By Ramsey Scott
Wyoming Tribune Eagle
Via Wyoming News Exchange
CHEYENNE – Wyoming’s latest economic forecast shows the drop in oil prices to end 2018 will mean a serious blow to the state’s overall revenue picture.
The January report from the Consensus Revenue Estimating Group estimates $125.1 million less in revenue than what the group predicted in October. That number grows to $145.4 million less than predicted for the 2021-22 biennium budget.
While Monday’s report puts a damper on October’s predictions, the state is still expecting higher revenues than CREG predicted a year ago. The newest CREG report still shows Wyoming should see more than $400 million added into its General Fund Account and Budget Reserve Account.
The nine-figure reduction in anticipated state revenues is the result of a steep decline in oil prices to end 2018, which CREG is forecasting will be a continuing trend moving forward. The group lowered its forecast for oil prices by $15 a barrel in 2019, $10 a barrel in 2020 and another $5 in 2021. That downward move means CREG predicts the state will see $60.8 million less in severance taxes to use during the remainder of the 2019-20 biennium budget.
One highlight of the report is an increase in the amount of money Wyoming is expected to take in from sales and use taxes. Despite the drop in oil prices, and the subsequent decline in state revenues from severance taxes and federal mineral royalties, sales and use taxes are predicted to increase by $23.5 million for the remainder of the 2019-20 biennium budget.
Gov. Mark Gordon said the lower CREG revenue estimate was expected. And it highlighted the need for the state to work to create a steady revenue stream, something he highlighted both during his campaign and in last week’s State of the State address.
“There’s some excitement, though, that we still have a lot of activity in the oil sector on exploration, which has helped sales and use (tax) numbers,” Gordon said. “In the coming days, you’ll see that our (budget) recommendation is right in line with what this CREG report suggests.”
Don Richards, co-chairman of CREG, said Monday that sales and use taxes typically drop when the energy sector experiences price drops. But two factors played significant roles in CREG increasing its October forecast for those taxes by $14.5 million for 2019 and $9 million for 2020.
One factor is the increase in the efficiency of oil production from operating rigs.
Energy companies don’t have to invest as much human capital to maintain production, which, in turn has kept them from turning off rigs to save cash when prices drop.
Unless oil prices stay substantially below earlier predictions for at least a year, energy companies will most likely keep up production at existing wells, said Nick Colsch, director of the Wyoming Center for Business and Economic Analysis at Laramie County Community College.
Colsch said the cost of capping an existing well, coupled with the low capital cost for production, means energy companies are most likely going to keep oil flowing.
Another factor in the new CREG report is the increase in online sales tax collection. Richards said the U.S. Supreme Court decision in 2018 that allows states to collect online sales tax on transactions through companies like Amazon means Wyoming’s tax collections have seen a boost.
And Colsch said the increase in consumer confidence due to recent federal tax cuts and continued low unemployment is helping drive sales across various sectors. Whether it’s purchasing a new shirt or going out to eat an extra night every week, Wyoming is benefiting from the overall good feelings in the economy right now.
“There’s more confident consumers right now. And with continued population growth in Wyoming, you’ll continue to see sales and use tax increasing,” Colsch said.
How this could affect the Legislature’s appetite for any of former Gov. Matt Mead’s supplemental budget requests will be one of the big questions moving forward from this session. In his supplemental request, Mead left almost $300 million in revenue unallocated, with the hope of it being pushed into reserves. With the new CREG report, that number of allocated revenues dropped to just under $240 million if every one of Mead’s requests were allocated.
Sen. Larry Hicks, R-Baggs, a member of the Joint Appropriations Committee, said the CREG report’s outlook on oil prices wasn’t a surprise to anyone paying attention to the market. When looking at how the Legislature potentially funds supplemental requests, Hicks said those requests were made working off the more rosy assumptions of the October CREG report.
“A lot of money is off the table. I think it’s going to be a little tougher to support across the board (Mead’s) recommendations,” Hicks said.
While many of the recommendations in Mead’s request align with the mindset of the Legislature, Hicks said the fact remains that the state is facing a deficit of several hundred million dollars for education funding. And given the volatility of the mineral market, the Legislature needs to be conservative in how it prepares for a worst-case scenario.
One issue where Hicks said he believed the Legislature would support Mead’s recommendations was some form of a pay increase for state workers. Mead included a 3 percent increase in his request, and while Hicks didn’t know what an overall increase might look like, he said lawmakers recognized the need for action to retain and recruit talent to the state.
“Percentages is where the debate will be, not whether it’s needed. It’s just the level we can afford,” Hicks said.
