The new revenue estimate is out: Here’s what you need to know
Earlier this week, Texas Comptroller Glenn Hegar announced that he expects $194.6 billion of state revenue to be available for general-purpose spending in the fiscal 2026-27 biennium. The Biennial Revenue Estimate is an important step in the continuous two-year state budget process and gives initial funding parameters to House and Senate budget writers for the legislative session now underway.
Here are some of our initial takeaways on what the numbers could mean for Texas:
Expected Fund Balance and Steady Revenue Collections Drive Projections
The $194.6 billion in available revenue is, for the second straight budget cycle, substantially boosted by a fund balance, or “budget surplus,” of $23.8 billion carried over from the previous biennium.
A fund balance of this magnitude is possible due in part to a combination of supplemental COVID-related federal aid as well as legislators’ discipline in allocating resources for maintaining state government operations that leaves a sizable portion of the increased revenue from the current and previous budget cycles.
Opportunity to Address Big Issues
This large “surplus” and strong anticipated revenue outlook gives budget writers more flexibility. Similar to last session, this outlook presents an opportunity to strategically and more comprehensively address difficult, long-term challenges like looming water infrastructure and supply issues.
Lawmakers can also address workforce readiness by continuing the work begun in previous sessions on school finance, coordination of education and workforce agencies and community college funding reform to ensure Texas’ educational and workforce systems can meet rapidly evolving labor force needs.
Legislative leaders have signaled interest in pursuing more funding for the Texas Energy Fund, additional property tax relief, as well as for public education. The revenue outlook likely makes these priorities more viable.
Economic Stabilization Fund is Expected to Reach its Cap
Hegar also announced that Texas is expected to reach the $26.5 billion cap on the Economic Stabilization Fund (ESF) more commonly referred to as the Rainy Day Fund, at the beginning of fiscal year 2026.
What would be the immediate impact of hitting the cap? Oil and gas severance tax revenues that would have been transferred to the ESF would go to the general revenue fund instead.
Lawmakers could avoid hitting the ESF cap by directing money from the ESF for other purposes via a supermajority vote.
Even if the cap is hit, though, the ESF will likely continue to grow despite the halting of transfer of severance tax revenue thanks to income earned from the portion of the fund that is invested.
Revenue Drivers and Economic Trends
Texas’ consistently robust economy has driven growth in recent years in the largest source of state tax revenue — sales tax collections.
Hegar referenced other traditional large sources of tax revenue, including motor vehicle sales and rental taxes, severance taxes and franchise taxes. But he drew special attention to the recent acute increase in insurance tax collections.
We wrote about this topic previously, but increases during 2022, 2023 and 2024 were driven strongly by increases in auto and home repair costs as well as the increased incidence and severity of natural disasters. While Hegar expects this trend to cool, he predicts insurance tax revenues to remain elevated but grow more slowly than the past few years.
Spending Limits Set Boundaries
While the revenue outlook looks promising, budget writers will still need to operate within the state’s various statutory and constitutional limits, designed to place boundaries on spending growth.
In practice, the constitutional tax spending limit and statutory consolidated general revenue spending limit will be most relevant for this budget cycle in determining and limiting how much of the projected surplus and anticipated revenue can be spent. LBB members yesterday adopted a projected biennial growth rate of 8.93% for each of these two limits.
This adopted growth rate yields a $120.1 billion cap for appropriations subject to the tax spending limit and a $147.0 billion cap for appropriations subject to the consolidated general revenue limit. Both of these dollar numbers will likely change with any adjustments to FY2024-25 spending levels, as with a supplemental appropriations bill.
Exercising fiscal restraint in addressing the evolving needs of a growing state will continue to be a challenge that lawmakers will have to meet.
The BRE’s release kicks off the part of the two-year state budget cycle where lawmakers weigh in on finalized budget requests from state agencies. Initial drafts of the state budget should be filed in the House and Senate in upcoming weeks, and legislators will begin hearings shortly after on their 1,000-plus page state budget.
At Texas 2036, we will continue to analyze and keep you up to speed on the state budget as it progresses and the implications for Texas in the days and months ahead. Follow us at www.texas2036.org for the latest updates.