Inside the State’s Record RevenueA Once-in-a-Lifetime Opportunity

By Brynne Harder Published May 2023

The Comptroller’s Biennial Revenue Estimate in January showed $188.23 billion for general purpose spending in the 2024-25 biennium. That is a record amount of funds available to the 88th Texas Legislature with which to fund government services under a constitutionally required balanced budget.

In this case, one record leads to others. The state also is setting records for the largest biennial ending balance (of $32.7 billion for 2022-23) (Exhibit 1) and the largest balance of the Economic Stabilization Fund (ESF), which is projected to reach the constitutional cap for the first time. A biennial ending balance is a surplus at the end of a budget cycle, and the ESF, also known as the Rainy Day Fund, serves as a piggybank for the Legislature to use during lean budget times or for special purposes.

In short, this is an unusual economic situation.

To know how this happened, it’s helpful to know where Texas’ money comes from (Exhibit 2).

The various taxes and fees collected in Texas fall into a few general groupings. More than half of the state’s tax revenue comes from sales tax: the extra cents per dollar added on to items purchased every day. Since April 2021, monthly collections have exceeded $3 billion. That’s another first for the state.

In an economy like this one, we can’t ignore other taxes. Many tax revenue categories reached their highest collections on record, leading to the largest one-year increase in total tax collections as compared with the prior fiscal year, for fiscal 2022.

A couple of factors had a larger-than-normal role in contributing to these increases: inflation and volatility.

Inflation

The increase in sales tax revenue was partially due to many of us buying more. On top of that, we’re all spending more because of rising inflation. The inflation rate, as measured by the Consumer Price Index, started increasing above 2 percent in 2021. The April 2021 inflation rate would be the largest 12-month increase since 2008, and the inflation rate in June 2022 reached a 40-year high at 9.1 percent. The inflation rate started inching down after that while also remaining persistently elevated on average.

As a result, an extra $6.7 billion went to Texas’ sales tax collections from April 2021 to December 2022. In Exhibit 3, this is represented by looking at the difference between current dollars and constant dollars. The greater the distance between the two lines, the more sales tax revenue is being added because of inflation.

Tax Volatility

All taxes have some level of volatility. Because taxes are calculated as a percentage of the price of goods sold, tax totals are dependent on how much we’re paying for items and how much we’re buying.

But where volatility becomes pronounced is with severance taxes, which are imposed on oil and natural gas extraction. To see this, click on “severance taxes” in Exhibit 4’s key. Without severance taxes, the different categories show large swings up and down. But zoom out by clicking on severance taxes again and their volatility is overshadowed.

Fiscal 2022 collections could make even severance taxes’ usual volatility look tame. From only September to March, collections were higher than in all fiscal 2021. For the full fiscal year, they’d increased 116 percent over the previous year.

Tax volatility for oil and natural gas is due to both production and prices. In the last nine years, some of the highest and lowest prices were recorded. At least some of the fluctuation was in response to global events that occurred over just the past three years. Oil prices reached a record low of negative $37.63 in 2020, and natural gas reached its second-highest price on record of $9.32 in 2022.

As witnessed, immense changes to the economy can happen quickly. Still, a confluence of world events leading to record tax collections isn’t likely to happen again. For now, there is lots of speculation on how the money will be or should be spent.

“There are many priority items in need of investment: property tax relief, broadband access, electric grid reliability, and salary adjustments for teachers and nurses to name only a few. However, prioritizing these and making smart spending decisions is equally important,” says Comptroller Glenn Hegar.

Explore the Topic Further

Read the full 2024-25 Biennial Revenue Estimate.

Look through more interactive graphics on revenue collections, inflation, volatility and the Economic Stabilization Fund all as part of the BRE.

Watch an explainer on inflation basics and factors that contribute to changes in gasoline prices in the It’s simple. Kind of … video series.

Learn more about Texas’ Rainy Day Fund as it approaches its constitutional cap in Fiscal Notes.