As exploration and production (E&P) companies cut back spending in order to stay afloat in a low commodity price environment, the downturn has many oil and gas states feeling the budget squeeze as well.

Energy states with taxes aimed at capturing value from extraction activity are seeing significant declines in those revenue streams.

According to revenue projections updated in October by Texas Comptroller Glenn Hegar’s office, the state’s natural gas production tax revenues fell by more than $600 million from $1.9 billion in 2014 to just shy of $1.3 billion in 2015. Revenues are projected to decline further in 2016 to $871 million before rebounding somewhat in 2017 to just over $1 billion.

Revenues from Texas’s oil and gas production taxes fell by almost $1 billion between 2014 ($3.87 billion) and 2015 ($2.88 billion). The state’s oil and gas production tax revenue estimates for the next two years are $1.8 billion in 2016 and $2 billion in 2017.

Neighbor Oklahoma is bracing for a leaner budget in the 2016 fiscal year. Gov. Mary Fallin has issued an executive order requiring all state agencies to plan for 10% budget cuts to non-essential services. Fallin alluded to lower-than-expected revenues and the likelihood of a “significant shortfall” in the next budget year. Last month, state officials reported that gross production tax revenues in August were 63.9% below estimates and down 28% year/year (see Shale Daily, Oct. 13).

Wyoming and North Dakota are similarly coping with declining oil and gas revenues. According to a recent Wyoming budget report, the state’s total severance tax revenues and federal mineral royalties are expected to decline 18.1% in the current two-year budget cycle compared to the 2013-2014 budget cycle, largely driven by low commodity prices in oil and gas. Meanwhile, North Dakota is forecasting $3.9 billion in oil and gas revenues over the next two years, compared to more than $6 billion the state collected during the last two-year budget cycle.

In the Appalachian Basin, Pennsylvania and West Virginia face well-publicized budget problems of their own.

Last month, West Virginia Gov. Earl Ray Tomblin announced across-the-board 4% budget cuts for state agencies and a rare 1% cut to education funding — all aimed at reducing an estimated $250 million revenue shortfall, including a $190 million shortfall in severance tax collections (see Shale Daily, Oct. 6).

Meanwhile, Pennsylvania continues debating how to close a structural budget deficit estimated at around $2 billion. Though a downturn in oil and gas investment doesn’t appear to be a direct cause of the gap, Gov. Tom Wolf has proposed a severance tax on drilling in Pennsylvania as part of the solution (see Shale Daily, Sept. 17).

The full impact of the current commodity market on individual state budgets will surely be case-specific. Marcy Block, senior director of U.S. public finance for Fitch Ratings, said in an analysis that “many states have long track records of offsetting commodity-based declines with other budget facilities. Many maintain reserves to offset losses of operating revenue … However, some of these offsets would lose their power if an extended slump in commodity markets continues into fiscal 2017.”

Block also said “states with more diverse economies and revenue sources should be able to weather prolonged commodity price declines more effectively.”

Chris Bryan, a spokesman for the Texas comptroller’s office, said the drop in oil and gas revenues, while significant, is small in the context of the state’s overall budget.

“The Texas economy is very different from what it was during the last period of prolonged energy weakness,” Bryan said. “The economy is much more diversified now, much less reliant on oil and gas for core budget needs.”

By contrast, West Virginia, a small state reliant on severance tax revenues to help balance its budget, is dealing with the double whammy of low oil and gas prices and a faltering coal industry.

In North Dakota, Deputy Tax Commissioner Joe Morrissette said the state only allocates a maximum of $300 million in oil revenues per biennium to its general fund, with the rest going to a “series of special funds for special purposes.”

The bigger impact on a state like North Dakota, Morrissette said, is the economic ripple effect of declining activity in the industry. This has impacted core revenue streams like the state’s sales tax, which fell short of projections by 22% in September, he said.

“Some of that is not just consumer purchases. Some of that is directly traced back to the oil industry codes because there’s less drill pipe and frack sand and those taxable inputs that go into each well,” Morrissette said.

Bryan said sales tax revenues in Texas have also flattened out after a period of sustained growth. This is likely a symptom of the oil and gas slowdown, he said.

“If a major industry in your state is weathering a significant downturn like this, you want to see [revenues] come in for a soft landing, so to speak, and thus far that’s what we’ve seen,” Bryan said.