The Lone Star State Not Alone Regarding Looming Fiscal Challenges

After several years of healthy budget surpluses, states are gearing up to address a more restrictive fiscal environment. The budgeting challenges are not severe at this point, but they are numerous – and noteworthy. These issues include: 

• The phasing out of pandemic funding
• Dwindling rainy day funds
• Stagnating sales tax revenue
• Decreasing consumer spending
• The need to fund a spate of in-place and upcoming property tax cuts

Each of these trends, of course, ultimately affect indirect tax policy-making. If fiscal environments pose challenges, local governments are likely to consider sales tax rate increases. On their part, state governments appear more likely to consider ways to broaden the tax base (e.g., by subjecting more services to sales tax or by enacting new forms of digital taxes). 

Texas is a notable example of several of these trends. In fiscal 2024, the state’s All Funds revenue account (which includes federal income) stood at $181.12 billion, down 3.6 percent from fiscal 2023, according to a report from the Texas Comptroller’s office. Yes, this is a minor pullback, but it’s likely a  sign of things to come. All Funds tax collection held roughly steady at $81.87 billion, down 0.3% from fiscal 2023.

Declining federal transfers are a major contributor to the revenue dip. Through February 2025, Texas received $85 billion in federal pandemic-related funds, according to a study by the Baker Institute. The state’s overall federal income peaked at around $82 billion in 2021 but contracted to about $59 billion in 2024.

Texas legislators have anticipated a decline in revenue, and there is currently no indication of urgent concern. In fact, legislators are pressing ahead with a slate of property tax cuts. In 2023, the state leveraged a hefty surplus to fund an $18 billion reduction in property taxes. In November 2025, voters will be asked to approve an extension of the reduction plus a further round of cuts, bringing the total reduction to $51 billion.

Many other states are experiencing declines in federal revenue and adjusting their property tax policies. This will likely result in further changes to sales tax rules and rates in order to stabilize potentially precarious budget situations. For example, in Wyoming voters will decide in 2026 on exempting 50% of a primary residence’s assessed value from property taxes, while in Tennessee, a proposed constitutional amendment would prohibit the state from imposing property taxes.