Historic State Revenues Give Texas Lawmakers a Once-in-a-Lifetime Opportunity

Special to the Texas Municipal League
by Glenn Hegar

March 2023

As Texas enters its 88th legislative session, the legislature has a once-in-a-lifetime budgeting opportunity. With record revenues over the last year, in part driven by record inflation, the legislature is projected to have a cash carryover balance at the end of this budget cycle of $32.7 billion. While this is a historic opportunity to prioritize the current two-year budget, it is also an opportunity to prioritize spending longer term and provide historic property tax relief to Texas taxpayers. As I announced these numbers at the beginning of session, I also provided words of caution as the Texas economy faces the potential headwind of a slowing global economy that may cause a short and brief recession in our state later this year.

On the heels of the disruption caused by the COVID-19 pandemic and on the brink of a global economic downswing, Texas has experienced vigorous economic growth, keeping the state in a national leadership role. Record revenue collections have provided state lawmakers with an astonishing projected cash balance. It is also poised to fill the Texas’ Economic Stabilization Fund (ESF), more commonly known as the “rainy day fund,” for the first time since its creation 34 years ago. We may never have a surplus of discretionary funds like this again. The hard part will be deciding what to do with it.

On January 9, 2023, the Comptroller’s office released its 2024–25 Biennial Revenue Estimate (BRE) for the Texas legislature to use in writing the state’s budget this legislative session. My staff projects that the state will have an estimated $188 billion available for general purpose spending in the 2024-25 biennium, a record 26.3 percent more than in the previous two-year budget period.

Record deposits to the ESF mean that the fund is likely to reach its constitutional cap by fiscal 2025. Barring any legislative action, the ESF is poised to have an all-time-high balance of $27.1 billion by the end of the 2024-25 biennium.

While the BRE sets an amount of money that will be available for the legislature to spend, there are other limits on the amount of money that the legislature can actually use. There is both a constitutional and a statutory limit on spending to account for. The Texas constitution sets a limit on legislative spending – applying to state tax revenues that aren’t constitutionally dedicated. Appropriations from these funds cannot exceed the rate of growth of the state economy unless a majority of the legislature approves. Additionally, the 87th legislature limited growth in appropriations of consolidated general revenue effective with the 2024-25 biennium, mandating that such appropriations be limited to the combined estimated rate of Texas population growth and the estimated rate of monetary inflation; exceeding the limit on these funds would require a three-fifths vote of the legislature. Exceptions are possible for instances of tax relief or disaster recovery.

This biennium’s ample revenue is due in large part to the substantial growth in state tax revenue collections over the past 18 months with the highest increase in year-over-year tax collections the state has seen in at least 30 years. Only five times in the last 30 years has Texas’ total tax collection grown by double digits over the previous year, making this past fiscal year’s increase of 25.6 percent even more impressive. State sales taxes are by far the state’s largest source of revenue, currently bringing in 58 percent of the state’s GR-R tax collections and expected to rise to 59 percent in the 2024-25 biennium for a total of $87.9 billion.

The oil production tax is the state’s next largest source of general revenue in the coming biennium and estimated to total nearly $13.3 billion. Next are the motor vehicle sales and rental taxes (projected to contribute $12.7 billion) and the franchise tax (adding $12.6 billion); $8.8 billion will go to general revenue and the rest will go to the Property Tax Relief Fund. Natural gas production taxes are set to yield an estimated $8.6 billion in the next biennium. The BRE forecasts all-funds sales tax revenue will grow by 7.1 percent in fiscal 2023, 2.5 percent in fiscal 2024 and 5.1 percent in fiscal 2025.

Taking all revenue sources into account, Texas is expected to receive $342.3 billion in 2024-25. While significant growth in state revenue is expected to continue, sustained growth cannot continue forever. I must advise some caution. The revenue increases that we’ve seen have been in many ways unprecedented, and we cannot reasonably expect a repeat.

Texas’ budget surplus is the result of many positive forces, including the state’s business-friendly policies, conservative budgeting practices and the hard work of ambitious Texans whose visions benefit the state. Some events, such as spikes in energy prices, are positive for parts of the economy while unwelcome to others. Unfortunately, the state’s record revenues are partly due to the highest rate of general price inflation seen in 40 years. Besides causing revenues to substantially exceed expectations, inflation also has driven up the cost of many goods and services affecting the daily lives of Texans. While increases recently have moderated, many people and businesses still are bending under the weight of inflation. Adding to near-term challenges, our forecast projects a mild recession. The expected downturn for Texas will be relatively shallow and short, but it will not make Texans’ lives any easier. Any Texas revenue forecast, however, is inherently unpredictable. Many tax collections are less predictable than others, including the state’s severance tax collections, which are determined by price and production and are subject to the volatility of the energy market.

Lawmakers will have to make thoughtful decisions when determining budgetary allocations. Some considerations might include investment in our electrical grid, broadband connectivity, port and water infrastructure investment, salary adjustments for state employees, our teachers and nurses, as well as the development of our skilled trade workforce.

Additionally, lawmakers must be mindful of the fact that every tax dollar received by the state is coming out of Texans’ pockets. Even with constitutional spending limits and an inflation-influenced new normal, the enormous amount of projected revenue gives the state a remarkable opportunity for lawmakers to make the choice to invest in infrastructure and services that will fuel growth for Texas and provide meaningful tax relief for Texans struggling with rising prices. This 88th legislative session will be one to watch, impacting Texans for generations to come. The state’s strong growth in revenue collections and history of conservative spending leaves a strong balance sheet and record surplus for the upcoming legislative session and budget.