By Dan Frosch

Oil and gas markets are beginning to bounce back, but a protracted downturn will have a marked impact on Texas' budget over the next two years, state finance officials said Monday.

Texas' available revenue for 2018 and 2019 is projected to drop by 2.7%, compared with the current two-year budget period, state comptroller Glenn Hegar said in a financial forecast for Texas lawmakers before they convene Tuesday for the state's legislative session.

Texas, which accounts for roughly 9% of U.S. economic output, helped push the nation out of the recession, partly due to shale drilling. But sagging oil prices stunted the state's recent economic success, and made Texas a drag on the nation's economy.

According to figures released on Monday, after a nearly 6% increase in gross state product in 2015, Texas' economy is estimated to have grown by only 0.2% during the last fiscal year, barely avoiding contraction.

"Ongoing weakness in activity related to oil and natural gas has been a drag on state economic growth," Mr. Hegar said.

In particular, Mr. Hegar noted the drop in total sales tax collections in Texas' mining sector -- made up primarily of the oil and gas industry.

Remittance from companies in the mining sector dropped by 52% in 2016 to the lowest levels the state has seen since 2010. And last year, Texas' mining sector accounted for just 2.9% of sales tax collections, down from 6.1% the previous year. The oil and gas industry's struggles also affected other areas as well, such as manufacturing and trade, Mr. Hegar said.

"This was not unexpected," said Sherri Greenberg, a professor at the Lyndon B. Johnson School of Public Affairs at the University of Texasat Austin. "When you see a big drop in oil and gas, we know there will be a hit to the state budget here."

Ms. Greenberg said there would likely be a debate in the legislature over whether the state should dip into its Rainy Day Fund to help make up for the revenue fall or make cuts to services.

Issues likely to be affected by the revenue forecast during the legislative session are education spending and the state's beleaguered foster care system. The state is currently operating under a two year budget of $106.2 billion that was passed in 2015.

Still, Mr. Hegar said there were signals that the energy sector in Texas was recovering and the state's economy was well-positioned to weather the revenue dip.

Tax collections from oil production are projected to generate $4.7 billion in 2018 and 2019, a 32% increase from tax collections during the current two-year budget period, Mr. Hegar said.

Natural gas tax collections are predicted to rise by 27% over the same time frame -- from $1.3 billion to $1.7 billion in 2018 and 2019.

Overall economic growth was projected to rise as well, by 2.5% in 2017 and 3% the following year. The state's unemployment rate -- which is 4.5 % -- is expected to remain relatively unchanged in the coming years, Mr. Hegar said.

The cautionary revenue forecast didn't come as a surprise to Texas lawmakers as they prepare to iron out the state's budget.

"Texans expect their government to live within its means, and I fully expect to sign a budget that does just that," said Texas Gov. Greg Abbott, a Republican, in a statement following the forecast.

Write to Dan Frosch at dan.frosch@wsj.com

(END) Dow Jones Newswires

January 09, 2017 16:34 ET (21:34 GMT)

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