raimi highlights the implications for homeowners in affected regions: “When oil prices are high, low tax rates will give them a welcome break on their annual property tax bill. But when oil prices are low, tax rates will tend to go up, increasing their bill. This might not be a problem, except for the fact that many oil- and gas-producing regions are heavily reliant on the industry—meaning that the homeowner may see a downturn in wages or a loss of employment at the same time that their property tax bill rises.”

And things could get tighter still, according to Raimi: “Currently, the Texas state legislature is considering a proposal that would exacerbate revenue volatility even further. The bill under consideration, Senate Bill 2, would require governments to hold elections to approve of revenue growth of more than 5 percent, more restrictive than the current 8 percent. … [T]hese policies make it difficult for local governments to set tax rates that best suit their needs. What’s more, they also incentivize oil and gas investment when favorable conditions already exist—then discourage investment during periods of low oil prices, when the economy could use a boost.”

According to the post, “There’s a common bumper sticker found in west Texas and other longtime oil- and gas-producing regions that reads along the lines of, ‘Dear Lord, please just give me just one more oil boom. I promise not to screw it up this time.’” Raimi notes that, “Policymakers may want to keep this sentiment in mind when considering the design of revenue policies.”

Read Daniel Raimi’s new post: Local Revenue Volatility and Oil and Gas Development in Texas.

Read Daniel Raimi’s related research.