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Sales tax collections drop significantly; state budget will face challenges

Synopsis

Double-digit declines in sales tax collected in May and evident in most economic sectors, coupled with a predicted slow recovery of business activity, will pose problems for legislators crafting the state’s budget for the next biennium.


 

Key takeaways

  • Texas sales tax collections dropped by double digits in May, as did collections of all other specific sector taxes except telecommunications services. Sales taxes are the largest source of state funding for the state budget.
  • Comptroller Glenn Hegar expects business activity to slowly recover with the easing of local and state orders meant to limit the spread of coronavirus, but predicts the impact on sales tax collection will be felt for “months to come.”
  • Sales tax is the largest source of state funding for the state budget. Legislators meet again in January 2021 to plan the state’s budget for the next two years.

The state’s sales tax revenue dropped 13.2 percent in May compared to the same time last year, according to Texas Comptroller Glenn Hegar, the steepest year-over-year decline since January 2010.

Sales tax is the largest source of state funding for the state budget, accounting for 57 percent of all tax collections. Reduced sales tax collection will impact revenue available when legislators meet in January 2021 to craft the state’s budget for the next two years. Adjustments to the state’s current budget may also be needed, though federal funding from the CARES Act or other legislation may help mitigate some state expenses.

The majority of May sales tax revenue is based on sales made in April and remitted to the agency in May. Widespread social distancing requirements were in place across much of the state throughout April.

“Significant declines in sales tax receipts were evident in all major economic sectors, with the exception of telecommunications services,” Hegar said. “The steepest decline was in collections from oil and gas mining, as energy companies cut well drilling and completion spending following the crash in oil prices.

“The business closures and restrictions and stay-at-home orders due to the COVID-19 pandemic spurred deep drops in collections from restaurants, amusement and recreation services, and physical retail stores. These declines were offset in part by increases from big box retailers and grocery stores that remained open as essential businesses, online retailers and restaurants that could readily pivot to takeout and delivery service.

“With the easing of state and local government social distancing orders beginning in May, business activity in the sectors most affected by measures to curb the pandemic should begin to slowly recover, but operations resuming at reduced capacity will result in continued reductions in employment, income and activity subject to sales tax for months to come.”

The effects of the economic slowdown and low oil prices were evident in other sources of revenue in May 2020. Texas collected the following revenue from other major taxes:

  • motor vehicle sales and rental taxes—$265 million, down 38 percent from May 2019 and a modest improvement over April’s results;
  • motor fuel taxes—$221 million, down 30 percent from May 2019 and the steepest drop since 1989;
  • natural gas production tax—$31 million, down 76 percent from May 2019;
  • oil production tax—$90 million, the lowest monthly amount since July 2010, down 75 percent from May 2019 and the steepest drop since a 77 percent drop in March 1988;
  • hotel occupancy tax—$8 million, down 86 percent from May 2019 and the steepest drop on record in data going back to 1982; and
  • alcoholic beverage taxes—$28 million, down 76 percent from May 2019 and the steepest drop on record in data going back to 1980.

The Comptroller extended the due date for franchise tax payments this year from May 15 to July 15, meaning that comparisons to May 2019 collections are uninformative. The Comptroller’s office detailed other COVID-19 impacts to the Texas economy, including the skyrocketing claims for unemployment benefits, in the most recent edition of Fiscal Notes.

For details on all monthly collections, visit the Comptroller’s Monthly State Revenue Watch. For an extensive history of tax policy developments and fees since 1972, visit the Comptroller’s updated Sources of Revenue publication.

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