Texas lawmakers have gotten used to state budget surpluses. That era may be ending.

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The era of massive state budget surpluses in Texas could be coming to an end.

As the last of the federal government’s COVID-19 emergency funds are spent and sales tax revenues return to historic averages after a large spike, budget analysts say state lawmakers will have far less wiggle room when it comes to funding their spending priorities.

“I don’t think we’re in any kind of crisis, but I think the days of big budget surpluses are probably over,” said Bill King, a fellow in public finance for Rice University’s Baker Institute of Public Policy. “We’re going to be very careful how we spend money.”

In addition to federal pandemic aid, sales tax revenues from inflation and a post-lockdown economic rebound led to state budget surpluses. Texas lawmakers leaned on a $33 billion surplus in 2023 to pay for an $18 billion property tax-cut package, a $5 billion infusion for the new Texas Energy Fund and a host of infrastructure projects. Lawmakers entered this year’s legislative session with a $24 billion surplus, which helped to maintain previous tax-cuts; upgrade energy, water and broadband infrastructure; and cover other new spending items in the upcoming two-year budget cycle.

In fiscal year 2024, however, the state saw a 4% decline in revenue, the sharpest year-over-year decline since the Great Recession, and the first decrease since 2017. The first nine months of fiscal year 2025, which began in September and ends in August, saw 2.56% revenue growth from last year, according to the state comptroller’s office, a figure well below the 6% annual rate of growth the state has averaged since 2003.

The comptroller’s office now forecasts minimal growth in revenue in the coming years.

State Sen. Paul Bettencourt, R-Houston, said legislators have been expecting the dip in revenues and the state is prepared to maintain a balanced budget. He said the large property tax cuts of 2023 were necessary relief for property owners, but the Legislature also limited the amount of new property tax cuts it funded during this year’s session.

“What you’re seeing is we’re going to try to make our long term commitments and make sure they’re sustainable, but we’re also not trying to go overboard either,” Bettencourt said.

Federal funds have long made up about one-third of the state budget, but the pandemic saw a significant increase in those contributions. In fact, federal dollars accounted for 48% of all of the state’s revenue in 2021, according to a study of the state’s income by King and Baker Institute fellows John Diamond and Joyce Beebe.

A total of $85 billion in COVID relief funds had been sent to the state through February of this year, according to the Texas Legislative Budget Board.

The comptroller’s office forecasts further declines in federal funding over the coming years as COVID relief dollars officially run dry and the Trump administration pushes cuts in federal funding to states.

Texas does not collect a state income tax like many other states. Its coffers are filled through a combination of sources that include state sales tax, franchise taxes on businesses and taxes on oil and gas production.

Sales taxes are Texas’ second largest source of revenue, but it has been a turbulent five years of consumer spending. Sales tax revenue declined nearly 18% in 2020 at the beginning of the pandemic. That number rebounded with an 11.7% increase in 2021 before surging by over 30% percent the following year as lockdowns ended, the economy rebounded and inflation drove up sales tax collection, according to the Baker Institute study.

The state’s economy is already projected to slow this year, according to the Federal Reserve Bank of Dallas, and President Donald Trump’s tariffs have introduced further economic uncertainty. Those factors could be a drag on sales tax revenues.

The U.S. Energy Information Administration also expects demand for oil will shrink and gas prices will fall throughout 2026. Both would impact the state’s tax revenue from oil and gas production, which make up just under 5% of the state’s revenue.

Additionally, the Trump administration’s efforts to cut federal spending could hit the state budget going forward.

The state could see some of that money come back its way if Congressional lawmakers approve Trump’s “Big Beautiful Bill,” which could include at least a $12 billion federal reimbursement for Gov. Greg Abbott’s Operation Lone Star, a border security initiative.

The pressures facing the state government’s budget in the wake of the pandemic are not unique.

Cities, counties and school districts across the state are staring down fiscal cliffs as their own COVID relief funds run dry and similar bursts in sales tax revenue cool off. Texas’ five most populous cities — Houston, San Antonio, Dallas, Austin and Fort Worth — all face budget deficits.

“It’s all connected,” said Shannon Halbrook, a fiscal policy expert at the left-leaning think tank Every Texan. “Schools and local governments also have to deal with inflation. As inflation goes up, they have to pay more for their staff, their buildings, their air conditioning, all that kind of stuff is going up for them as well. Meanwhile, we have an environment in Texas where it’s really hard to try to raise revenue.”

Large chunks of the state’s excess funds were spent on infrastructure upgrades to broadband, water and energy, as well as one-time seed money for programs like the Texas Energy Fund and Texas University Fund. Those expenses will not require recurring costs, leaving little impact on the budget without federal COVID relief funds.

“The approach by the state was definitely a little bit more conservative,” said Rahul Sreenivasan, director of government performance and fiscal policy for nonpartisan think tank Texas 2036. “It was not as aggressive as some of the other local jurisdictions' approach to spending it. There’s things you can criticize about both, but the state chose an approach that wouldn’t put them on a path to fiscal cliff when the money runs out.”

When the budget was approved by the Legislature in May, state Sen. Joan Huffman, the Senate’s lead budget writer, touted the approach to budgeting in recent years.

“The Texas economy is the envy of the nation, and the budget will secure our state's prosperity for generations to come,” she said. “We have leveraged our state surplus over several sessions to make targeted, one-time investments without burdening future budgets.”

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