Hey, Texplainer: How does Texas' budget use taxes from oil and natural gas production?

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Today’s Texplainer is inspired by a question from Texas Tribune reader Glenneth Bednorz. 

Hey, Texplainer: What are the taxes paid from oil and natural gas production used for in the current state budget?

Texas leads the nation in both oil and natural gas production — which, in turn, yields significant revenue for the state.

Texas charges businesses a 4.6 percent tax rate on oil production and a 7.5 percent rate on natural gas production. In the 2017 budget year, the oil production tax raised more than $2 billion for the state, while the natural gas production tax brought in a little less than $1 billion.

Revenue from those taxes is divided among several state funds. 

The state's savings account — technically called the Economic Stabilization Fund but known around the Capitol as the Rainy Day Fund — gets 37.5 percent. The Legislature has used the Rainy Day Fund over the years for emergency and one-time expenses, including disaster relief. While oil and gas production taxes are one of its main sources of revenue, the Legislature can also add any surplus in the state budget to the fund — though there hasn’t been a surplus in more than a decade.

Another 37.5 percent goes into the State Highway Fund, which is used for highway construction and maintenance and policing public roads. Other sources of revenue for the State Highway Fund include motor vehicle registration fees and the sales tax on motor oil.

For the 2017 budget year, both the State Highway Fund and the Rainy Day Fund received $734 million from oil and natural gas production taxes, according to Chris Bryan, a spokesperson for the comptroller's office.

The remaining 25 percent goes to the Foundation School Program, a Texas Education Agency-administered fund used for expenses such as teacher salaries, bilingual education and special education. As with the other funds, oil and gas production taxes aren't the only source of revenue for the Foundation School Program: DeEtta Culbertson, a TEA spokeswoman, said 25 percent of all occupation taxes are constitutionally dedicated to public education and are deposited into the program, giving it a total annual revenue of about $1 billion.

Texas is expected to collect roughly $4.9 billion in oil production taxes and $1.8 billion in natural gas production taxes for the 2018-19 budget cycle, according to the latest estimates from the comptroller’s office.

“As oil prices have recovered in the past few years, we’ve seen those revenues increase significantly,” said Bryan, the comptroller's spokesman. “We definitely predict growth in that sector moving forward.”

The bottom line: Businesses are taxed when they remove natural resources from Texas land. That revenue is collected by the state, which deposits 37.5 percent into the Rainy Day Fund, 37.5 percent into the State Highway Fund and 25 percent to the Foundation School Program.