Blog Post

Managing Revenues through a Downturn in Texas’s Eagle Ford Shale

Jan 30, 2017 | Daniel Raimi

Compared with other major shale plays across the United States, the Eagle Ford shale in south Texas has experienced perhaps the most dramatic downturn in activity following the late 2014 collapse in oil prices. And unlike other major oil-producing regions of the United States, Eagle Ford has relatively little historical experience with the booms and busts that can come with an economy driven by oil and gas extraction (see Figure 1). Partly due to this limited experience with volatile economic cycles, local governments in the region have taken a range of approaches to revenue management, resulting in distinct local experiences.

Figure 1. New Wells and Oil production from the Eagle Ford Formation

Data source: DI Desktop.

Texas property tax law limits growth in property tax revenues for county governments to roughly 8 percent per year. However, as we have described in previous blog posts and reports, rapid industry growth can require an equally rapid scale-up in government services, and annual revenue growth of 8 percent has, in many cases, been insufficient to meet growing demands for road repair, law enforcement, and other public services. (Texas municipalities, which rely more heavily on sales taxes, typically do not face this issue.)

In practice, when property valuations rise dramatically, as they often do during boom periods, county officials face a choice. They may either: 1) reduce tax rates dramatically, limiting government revenue to the prescribed 8 percent annual growth rate, or 2) keep tax rates steady and see a surge in revenue, a politically difficult approach that requires voter approval.

A related set of issues tends to arise when property values fall, as they have since 2014. Because of the sharp drop in mineral values associated with oil and gas property, county officials faced another choice. They could either: 1) increase tax rates so that government revenues would remain stable (another politically difficult decision), or 2) keep rates low, resulting in sharp declines in revenue. Figure 2 illustrates recent tax rates in three neighboring Eagle Ford shale counties.

Figure 2. County Property Tax Rates in Three Eagle Ford Shale Counties

Data sources: Annual county budgets. Pre-2012 data not available for Karnes County.

Because of their distinct approaches to revenue management, these three counties have had varied fiscal experiences. In Karnes County, which cut tax rates sharply, and has raised them relatively slowly, local officials report that demand for services has largely outstripped revenues. The county has struggled to maintain local infrastructure, and is now expecting to lay off a substantial number of staff.

In Gonzales County, local officials report that the net fiscal impact of Eagle Ford development has been “slightly” positive, but note the challenges of maintaining roads through volatile revenue cycles. And in DeWitt County, the surge in revenues brought about by a stable tax rate has enabled substantial capital expenditures on roads, equipment, and other infrastructure, resulting in a large net positive fiscal impact.

Image 1 depicts Cheapside Road, a county road that is heavily traveled by industry trucks and other vehicles. The newly paved road in the foreground is maintained by DeWitt County, and the degraded road in the background by Gonzales County. In this image, the counties’ two distinct approaches to revenue management are readily apparent.

Image 1. The Dividing Line between DeWitt and Gonzales Counties

Photo by Daniel Raimi, 1/17/2017. Cheapside Road, DeWitt County, TX.

The views expressed in RFF blog posts are those of the authors and should not be attributed to Resources for the Future.