Biennial Revenue Estimate, 2008-2009

Available Revenue

The 80th Legislature will have an estimated $82.5 billion available for general purpose spending in the 2008-09 biennium, 10.0 percent above the corresponding amount estimated for 2006-07. (See Table 2.) This figure represents the sum of the 2006-07 ending balance, 2008-09 tax revenue, and 2008-09 non-tax receipts, less estimated transfers to the Economic Stabilization Fund and adjustments to general revenue-dedicated account balances.

Table 2 - General Revenue-Related Funds By Source
(Revenue in Millions)

Tax Collections

  2006-07 2008-09 Percent Change
Sales and Use Taxes $37,680 $41,502 10.1%
Motor Vehicle Sales and Rental Taxes 6,327 6,879 8.7
Motor Fuels Taxes 1,616 1,700 5.2
Franchise Tax 5,423 5,836 7.6
Insurance Taxes 2,481 2,556 3.0
Natural Gas Tax 4,149 3,524 (15.1)
Cigarette and Tobacco Taxes 1,130 1,091 (3.5)
Alcoholic Beverage Taxes 1,385 1,507 8.8
Oil Production and Regulation Taxes 1,642 1,419 (13.6)
Inheritance Tax 16 0 (100.0)
Utility Taxes 933 820 (12.1)
Hotel Occupancy Tax 638 709 11.2
Other Taxes 138 134 (2.4)
Total Tax Collections $63,558 $67,678 6.5%

Non-Tax Collections

  2006-07 2008-09 Percent Change
Licenses, Fees, Fines, and Penalties $2,700 $2,473 (8.4)%
Interest and Investment Income 1,845 1,495 (19.0)
Lottery Proceeds 2,073 2,130 2.7
Sales of Goods & Services 190 196 3.2
Settlements of Claims 1,052 950 (9.7)
Land Income 17 15 (11.3)
Contributions to Employee Benefits 453 498 10.1
Other Revenue Sources 2,421 2,052 (15.2)
Total Non-Tax Collections $10,752 $9,809 (8.8)%

Total Net Revenue

  2006-07 2008-09 Percent Change
Total Net Revenue $74,310 $77,487 4.3%

Balances and Adjustments

  2006-07 2008-09
Beginning Fund 1 Balance $3,687 $6,986
Beginning Funds 2 and 3 Balances 52 2
Change in GR-Dedicated Account Balances 162 0
Reserve for Transfers to the ESF (3,241) (2,009)
Total Balances and Adjustments $660 $4,979

Total General Revenue-Related Funds Available for Certification

  2006-07 2008-09 Percent Change
Total General Revenue-Related Funds Available for Certification $74,970 $82,466 10.0%

Note : Totals may not sum because of rounding.
SOURCE : Susan Combs, Texas Comptroller

The 2006-07 Ending Balance

The estimated ending certification balance for 2006-07 will be $7.0 billion after setting aside a required $1.7 billion transfer to the Economic Stabilization Fund (ESF). This balance is the product of both unexpectedly vigorous revenue growth — driven principally by sustained growth in oil and natural gas prices, housing, and consumer purchases — and 2006-07 available revenue remaining unappropriated.

Some examples of unusually strong revenue performance in fiscal 2006:

  • Sales Taxes: Collections increased an exceptional 12 percent over the previous year. Adjusted for inflation, this rate of growth was the highest since 1978.
  • Franchise Tax: Franchise tax revenues registered a 20.1 percent increase, reflecting another year of rebounding corporate profits, particularly in the energy industry.
  • Motor Vehicle Taxes: Despite the run-up in fuel prices, manufacturer and dealer incentives continued to lure prospective buyers into showrooms, fueling a 7.9 percent increase in tax collections — the highest since fiscal 2000.
  • Severance Taxes: Persistent threats of supply disruptions abroad, diminished excess production capacity, and growing global demand all worked to push up prices and tax receipts. Oil production and regulation tax revenues jumped 26.5 percent to $862 million, the highest level in 21 years. Natural gas tax revenues climbed even faster — by 41.2 percent.

Fiscal 2006's remarkable pace, however, cannot be expected to continue. As discussed in the Economic Outlook section, Texas housing activity is expected to drop, oil and natural gas prices to recede, and consumer purchases to abate as the national and Texas economies cool.

Transfers to the Economic Stabilization Fund

Transfers from state oil production and natural gas tax collections to the ESF should total $3.7 billion over the three-year period 2007-09. In 2008, an additional transfer will be made to the ESF equal to one-half of the unencumbered 2007 general revenue ending balance — an estimated $597 million, yielding a total three-year transfer of $4.3 billion. As required by the Texas Constitution, estimated transfers to the ESF have been deducted from available revenues and balances. Following the transfer in fiscal 2010 for fiscal 2009 revenues, and accounting for outstanding appropriations, the ESF balance should reach $4.3 billion.

Tax Revenue

Taxes provide the most important source of general revenue for the state. As in years past, sales and use tax collections will continue to dwarf all other tax revenue sources, with motor vehicle sales and use tax and franchise tax revenues a distant second and third, respectively. The franchise tax serves as the state's general business tax and is the largest state tax not levied on consumption.

Sales and Use Taxes

The state limited sales and use tax is levied at 6.25 percent. Subject to certain exemptions, the tax is paid by businesses and consumers for a wide range of goods and services purchased within or brought into the state. Sales and use taxes also include the boat and boat motor sales and use tax; the motor lubricant sales and use tax, which is dedicated to the State Highway Fund; and the fireworks tax, which is surtax dedicated to the Rural Volunteer Fire Department Insurance Account.

In fiscal 2006, Texas sales and use tax receipts totaled $18.2 billion, up 12.0 percent from 2005. This increase followed gains of 7.9 and 5.8 percent in 2004 and 2005, respectively, and continued the positive trend in collection growth that began after two successive years of declines in 2002 (down 1.1 percent) and 2003 (down 1.7 percent).

The increase in sales tax revenues in fiscal 2006 was driven by several major sectors of the economy. The construction and wholesale trade sectors each experienced gains of more than 15 percent for the year. In addition, higher energy prices led to significant increases in the mining and utility sectors, which were up 57.4 percent and 28.0 percent, respectively. Oil and gas equipment, e.g., drilling rigs, pump jacks, and drilling mud, is subject to the sales tax. Sales and use tax collections from the retail trade sector, which typically accounts for more than 50 percent of total sales tax revenue, rose by 10 percent in fiscal 2006.

The exceptional rate of growth in the sales tax witnessed in fiscal 2006 is all the more remarkable given that inflation — excluding volatile energy components — in recent years has been (and continues to be) low by historic standards. In fact, outside of those years where legislative changes to the tax resulted in large revenue increases, fiscal 2006 saw the largest inflation-adjusted growth in sales tax revenue since 1978.

The growth in sales tax collections should taper down from the dramatically high rate experienced in 2006, largely because of the anticipated slowdown in the growth of consumer spending in the state. In addition, the expected reversal in current oil and natural gas price trends and new home construction should cause a drop in the sales of oil and gas machinery and building materials.

Sales taxes are expected to generate $41.5 billion in 2008-09. Compared to the $37.7 billion estimated for 2006-07, this will represent a 10.1 percent biennial increase.

Franchise Tax

The franchise tax is the state's primary tax on business, but it is scheduled to undergo an extensive transformation pursuant to recent legislation.

Until that legislation takes effect in calendar 2008, the franchise tax will continue to be collected under the provisions that have been in effect since 1992. Under those provisions, all corporations (including subchapter S corporations, banks, savings and loan institutions, and limited liability companies doing business in Texas) calculate their tax liability with reference to two tax bases: taxable capital (net worth) and earned surplus. Earned surplus is essentially a company's modified federal taxable income apportioned to Texas. The current tax rates are 0.25 percent for taxable capital and 4.5 percent for earned surplus. However, the earned surplus tax is paid only to the extent that it exceeds the tax liability on net worth. In practice, taxpayers pay the higher of their net worth tax or their earned surplus tax.

In 2006, the 79th Legislature, 3rd Called Session, enacted HB 3, which broadened the applicability of the franchise tax base to include an expanded group of business types and made substantial changes to the calculation of a business entity's tax liability. These changes are scheduled to apply for all tax reports due on or after January 1, 2008. For reports due before that date, the franchise tax will apply substantially as it has since 1992.

All franchise tax receipts in 2006-07 will reflect the current base and rate and are estimated to total $5.4 billion — a 35.4 percent increase over the amount collected in 2004-05. The large increase reflects the strong rebound in corporate profits that began in calendar 2002 and continued into calendar 2006. Nationwide, corporate profits surged as production costs were held in check due to strong productivity gains and modest wage growth. In addition, the steep rise in oil and gas prices from the 2004-05 to the 2005-06 biennium translated into record profits for the energy industry, generating a dramatic increase in expected 2006-07 franchise tax revenues.

With respect to 2008-09, the universe of business entities subject to the tax will expand to include: partnerships, business trusts, professional associations, business associations, joint ventures, holding companies, and other legal entities. Business entities not subject to the franchise tax under current law and in 2008 will include sole proprietorships and general partnerships composed entirely of natural persons. Exempt entities defined in Chapter 171, Subchapter B, as exempt from the current franchise tax are to remain exempt under the new legislation.

Also beginning with reports due on or after January 1, 2008, the base for the franchise tax will be "taxable margin" apportioned to Texas. "Taxable margin" is defined as the smallest of three calculated values: 70 percent of total revenue; total revenue less the cost of goods sold; and total revenue less compensation.

A firm's taxable margin will be apportioned to Texas using the ratio of receipts in Texas to receipts everywhere. The tax rate applied to apportioned taxable margin will be 1 percent for a business not primarily engaged in wholesale or retail trade. For a business primarily engaged in wholesale or retail trade, the tax rate will be 0.5 percent. Groups of business entities related by common ownership and engaged in a unitary business will have to file a combined report.

The 2008-09 biennium will be the first biennium in which the franchise tax is calculated on the taxable margin base. Estimated total (all funds) revenue for the 2008-09 biennium is $11.9 billion — more than double the $5.4 billion estimated for 2006-07. However, pursuant to legislation also adopted by the Legislature in 2006, only $5.8 billion in 2008-09 franchise tax revenue — the estimated amount that would have been collected under the previous franchise tax law — will be available for general-purpose spending. As described below, the remainder will be dedicated for school property tax relief.

In 2006, the 79th Legislature, 3rd Called Session enacted HB 2, which established provisions for dedicating part of the franchise tax revenue collected under HB 3 to the Property Tax Relief Fund. The dedicated revenue is the amount collected under the taxable margin based tax that exceeds the amount estimated to be collected under the prior capital and earned surplus based tax. For the 2008-09 biennium, the amount estimated for the Property Tax Relief Fund from the franchise tax is $6.1 billion.

Motor Vehicle Taxes

The state's principal motor vehicle taxes consist of the motor vehicle sales and use tax, the motor vehicle rental tax, and the manufactured housing sales and use tax. Like the general sales tax, motor vehicle taxes respond to changes in the state's economic growth and reflect both changes in the number of vehicles purchased and changes in price.

Combined, motor vehicle taxes are expected to generate $6.3 billion in 2006-07, up 13.6 percent over the $5.6 billion collected in 2004-05. Throughout most of 2006, manufacturer and dealer price incentives continued to lure prospective buyers into showrooms. While preferences began to switch from trucks and SUVs to smaller and more fuel-efficient vehicles, new model offerings and various financing and lease incentives kept consumers buying. Any slack in consumer demand was taken up in business fleet purchases, which blossomed in late summer 2006.

As the economy continues to soften, the outlook over 2007-09 is for much more modest increases in motor vehicle sales tax revenue. As a group, motor vehicle taxes are expected to contribute $6.9 billion to state revenue in 2008-2009. Although this is still up 8.7 percent from the preceding biennium, the rate of increase is down 36 percent, when compared to the 13.6 percent growth rate for 2006-07.

In addition, pursuant to HB 2 and HB 4, 79th Legislature, 3rd Called Session, an additional $8.6 million in motor vehicle sales tax revenues in fiscal 2007 plus $25.2 million in 2008-09 will be made available for school property tax relief. The additional funds will derive from the new "presumptive value" calculations required by HB 4 for the purpose of calculating motor vehicle sales tax liability for vehicles sold in private-party transactions, effective October 1, 2006.

Oil and Gas Severance Taxes

These taxes consist of the oil production tax, levied at 4.6 percent of value; the natural gas tax, levied at 7.5 percent of value; and the oil regulation tax, levied at 3/16th of one cent per barrel of oil produced in the state.

Severance tax collections are the product of two factors: production and price. Texas oil production peaked more than a quarter century ago, in 1972, when it reached 1.26 billion barrels. Since then, oil production has declined, falling to 348 million barrels in 2005. Beginning in 2002, the taxable oil price took on an upward path, rising from $17.54 in January to an all-time monthly high of $69.82 per barrel in July 2006. Persistent threats of supply disruptions abroad, hurricane-related production losses in the Gulf of Mexico, diminished excess production capacity, and growing global demand all worked to push the fiscal 2006 taxable price to an all-time average annual high of $61.12 per barrel. In turn, oil production and regulation tax revenues increased to $862 million for fiscal 2006, the highest level in 21 years, and triggered the constitutional transfer of $247 million in revenues to the Economic Stabilization Fund — only the third time that this has occurred with respect to this tax.

Because of the continuing trend of production declines and expected lower prices in the near term, oil production and regulation taxes are anticipated to generate $1.4 billion in revenue for 2008-09, compared to $1.6 billion in 2006-07, a 13.6 percent decline.

Taxable natural gas prices continued to rise in fiscal 2006 to $7.06 per Mcf, 29.8 percent over the fiscal 2005 price of $5.44. Much of the price increase occurred in the third and fourth quarter of 2005 — as a result of hurricane Katrina — induced production losses in the Gulf of Mexico. Prices began to fall in the second quarter of 2006 due to reduced demand from the hurricane-damaged industrial sector and one of the warmest Januarys on record. Over the second and third quarters of 2006, record levels of natural gas were injected into storage. Fiscal 2007 prices are projected to decrease to $6.02 per Mcf as the storage overhang continues to exert downward pressure on prices through the winter.

Prices are expected to rebound in late fiscal 2007 and early fiscal 2008 as storage volumes are worked off, Canadian imports decrease, and minimal additions are made to LNG supplies, only to decrease later in fiscal 2008 and throughout most of fiscal 2009 as the economy continues to cool and global competition in the petrochemical sector exerts downward pressure on prices.

A special note must be given to the tight-sand gas reservoir known as the Barnett Shale, which currently spans 16 counties in the Fort Worth Basin and accounted for 9 percent of Texas gas production in 2005. As of December 2006, Texas Railroad Commission (RRC) records show a total of 5,477 gas wells operated by 165 producers, producing approximately 1.5 billion cubic feet per day. A significant portion of this gas is produced in an area designated by the RRC as a high-cost gas, tight-sand formation.

To encourage exploration and drilling in tight sand formations, the Legislature created a temporary incentive program in 1989, later made permanent in 2003. Under the program, producers are allowed to apply for severance tax refunds on qualifying high-cost gas production for which taxes were paid. Given the expected exploration activity in the Barnett Shale, additional natural gas tax refunds on the order of $80 million are expected over the three-year period 2007-09.

Natural gas tax receipts are expected to total $3.5 billion in 2008-09 — down 15.1 percent from the $4.1 billion collected in 2006-07.

Insurance Taxes

Most of the insurance that is purchased in Texas is subject to two types of taxes: insurance premium taxes and insurance maintenance taxes. While the tax base for each is generally the amount of gross premiums written, the rates vary depending upon the type of insurance.

Insurance maintenance taxes are used to fund regulatory costs, and the tax rates are adjusted annually based on each regulatory agency's appropriation and unexpended balance from the previous year. Insurance premium tax collections are deposited into the General Revenue Fund and are thus available for general purpose spending. Property and casualty (P&C) insurance is taxed at a 1.6 percent rate, and title insurance is taxed at 1.35 percent. The rate for life, accident, and health (LA&H) insurance is 1.75 percent, which also applies to HMO gross revenues.

Compared to the 8.1 percent biennial increase registered in 2004-05, insurance tax collections have been climbing at a much more modest pace in recent years. For 2006-07, insurance tax revenues are expected to rise by just 3.6 percent, to $2.5 billion, followed by a 3.0 percent increase, to $2.6 billion, in 2008-09.

One major factor behind the declining growth rates has been the recent "softening" in the P&C market, which has recorded high investment gains, and relatively low losses, post-Katrina for homeowners insurance, and even lower for auto and workers' compensation lines. As the market softens, insurers compete more vigorously for premiums and market share, and premiums either rise more slowly or fall. The competition for premium dollars has also shown up with life insurance, where advances in heath care and longevity have also worked to lower losses.

In contrast, health insurance premiums have continued to rise — albeit a little more slowly — with the ultimate effect of causing an increasing number of employers to either drop group coverage or to switch to plans characterized by lower premiums and higher deductibles and other employee out-of-pocket costs. In addition to these downward pressures on taxable premiums, insurers will be able to defray a larger portion of their premium tax liabilities over the next several years through the application of tax credits for recent guaranty fund assessments made in 2005 and 2006.

Tobacco and Alcoholic Beverage Taxes

Cigarettes, which account for the great majority of tobacco tax revenue, have been taxed at the rate of $0.41 per pack of 20 cigarettes since 1990. Pursuant to HB 5, passed by the 79th Legislature, 3rd Called Session, the tax rate rose by an additional dollar to a total of $1.41 per pack effective January 1, 2007. This tax increase, ongoing health concerns, and the increasing number of municipal restrictions on smoking are all expected to exert a significant downward force on consumption and, in turn, associated tax revenues.

In 2004-05, cigarette and cigar/tobacco products tax collections totaled $1.1 billion, 1.0 percent above the amount collected in the previous biennium. In response to the increase of the cigarette and cigar/tobacco products taxes effective January 1, 2007, total (all funds) combined collections of both taxes in 2006-07 are expected to increase by 43.4 percent to $1.6 billion. As with the franchise tax, discussed above, only the amount attributable to the tax rates effective before HB 5 — a relatively flat $584 million in fiscal 2007, is estimated to be available for general purpose spending, while the remainder — $496 million — will be dedicated for school property tax relief pursuant to HB 2, 79th Legislature, 3rd Called Session.

For 2008-09, when the tax rate increase will be in effect for the entire biennium, total (all funds) combined collections of both taxes are expected to rise by 54.8 percent, to $2.5 billion. Of this amount, a still flat $1.1 billion will be available for general purpose spending, and $1.4 billion will be dedicated for school property tax relief.

Texas imposes several alcohol taxes. Most of these taxes — for beer, liquor, wine, and malt liquor (ale) — are based on the volume or quantity sold. Only the tax on mixed beverages, levied at 14 percent of gross receipts, is value-based.

By far the largest of all alcohol taxes, the mixed beverage tax is expected to raise $1.1 billion in 2008-09 (10.4 percent above the $1.0 billion expected for 2006-07) and account for three-quarters of all alcoholic beverage tax receipts during the biennium. Collections from the beer, liquor, wine, and malt liquor (ale) taxes are expected to show more modest growth. As a group, all alcoholic beverage taxes are expected to generate $1.5 billion in 2008-09, up 8.8 percent from $1.4 billion estimated for 2006-07.

Motor Fuels Taxes

In fiscal 2006, year-to-year gasoline tax collections actually decreased (for only the second time since 1991), albeit by a minute 0.1 percent. The decline was solely attributable to cutbacks in demand in response to the summer spike in gasoline prices. In contrast, diesel fuel tax collections rose by 9.1 percent during the year, due in large part to the vigorous state and national economies.

After deducting for transfers to the State Highway Fund, motor fuels tax revenues for the 2006-07 biennium are expected to rise by 2.7 percent to $1.6 billion, in contrast to the 4.4 percent increase registered in 2004-05. For 2008-09, the corresponding general revenue – related amount is expected to rise by 5.2 percent, to $1.7 billion, as fuel prices moderate. Diesel fuel consumption should continue to grow much faster than gasoline consumption.

Utility Taxes

Late summer 2005 hurricane activity in the Gulf of Mexico forced Texas and Louisiana oil refineries and natural gas processing plants to shut down for an extended period, causing temporary shortages of petroleum and natural gas across the nation. These shortages in turn drove up already high petroleum and natural gas prices. While the electric utility market remains fairly competitive, high feedstock prices have raised production costs, which ultimately show up in taxable receipts.

Investor-owned utilities pay several taxes on their gross receipts. Of these, the gas, electric, and water utility tax is the largest, and it showed the greatest impact from hurricane-related interruptions of natural gas and fuel oil supplies. Compared to the $632 million collected in 2004-05, revenues from this source are expected to reach $805 million in 2006-07, a 27.3 percent increase. Looking at 2008-09, however, falling energy prices are expected to cause a 12.2 percent decline in these revenues, to $707 million.

Public utility gross receipts assessments (which are paid by electric and telecommunications utilities) and gas pipeline tax revenues are expected to exhibit similar growth patterns: sharp rises in the current biennium followed by declines in 2008-09, a direct result of falling energy prices.

Overall, combined utility tax revenues are expected to show a 26.7 percent biennial increase in 2006-07, yielding $933 million, largely because of higher energy costs from natural gas or electricity generated from natural gas and fuel oil. The outlook for 2008-09 will shift, with total utility tax receipts expected to fall 12.1 percent to an estimated $820 million, due to declining natural gas and crude oil prices.

Hotel Occupancy Tax

Following the 4.9 percent downturn in 2002-03, hotel occupancy tax revenues rebounded by 9.2 percent in 2004-05, reaching $501 million, as tourism and business travel picked up in response to the improving national and state economies. As the economic growth continued to pick up steam through 2006, revenues jumped, to the point where total collections for 2006-07 are expected to jump 27.3 percent, yielding $638 million. Given the more modest, but sustained economic growth forecast for the upcoming biennium, hotel occupancy tax revenues are expected to follow suit, rising 11.2 percent to $709 million in 2008-09.

Inheritance Tax

Beginning in calendar 2005, the state inheritance tax ceased to be levied, pursuant to changes in federal tax law in 2001. The federal law, which began decreasing state revenues in fiscal 2003, reinstates the state and federal taxes in 2011, unless the federal provisions eliminating the tax are extended. Although Texas no longer imposes a tax on estates, minimal revenue from past due returns, audits, and payout agreements continue to be collected. The inheritance tax generated $13.4 million in fiscal 2006 — a 96.0 decrease compared to fiscal 2002, the last full year of collections before the change in federal law. For the 2006-07 biennium, the tax is estimated to bring in $15.6 million, falling to zero in 2008-09.

Non-Tax Revenue

In addition to the $67.7 billion in tax revenue estimated for the 2008-09 biennium, the state's general revenue-related funds are expected to collect $9.8 billion in non-tax revenue. This represents an 8.8 percent decline from the $10.8 billion in non-tax receipts estimated for 2006-07. Non-tax revenue comes from the total return distribution from the Permanent School Fund to the Available School Fund, state lottery proceeds, fees, and other sources.

Interest and Investment Income

For 2006-07, interest and investment income is expected to rise 8.5 percent over 2004-05 collections, from $1.7 billion to $1.8 billion. This increase was driven largely by the particularly strong performance in fiscal 2006, which saw not only higher interest rates but larger general revenue-related balances. In the next biennium, however, interest and investment income is expected to decrease by 19.0 percent to $1.5 billion. The $22.9 billion Permanent School Fund produces most of the investment income accruing to general revenue-related funds, but the Permanent School Fund will base its distribution to the Available School Fund on a rate of 3.5 percent in the upcoming biennium instead of the 4.5 percent rate used in the previous biennium.

Lottery Proceeds

In fiscal 2006, overall Texas lottery sales increased by 3.1 percent, with instant tickets, which accounted for nearly 76 percent of total dollar sales, posting a 5.8 percent sales increase. For all game types combined, Texas lottery sales totaled $3.8 billion in fiscal 2006, of which $1.03 billion was transferred to the Foundation School Fund. Lottery transfers to the state are projected to grow at about the same rate as the state's population, totaling $2,130 million in 2008-09, virtually unchanged from the estimated $2,073 million in 2006-07.

Fees and Other Revenues

In addition to the long-established and ever-increasing variety of fees for transportation and the conduct of certain professions and businesses, this category includes a disparate group of revenues including tobacco settlement proceeds, unclaimed property, third-party payments from private vendors in the state-federal Medicaid program, and federal payments to the state for treating indigent patients. For 2006-07, this category is estimated to show a dramatic 35.0 percent biennial increase, propelled largely by increased professional, court-related costs, and fines — particularly state traffic fines. Because of expected declines in federal funds and tobacco settlement payments, total revenues in this category are estimated to drop 9.1 percent in 2008-09, to $6.2 billion, compared to the $6.8 billion expected for 2006-07.

In fiscal 1999, Texas began receiving regularly scheduled court settlement payments from tobacco product manufacturers. Beginning in 2000-01, payments were adjusted for changes in the national consumer price index and the settling tobacco companies' U.S. cigarette sales and domestic operating profits. In 2008-09, Texas tobacco settlement receipts are expected to total $936 million, a 9.1 percent decline from the $1,030 million expected in 2006-07.

Future tobacco settlement payments may be affected negatively by the cigarette tax increases imposed recently by Texas and other states (and their local governments). The resulting higher consumer prices are likely to accelerate the national decline in cigarette consumption, reducing the sales volume of the settling cigarette manufacturers and thereby causing lower settlement payments.

Fiscal 2006 saw the addition of the telecommunication utility/commercial mobile service provider assessments as a new general revenue source. Previously deposited in GR Account 0345 – Telecommunications Infrastructure, the 79th Legislature, Regular Session, redirected the deposit of the assessments into the General Revenue Fund 0001.

These assessments were originally adopted in 1997 by the 75th Legislature to provide grants and loans to purchase equipment and improve the telecommunication infrastructure for programs such as distance learning, library information sharing and telemedicine or tele-health services. Currently, the assessments are appropriated to the Texas Education Agency for the technology allotment. Only modest revenue growth is expected for this source: for 2008-09, the assessments are estimated to generate $422 million, up 0.5 percent from the $420 million estimated for 2006-07.

With respect to federal payments, after falling by a sharp 26.9 percent to $528 million in 2006-07, revenues from the Disproportionate Share Program, which helps pay for indigent care at state and local hospitals, are expected to fall again, by 16.8 percent, to $439 million in 2008-09.

Since fiscal 2005, the increasing diversion of potential state Disproportionate Share funds to the closely related Upper Payment Limit Program, which pays eligible health care providers at the generally higher Medicare — rather than Medicaid — rates for each procedure, has and will continue to significantly reduce state Disproportionate Share revenues.

Like Disproportionate Share, state vendor drug rebates from major pharmaceutical manufacturers participating in Medicaid's vendor drug program are also on the decline, as Medicare (rather than Medicaid) assumes responsibility for providing prescription drugs to low-income senior citizens. For the first time in eight years, the general revenue portion of Medicaid-related vendor drug rebates fell — by 8.0 percent — in fiscal 2006, with the consequence that revenues in 2006-07 are expected to climb by only 1.8 percent over 2004-05 receipts. As older Texans increasingly turn to the Medicare prescription drug program, the general revenue portion of Medicaid vendor drug rebates is expected to fall by another $57 million, or 11.5 percent, to $441 million in 2008-09.