Texas is facing a shift in its state budget outlook as the days of big surpluses may be over. Over the past few years, the state enjoyed extra funds thanks to federal COVID-19 relief money and a boost in sales tax revenue during the post-pandemic rebound. But now, as federal emergency aid dries up and sales taxes settle back to normal levels, the Texas budget is tightening.
In recent years, federal aid made up a large piece of the state’s income, reaching nearly half of all revenue in 2021. The state received about $85 billion in COVID-related funds through early 2025, which helped Texas build a $33 billion surplus in 2023. That money helped pay for major property tax cuts, new infrastructure projects, and the creation of the Texas Energy Fund. Going into 2025, lawmakers were working with a $24 billion surplus, allowing them to protect previous tax cuts and fund upgrades in energy, water, and broadband.
Now the picture is changing. Texas saw its first revenue drop since 2017, with a 4% decline in the last fiscal year, the steepest since the Great Recession. Early data for 2025 shows some growth but at a slower pace than usual—2.56% compared to an average of 6% annually over the past two decades. The state comptroller predicts very little revenue growth in the near future.
Lawmakers say they expected this downturn. State Senator Paul Bettencourt of Houston said the Legislature is ready to keep the budget balanced and make only sustainable commitments going forward. He stressed caution around new tax cuts and avoiding overextending the budget.
Texas faces challenges beyond federal fund declines. Sales tax, its second-largest revenue source, is influenced by consumer spending, which has been uneven in recent years. Sales tax fell sharply during the pandemic but bounced back with strong growth in 2021 and 2022, helped by inflation and reopening. However, the economy is slowing, and factors like tariffs and potential drops in oil and gas demand add uncertainty. Oil and gas taxes make up just under 5% of state revenue, so shifts there also matter.
At the local level, cities like Houston, San Antonio, Dallas, Austin, and Fort Worth are also dealing with budget gaps as their own COVID relief funds run out, and inflation pushes up costs for essentials like staffing and facilities. Raising revenue has become tougher in Texas for governments across the board.
Despite these pressures, the state has been cautious with its extra funds. It focused spending on one-time projects like infrastructure improvements and seed money for energy and university programs rather than recurring expenses. Experts note this approach helps avoid hitting a “fiscal cliff” when the federal money ends.
Senator Joan Huffman, who leads budget writing in the Senate, said Texas has used its surplus carefully to invest in the state’s future without creating ongoing budget burdens. Meanwhile, some relief might come if Congress approves federal reimbursements, such as funds tied to Governor Greg Abbott’s border security program.
The era of easy budget surpluses in Texas is behind us. But state leaders seem intent on managing their resources carefully, keeping the budget balanced, and adjusting to a new financial reality without reckless spending. As this unfolds, Texans and their representatives will need to weigh how best to handle tighter budgets in the years ahead.