A major energy transition is currently underway, both in the United States and around the world. The coronavirus pandemic is accelerating the shift from fossil fuels to cleaner sources of energy, according to a new report from the International Energy Agency. The report also finds that peak demand for oil may have already been reached in economically advanced countries.
The energy transition is particularly evident in Texas. Federal and state grants have made us the largest wind state by far, with 29 gigawatts of installed capacity providing 20% of the electrons to the Texas power grid. At present, solar power accounts for only 2% of generation on the grid operated by the Electric Reliability Council of Texas; but 15 gigawatts of utility-scale projects underway will dramatically increase this energy source over the next several years.
While these changes are good news for the environment, they are bad news for the finances of the state of Texas and local communities. According to the Texas Comptroller of Public Accounts, production and sales tax revenues related directly or indirectly to the oil and gas industry exceeded $ 35 billion in fiscal 2019, or about a quarter of all state revenues. But due to the drop in prices and production levels brought about by the pandemic, taxes generated by the energy industry have fallen sharply this year. Combined with the general economic recession that has decimated state revenues, Texas faces a deficit of up to $ 20 billion for the 2022-2023 biennium, double the current balance in the rainy days fund. .
Other sources of state revenue that will be affected by the energy transition include the myriad of permits and fees paid by the oil and gas industry, as well as the University’s Permanent Fund and other endowments based on resources that support educational institutions. In addition, as drivers move from gasoline and diesel vehicles to electric vehicles, tax levies on sales of automotive fuels will decrease.
At the local level, property tax revenues are already drastically declining in some counties, municipalities and school districts that rely heavily on petroleum equipment and soil resources as part of their tax base. In fiscal 2019, Texas school districts received $ 1.54 billion in ad valorem taxes from mining properties producing oil and natural gas, pipelines, and gas services, while counties received $ 398.7 million. As the values of these properties decline as oil prices drop, revenues will decline for dozens of school districts and local governments. In addition, as fewer workers live and spend their income in the oil zone, the base for property tax and local sales will decline further. This has happened before in communities in Texas where large coal-fired power plants have been closed in recent years.
Given the unlikely likelihood that Texas will ever pass a personal income tax, finding new revenue to keep Texas and its local governments properly funded will be a daunting task. For example, is it time to start taxing wind and solar farms instead of subsidizing them? Do we need a special road use tax on electric vehicles to ensure that they pay their fair share of road maintenance costs? Should the national sales tax be increased or the base broadened to compensate for lost energy revenues? Should the excise taxes on gasoline, tobacco and alcohol – among the lowest in the country – be increased? What about the state franchise tax?
There is no easy choice, but the energy transition is real and we need to change Texas’ income structure to reflect this transition. Otherwise, basic government functions like education, public safety, road transport and recreation will be threatened.
Bernard L. Weinstein is Associate Director of the Maguire Energy Institute and Assistant Professor of Business Economics at Southern Methodist University. He wrote this column for The Dallas Morning News.