Today, Texas Comptroller Glenn Hegar released his office’s Biennial Revenue Estimate (BRE) for the 2026-27 biennium. This estimate tells the Legislature how much tax revenue they are expected to have at their disposal over the next two fiscal years; it’s a crucial number for lawmakers to consider as they begin to prepare the state budget. The BRE release fulfills one of the comptroller’s core constitutional responsibilities and marks the session’s unofficial kick-off.
Beyond providing the actual revenue estimate, the BRE also offers a short yet comprehensive economic analysis, summarizing tax revenue over the past two years, statutory and other mandated transfers, and the state’s economic outlook.
Questions we had before the BRE (and answers):
- What would the revenue estimate be, and how would it compare to the last biennium? The Comptroller estimates the Legislature will have $194.6 billion available for general revenue-related spending in the 2026-27 biennium. This is a decrease of about 1.1% from the 2024-25 biennium.
- What would the carryover balance (surplus) be? The Comptroller had previously estimated that the carryover balance would be around $20 billion. The official estimate given today is $23.76 billion. While smaller than last biennium’s $32.7 billion, it’s still a lot of money.
- What would Hegar say about the state economy in general, the possibility of a recession, or the impacts of possible tariffs or other federal policies that may be enacted by the Trump administration? As usual, Hegar was reluctant to make sweeping predictions. But he emphasized that any policy changes implemented by the incoming administration would likely be gradual enough that the state could respond appropriately.
- Would any tax revenue sources be higher than anticipated or otherwise unusual? Once again, sales taxes are high; though inflation has moderated, the sales tax base is simply larger now. Hegar once again called out the sharp rise in insurance tax collections, attributing that to higher prices of goods, services, and real estate in Texas.
- Would there be any interesting updates about the status of the rainy day fund, which has ballooned in recent years and is expected to hit its statutory cap this year? Hegar presented lawmakers with some policy options, including raising the cap, redirecting funds, or even reducing severance taxes.
The Revenue Estimate
The main purpose of the report is to provide the Comptroller’s estimate of tax revenue to be collected over the next biennium (fiscal years 2026-27). After accounting for certain required transfers, Hegar announced that $194.6 billion will be available for general revenue-related spending in the next budget. The total available, including federal and other special funds, is $362.2 billion.
The estimate also confirms the amount of cash carryover from the previous biennium (or the “surplus”) is $23.8 billion. From Comptroller Hegar’s prior testimony during interim committee hearings in the fall, this is about what we expected. Though some call this a “surplus,” we know this positive balance only exists because of ongoing, chronic underinvestment in our state’s people and services.
The limit asserted in the BRE is important, but it’s just one of five different constitutional and statutory limitations lawmakers will have to observe as they write the budget this session. Comptroller staff must make informed projections about trends and the state of the Texas economy to produce a reasonable estimate. The number provided by the comptroller is only an “estimate” because it tallies future revenue expected to be collected during the next budget cycle – Sept. 1, 2025 through Aug. 31, 2027. Because the budget is “pay-as-you-go,” at the end of each biennium, adjustments must always be made to correct for actual revenue collections during that time.
The ESF (Rainy Day Fund)
At a projected value of over $27 billion at the end of fiscal 2025, Texas’s Economic Stabilization Fund (ESF) is the largest rainy day fund in the country. As a percentage of spending, it’s 26.6% (about 12 points) higher than the national median of 14.4%. States across the country have been adding to their rainy day funds, according to the National Association of State Budget Officers (NASBO), due to rising inflation and tax revenue collection during the pandemic. The ESF receives most of its revenue from severance taxes, but is expected to hit its statutory cap this year. That means future transfers will go to General Revenue instead unless funds are spent from the ESF.
By the end of 2026-27, the Comptroller projects the ESF to be $28.5 billion. As Hegar pointed out, the Legislature could decide to change the policy regulating deposits to the rainy day fund by either raising the cap or redirecting more of severance (oil and gas) taxes to general revenue or other funds. Yet he reiterated the importance of maintaining a sizable rainy day fund sufficient to weather downturns in the state economy. He also notes that the invested portion of the ESF generates about $1 billion per year in investment income.
State Tax Revenue
In total, the Comptroller projected general revenue-related tax collections of $155.4 billion over the 2026-27 biennium. Of that, over 60% represents sales tax revenue, our largest state revenue source.
Sales Tax
Sales tax revenue rose sharply in all states during the pandemic, and as inflation moderates so too will that increase in revenue. Yet the BRE projects continuing growth of about 9 percent, with 2026-27 sales tax collections of $94.24 billion. Because Texas relies so heavily on our sales tax for state-sourced revenue, we have the seventh-most regressive tax system in the country. This means that lower-income Texans pay a much higher portion of their income in sales taxes, while upper-income Texans tend to spend more on savings or untaxed services. In fact, ending exemptions for business and professional services alone could bring in another $10 billion every biennium, according to the Comptroller’s 2023 Tax Exemption and Tax Incidence report. Those exemptions have not been modified since 1987.
Franchise Tax
The franchise tax is our primary business tax. With the Comptroller projecting modest and steady growth, the BRE suggests that franchise tax revenue collection will rise 10.9% this biennium to $15.67 billion. Although it’s been stable, it’s worth noting that gradual cuts to it, made most recently in 2015, are a prime example of the steady erosion of our tax base. When the franchise tax was cut in 2015, it turned from our second- to fourth-largest tax revenue source. In particular, that cut meant less money for schools. Businesses benefit from state services, and they should pay their fair share.
Severance Taxes
These are taxes paid on the extraction of oil and gas. Our most volatile state taxes, these are often subject to wide variations because of fluctuations in energy supply and demand. The BRE, however, projects fairly stable oil prices around $70 a barrel for the next two years, with associated tax collections around $11.84 billion. As for natural gas, the report projects a significant rise in natural gas demand because of electric power needs (prompted in part by AI and cryptocurrency data centers in Texas) and natural gas tax revenue for 2026-27 is expected to increase by 25.5% to $5.35 billion.
Insurance Taxes
Insurance tax collections rose sharply in the 2022-23 biennium, a sign that things are changing fast in the insurance market. The BRE states that insurance premium tax collections grew dramatically, by 15.5% in 2022 and 31.1% in 2023. Since then, growth has gradually declined – up 16.1% in 2024-25 and 10.5% in 2026-27, with a final revenue projection for the next biennium of $9.21 billion. As natural disasters become more frequent and more expensive, repairs become more costly, and our state infrastructure suffers from aging and neglect, insurance is of increasing concern for everyday Texans and the state alike.
Property Taxes
Property taxes are not state taxes, so the BRE does not address them directly. But Hegar did refer several times to the housing affordability crisis that Texas faces. As we begin another session, more property tax cuts are on the table to try to deal with that crisis. However, these are permanent cuts that will cause harm to our public education system and local governments. If we give away too much now, we won’t have reserves when we need them. While some Texans are undeniably still struggling with property taxes, the Legislature has options to keep property taxes lower, or target them for greater equity, rather than across-the-board cuts like last time. This session, any property tax cuts should be reserved for the lowest-income Texans and for renters, who were not directly helped by last session’s cuts.
Federal Revenue
With the pandemic behind us, the Legislature will no longer be able to rely on the temporary expansions of federal funding. Our public schools, health care agencies, state housing agencies, criminal justice agencies, and more will see less federal revenue than they did during and after the pandemic even though demands on those agencies’ resources will not change. Federal funding peaked at 48% of total net revenue in fiscal 2021 but has now returned to its pre-pandemic level of around 30%. This is likely to put pressure on the Legislature as they contend with less federal support.
According to Pew Research Center, Texas’s federal spending rose more than 71% over prior levels during the pandemic. Indeed, via the six primary federal COVID-19 aid bills alone, Texas had received nearly $86 billion as of Aug. 31, 2024. One major example is the extra funding for public schools provided via the Elementary and Secondary School Emergency Relief Fund (ESSER), which gave Texas education agencies and school districts approximately $20 billion. Federal funding is likely to remain elevated for a number of years as investments continue from the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA).
Economic Outlook
As part of the BRE, the Comptroller also offers forecasts on state GSP and employment. Hegar is typically conservative in his estimates. This time, his office forecasts no recession and modest growth that will still be higher than U.S. growth as a whole. As for possible changes in trade, tariffs, and taxes with the new presidential administration, Hegar pointed out optimism of business leaders but said that making accurate projections is difficult and policy changes happen gradually.
Next Stop: Budget Bills
With session starting tomorrow, soon we will see House and Senate budget proposals. This year, the Legislature must recognize that the people of Texas are worth greater investments in infrastructure and public goods. After last session’s historic $33 billion balance, we have another opportunity to make those investments.
Much of what legislators did last session was commendable – state worker pay raises, a raise for Medicaid community attendants, paid parental leave for state workers, and a cost-of-living adjustment for TRS COLA. Yet the governor’s obsession with vouchers left schools no better off, and the $18 billion property tax cuts were made too deeply across the board.
We often say that – for now – the Legislature does not have a revenue problem. It has a spending problem. With this sizable revenue estimate for the 2026-27 biennium, we again have a rare opportunity to make up for decades of underfunding, particularly for low-income Texans and communities of color. If we prioritize tax cuts for the wealthy and corporations, we’ll be wasting another rare opportunity for ourselves and future generations.
The budget is our state’s moral document. As a statement of lawmakers’ priorities, it should reflect the priorities of the people. Making investments in our people always brings a great return – in our schoolchildren, our workforce, our public health, and our infrastructure. The state economy depends on a thriving public sector, and the long-term outlook for Texas depends on making these investments.
The People’s Budget is our proactive policy vision for a budget that reflects all of us, offering a roadmap for long-term engagement with communities across our state. Our first round of conversations this year told us we’re on the right track, and now it’s time for the Legislature to listen.
