The November elections are concluded, and preparations have already begun for the Texas Legislature to convene in January 2013. We don’t know exactly what the 2013 session will bring - as Yogi Berra once said, “Predictions are hard - especially about the future.” But we can at least identify the major political forces that will be at play, and several major policy issues that will be deliberated and decided. Companies and industries should be actively monitoring and participating in these policy debates. As the old saying goes, during a legislative session you are either at the table or on the menu.

Internal Legislative Politics

Legislative sessions always begin with “inside baseball,” as legislators jockey for leadership positions. In the Texas House, Republicans will hold a commanding 95 - 55 majority, will elect the Speaker and will chair at least two-thirds of House committees. So the House will continue to be very Republican and very conservative. Sitting Speaker Joe Straus (R-San Antonio) is widely expected to retain the Speaker’s gavel (although he will likely face opposition from at least one conservative Republican legislator supported by conservative grassroots activists).

The Texas Senate maintains its 19-12 Republican majority, but it might become just as conservative as the Texas House. Lt. Governor David Dewhurst returns for his sixth session as presiding officer following an unsuccessful run for U.S. Senate, and he may pursue an even more conservative agenda in order to position himself for a more successful race in 2014. Dewhurst has already announced his committee chairs for the upcoming session.

The Texas Senate chamber will shift markedly to the right, as the five new Republican senators are significantly more conservative than the more moderate Republicans they are replacing. Republicans had hoped to pick up two seats to reach the 21-vote supermajority required to fully control the chamber under longstanding Senate customs. Since they failed, some Republicans will attempt to discard or amend the 21-vote custom to allow them more freedom to pass Republican initiatives. The Democrats (and perhaps some Republicans) will vigorously oppose altering this tradition, leading to a showdown on the Senate floor in the opening days.

In both chambers, the biggest legislative turnover in decades (largely due to redistricting) will produce an “experience deficit.” The Senate will welcome six new members, and the House will welcome 43. Almost half of all House members will be freshmen or sophomores. So government relations professionals have many new faces and names to learn, and the sausage-making may be messier than usual.

The State Budget

The state budget outlook is much rosier than it was in 2011, when the Legislature faced a historic $27 billion shortfall and the conservative Republican leadership bridged the gap with severe budget cuts and no new taxes. This session legislators will have more money to work with, as state tax revenues have grown by 14% over last year. However, private vendors looking for new appropriations will still find the purse strings to be very tight. Legislators still have to plug a close to $5 billion hole left over from the last budget, and find money to fund over $12 billion in new education and social services needs alone, resulting solely from the state’s rapid population growth. So we expect another tight budgetary session, where high-priority “needs” will be funded but “wants” may go unfulfilled.

Tax Increases? Margin Tax Reform?

The conservative Republican leadership will be ideologically opposed to raising taxes on a broad scale. But sophisticated industries know that in a tight budget environment, legislators are always creative in devising targeted new “fees” or in closing exemptions (politely termed “non-tax revenue actions”) to fund new pet projects, so they will have their government relations professionals closely monitoring the tax-writing committees.

The Texas margin tax, enacted in 2006, is a very unpopular tax system. (But aren’t they all?) Small businesses complain about the higher taxes they pay under the system - and especially do not appreciate owing tax even when they are losing money. Legislators continually respond to these complaints by promising to “fix the system,” possibly by replacing the margin tax with a higher sales tax or even a new statewide property tax. But we see little prospect of wholesale tax reform in 2013. Margin tax opponents have not rallied around a single alternative, and there are too may influential industries that favor the current system. Instead, this session we foresee only targeted tweaks to correct discrete perceived “injustices” in the current system, and perhaps an effort to raise the small business tax exemption upwards from the current $1 million level.

School Finance

Our prediction of no major tax reform, however, could go out the window depending on how the courts and the Legislature deal with Texas public school financing. The state and its school districts are once again in the courts debating the adequacy and constitutionality of how Texas funds its public schools. The Texas Supreme Court is expected to issue its ruling right in the middle of the 2013 regular session. If the court rules that the current system is indeed unconstitutional, the Legislature will be forced to return in a special session (perhaps in the summer of 2014) for school finance reform.

School finance reform historically requires wholesale state tax reform. For example, the last school finance ruling and overhaul led directly to the enactment of the margin tax in 2006. So industry advocates are already working hard to avoid a future fiscal hit. They will spend the 2013 regular session building relationships with the members of tax-writing committees, and gently presenting fiscal and policy arguments, hoping that this early “spade work” will pay off if the Legislature takes up tax reform in 2014.

Water

If 2011 was a session for clarifying water rights in Texas, 2013 may be a session for addressing water usage and water supply. The ongoing Texas drought has generated widespread attention and concern over whether Texas will have a sufficient water supply to accommodate its future population and commercial growth. Legislators may propose new statutes restricting water usage by various industries, from agriculture to manufacturing to energy (especially in hydraulic fracing).

Water policy specialists have produced a state water plan that outlines $53 billion in water infrastructure needs - new reservoirs, water treatment facilities and distribution systems, for example. Now all that is needed is initial funding to get the work started, so the legislative leadership will likely seek to provide up to $2 billion in seed funding this session. The question is where the Legislature will find that money, with most predicting it will pass some form of broad-based “water infrastructure fee” that will range somewhere from $4 per month for typical residences up to $100 per month for large commercial users. But the devil is in the details, so a wide array of interests will be watching closely, working to ensure that the burden falls heaviest on someone else.

Energy

The Railroad Commission of Texas will once again go under close scrutiny in 2013, as it is scheduled for a thorough “sunset review” by the Legislature. The scrutiny probably could not come at a more inopportune time for industry, as the monumental surge in Texas oil and gas production (largely in the Eagle Ford Shale) is bringing the industry and the Commission new attention and scrutiny. The State of Texas treasury is benefitting mightily from the surging jobs and revenue. But various advocacy groups and local governments have compiled a laundry list of concerns and complaints across a wide spectrum of issues.

The Railroad Commission sunset review will provide the industry with an opportunity to improve the Commission and its processes. But it will also provide anti-industry interest groups an opportunity to propose cumbersome new regulations. We see the Railroad Commission sunset review bringing a number of high-impact oil and gas issues to the floor of the House and Senate:

New Fees to Fund Road Repair

Increased exploration has led to widespread road damage in rural areas, and there is a growing consensus that the industry will need to share at least some of the repair cost burden. Various sectors of the industry are at the negotiating table, looking for a funding solution that does not disproportionally fall on their sector’s shoulders.

New Taxes to Fund General Government

The oil and gas industry will strongly oppose any new taxes or fees designed solely to help fund general government. The industry already pays a disproportionate share of state and local taxes, over $9.3 billion in Texas state and local taxes in fiscal year 2011. But large and thriving industries always present an easy target for legislators looking for new revenue.

Eminent Domain

The recent Denbury ruling and the Keystone Pipeline project have both given new life to the ongoing debate over eminent domain in Texas. Private property rights groups view this legislative session as an opportunity to attempt to further tighten eminent domain protections, and to move some eminent domain decision-making away from the Commission and to the local level.

Well Integrity, Groundwater Protection and Emissions

Increased production and the increase in fracing has led to public concerns over safety and environmental impact. The Railroad Commission and the Texas Commission on Environmental Quality are currently working to draft and enact new reasonable regulations to adequately address public concerns before the session begins. But that will not keep industry critics from attempting to impose more onerous regulations through legislation.

Water Usage

The legislative debate over water usage (see above) will necessarily involve the industry. At stake will be whether the state imposes new restrictions on the energy industry’s significant water usage, and how heavily it looks to the industry for the funding needed to improve the overall Texas water supply.

Additional Fracing Disclosure

The industry is hopeful that the Legislature will view recent legislation and rules requiring new public disclosure of fracing ingredients as sufficient, but is also expecting activist groups to return this session requesting even more.

Commission Structure and Process

Industry favors the current three-member commission model, but some advocates want to move to a single commissioner system. Industry also favors keeping contested case hearings at the Commission, while some critics favor moving them to the state’s general administrative hearing agency.

In the arena of electrical power, many legislators are concerned that the state’s power supply and reserve margins are not keeping up with the state’s rapidly growing population and commercial needs, and they want to avoid future rolling blackouts. Look for regulators and electric companies to see more flexibility in creating new power generation, and for consumer advocates to oppose many of these initiatives.

Social Issues

With their new-found strength in the Texas Senate, Texas conservatives see new opportunity to prevail on several items from their ideological wish list. Look for vigorous debate on issues like school choice, abortion, immigration, higher education reform, guns, etc. These “hot-button issues” can produce rancor in a legislative session that can directly affect the prospects for passage (or defeat) of more relevant legislation.

Everything Else

In the modern Texas legislature, practically every issue imaginable is considered in one piece of legislation or another. In 2011 legislators filed almost 6,000 bills, and they managed to pass a full 1,458 of them. In past decades certain industries or issues might be “neglected” every other session or so. But today, Texas industries assume that issues that affect them are likely to be on the agenda each and every session.

Conclusion

It is always difficult to see how the Texas Legislature can possibly address and resolve all of the challenging and divisive issues which face Texas within a single 140-day regular session. Legislators should probably expect their summer 2013 (and possibly their summer 2014) to be disrupted by one or more special sessions spent finishing the state’s business. We will provide further analysis as the course of the 2013 Texas Legislature develops.