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Texplainer: How Will High Gas Prices Affect the Budget?

With gasoline costing $1 more than a year ago, budget planners can add fuel expenditures to their list of worries. However, it's also true that oil companies will also pay more in taxes to the state as they beef up their drilling operations.

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Hey, Texplainer: What do high gasoline prices mean for the state budget?

Oil prices have risen recently, as unrest in the Middle East continues. Gasoline prices have gone up in tandem. In Texas, a gallon of gas costs a dollar more than a year ago. For state policymakers, a crucial question is how higher prices at the pump will affect Texas' estimated $15 billion to $27 billion budget gap. The answer, of course, is that it's complicated.

To some extent high oil prices are good for Texas tax revenues. "When prices remain above $100 per barrel, the state could see a short-term benefit to revenue," says RJ DaSilva, a spokesman for the Comptroller's office. That's because when oil companies drill more, they pay more production taxes. They also buy more equipment, on which they pay state sales taxes.

However, if Texans decide to drive less because of high fuel prices, revenues from the state gas tax (a 20 cent-per-gallon charge that has not increased since 1991) would fall. DaSilva also points out that high gasoline prices can dampen consumer and business spending. That could depress state tax revenues as well.

On the expenditure side, the impact is clear: Rising gasoline prices will increase costs. A comprehensive state analysis of current fuel expenditures is not available, but some idea of the situation today can be extrapolated from what happened in 2008, when oil (and hence gasoline) prices also soared. Gasoline prices today are their highest since that summer.

The Legislative Budget Board undertook a study of the impact of the high energy prices in 2008 on different state government agencies' spending, and found sharp increases. Statewide, expenditures on transportation fuels (like diesel and gasoline) rose by 33 percent in fiscal 2008 compared with fiscal 2007, the study found. The largest absolute increase occurred at the Texas Department of Transportation, which spent nearly $11 million more on transportation fuels. Agencies with the biggest percentage rise in spending on fuel included the Texas Historical Commission, the State Preservation Board, The Texas School for the Blind and Visually Impaired, the Department of Public Safety and the Texas School for the Deaf.

School districts were hit too, as were universities. Spending on transportation fuel at the University of Texas at Austin rose from $516,000 in fiscal 2007 to more than $775,000 in fiscal 2008.

Bottom line: While oil companies may pay more taxes, there's also plenty of financial downside, as fuel costs for state vehicles rise and consumers and businesses feel the pinch. 

Bonus point: Even though oil prices are high, they have so far had little effect on the prices for electricity. That is because — as T. Boone Pickens likes to remind us — the United States consumes a large amount of foreign oil, but our main electricity sources — like natural gas, coal, nuclear and even wind — are largely produced domestically. Natural gas prices in particular are extremely low compared to what they were several years ago, as companies drill into enormous, newly discovered shale-gas reserves in Texas and other states. And prices for other types of electricity tend to track natural gas prices, so electricity prices have not shot up — for the moment.

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Energy Environment State government Budget Texas Legislature