Southwest states see slowdown in tax revenue amid tax cut push

Signs of slowing revenue growth popped up in Southwest states in March as a boom time for tax collections appears to be winding down.

Following some record monthly collections last year, growth in 2023 is trending lower or even negative as states move to cut taxes during their current legislative sessions.

Oklahoma’s total tax collections over a 12-month period hit a high of $17.64 billion, while March revenue grew just 1.2% at $1.4 billion compared to a year earlier, marking the lowest level of growth since June 2022, State Treasurer Todd Russ reported Thursday.

“The results continue to reflect an expanding Oklahoma economy,”  he said in a statement. “With that said, rising interest rates are adversely impacting economic activity for both consumers and businesses.”

The state’s corporate tax revenue was down 1.8% in March from a year earlier and gross production taxes on oil and natural gas fell 5.2% at $156.6 million.

Fiscal 2022 brought record-breaking fossil fuel-related tax revenue for Oklahoma, as well as for Texas, which reported $6.36 billion in oil production taxes and $4.47 billion in natural gas production taxes amid high demand and high prices for the commodities.

A Dallas Federal Reserve energy survey found the oil and gas sector stalled in 2023’s first quarter.

“Growth in the oil and gas sector slowed to a crawl in the first quarter as firms faced increasing costs,” Michael Plante, Dallas Fed senior research economist and advisor, said in a statement. “Our respondents also expressed a worsening view of the near-term outlook for the energy sector.” 

Oil production tax revenue in Texas totaled $427 million last month, a 10% drop from March 2022, and the natural gas production tax generated $267 million, a 23% decrease.

Sales tax collections, the biggest revenue source for the Texas budget, were up 5.9% at $3.57 billion last month.

“In line with our biennial revenue forecast, state sales tax collections resumed the recent trend of significant but slowing growth, with the gain compared with the previous year being the lowest since the end of pandemic restrictions two years ago,” Texas Comptroller Glenn Hegar said last week in a statement. 

Arkansas’ gross general revenue fell 3.5% to $667.5 million last month, with individual income tax collections down 11.6%, while sales and use tax revenue came in 2.7% below forecast.

In Kansas, individual income tax collections totaled $314.6 million, which was $438,000 under estimates, but $16.4 million or 5.5% more than in March 2022.

Combined sales and compensating use tax receipts were $275.4 million, which slightly surpassed estimates but were down 1.7% compared to a year earlier due in part to a reduction in the state sales tax on food. 

A 11.6% jump in overall tax collections that totaled $758.3 million  last month was cheered by Democratic Gov. Laura Kelly, who said it proves the state could “responsibly” cut certain taxes. 

Kelly, who faces a GOP-dominated legislature, wants to immediately eliminate the sales tax on groceries that is being phased out, create an annual state sales tax holiday for school supplies, and increase the earnings threshold for taxing retiree social security payments. 

After passing dueling versions of tax legislation, the Kansas House and Senate reached an agreement last week to replace the state’s three-tier personal income tax structure with a flat 5.15% rate and accelerate the end of the food tax to Jan. 1.

Those and other measures in the bill would reportedly decrease state tax collections by $1.3 billion over three years. 

Budgetary imbalance in the wake of tax cuts enacted during the prior decade under then-Gov. Sam Brownback, a Republican, led to rating downgrades for Kansas, which recently received a positive outlook for its AA-minus issuer rating from S&P Global Ratings.

Other Southwest states are eying tax cuts with the Texas Legislature aiming to tap the state’s record $32.7 billion projected budget surplus for as much as $17 billion in property tax relief.

In the Republican-controlled Oklahoma Legislature, House Bill 2285, which is pending in the Senate after passing the House last month, would replace the state’s graduated income tax rate with a flat 4.5% rate next year and reduce the rate by 0.25% annually if certain revenue conditions are met. The measure, which also increases standard deductions, would decrease income tax collections by $56.5 million in fiscal 2023 and by $145 million in fiscal 2025, according to a House fiscal analysis.

House Democrats raised the specter of a revenue failure given Republicans’ big spending proposals. 

“By eliminating our graduated income tax structure, the legislature would be conferring a tax advantage to the wealthy and setting the state up for another revenue failure,” Democrat Whip Rep. Mickey Dollens said in a statement.

Such failures occurred nine times since 2000 when tax collections flowing into the general revenue fund fell below 95% of the certified estimate, forcing appropriation cuts to state agencies, according to the Oklahoma Policy Institute.

The Arkansas Legislature gave final approval last week to Senate Bill 549, which would reduce the top individual income tax rate to 4.7% from 4.9% and the top corporate income tax rate to 5.1% from 5.3% at a cost of $186 million in fiscal 2024 and $124 million in fiscal 2025, according to a legislative impact statement. The reductions would apply to tax years beginning with 2023.

“We’re building a sizable surplus…(the tax cut) will eat into that a little bit at a cost of about $124 million,” bill sponsor State Rep. Les Eaves said on the House floor.

New Mexico Gov. Michelle Lujan Grisham on Friday vetoed provisions in HB 547 she said would reduce annual state revenue by $1.1 billion, while approving a $500 million tax rebate and other recurring measures that will cost the state about $124 million in fiscal 2024.

“We are fortunate to have record revenues right now, but we know from past experience that this  won’t last forever,” she said in a statement. “While I am proud of our efforts to diversify our economy, our state budgets are still heavily reliant on the oil and gas industry and its boom-and-bust cycles. We must prudently manage our finances now to prepare for inevitable economic  downturns.”