Texas state revenues rebounded in fiscal year 2026, with stronger tax collections pointing to a resilient economy and a more favorable near-term budget outlook than state projections suggest. But growing uncertainty over federal funding could complicate the state’s finances in the years ahead, according to a new working paper from experts from the Center for Tax and Budget Policy at Rice University’s Baker Institute for Public Policy.
The analysis, Texas Revenues Modestly Rebound in Fiscal 2026, by John Diamond, Bill King and Joyce Beebe, finds that total state revenue increased 3.2% to $188.9 billion in fiscal 2026, following two years of little or no growth. Tax collections rose faster, increasing 4.8% to $88.2 billion — $1.6 billion above the Texas comptroller of public accounts’ forecast.
Diamond, King and Beebe conclude that the comptroller’s $178.3 billion revenue estimate for fiscal 2027 is likely too low. Stronger tax receipts, a newly approved $7.5 billion federal reimbursement and potentially higher oil and gas production tax collections could improve the state’s near-term fiscal position.
However, the paper cautions against treating those gains as a permanent increase in available revenue, particularly as changes in federal health care and nutrition assistance funding threaten to shift costs to Texas beginning in fiscal 2028.
Sales tax collections provided the clearest evidence of the state’s economic momentum. Receipts increased 6.5% to $52.2 billion in fiscal 2026, accounting for nearly 60% of all state tax collections. After adjusting for a 3.4% increase in the consumer price index, sales tax revenue grew approximately 3% in real terms.
Growth extended across consumer- and business-facing industries. Retail trade generated the largest dollar increase, while construction, utilities, information and services recorded faster percentage gains.
September 2026 collections offered further evidence of strengthening activity with sales tax receipts up 11.5% from the same month a year earlier. The paper also points to a pipeline of planned investments in data centers, advanced manufacturing, electric transmission, water systems, health care and other infrastructure that could support future economic activity and taxable purchases.
The paper notes important limitations to the outlook. Researchers cannot isolate data center construction’s specific contribution to sales tax growth, and some equipment purchases at qualifying data centers are exempt from state sales taxes. In addition, higher prices associated with tariffs and other input costs may account for some nominal revenue growth.
Oil and natural gas production taxes also increased, reaching $8.3 billion in fiscal 2026, up 5.7% from the previous year. But receipts remain volatile, reflecting changes in commodity prices and production. If oil prices remain above the $66-per-barrel assumption underlying the state’s fiscal 2027 estimate, oil production tax collections could exceed expectations.
Federal receipts remain Texas’ largest single revenue source, totaling $61.1 billion, or 32.3% of all state revenue, in fiscal 2026. That dependence creates both an opportunity for near-term revenue gains and a significant longer-term risk.
The comptroller’s fiscal 2027 estimate projects federal receipts of $55 billion, but it predates two developments: approval of a $7.5 billion reimbursement for Texas’ border security costs and a $281.3 million first-year award through the federal Rural Health Transformation Program.
The border reimbursement, approved in September 2026, would compensate Texas for Operation Lone Star expenses already incurred. The comptroller said the funds would be deposited in the state treasury and available for appropriation in January 2027.
Including the reimbursement alone would raise projected fiscal 2027 revenue to approximately $185.8 billion, according to the paper. That would put revenue just 1.6% below fiscal 2026 levels, rather than the 5.6% decline implied by the published estimate.
Yet the reimbursement is a one-time payment, not a recurring source of revenue. Meanwhile, federal policy changes could reduce funding for Medicaid and the Supplemental Nutrition Assistance Program (SNAP), potentially leaving Texas responsible for a greater share of program costs.
The researchers also identify declining health-related receipts as a concern. Revenue from state health service fees and rebates fell 16.6% in fiscal 2026 to $11.7 billion, largely because Medicaid managed-care refunds declined. Further changes to federal Medicaid financing could put additional pressure on these receipts and associated federal funding.
Texas enters the coming budget period in a comparatively strong position. The state’s October 2025 revenue estimate projected $203.6 billion available for general-purpose spending during the 2026-27 biennium, including balances carried forward from the previous period. It also projected a $28.5 billion ending balance in the Economic Stabilization Fund for fiscal 2027.
The team argues that this financial cushion, combined with stronger tax collections and anticipated investment, gives the state room to respond to the recent revenue slowdown deliberately, while still looking for opportunities to trim spending in preparation for a longer-term tightening of the budget.
But they recommend that lawmakers distinguish temporary revenue gains from recurring resources when developing future budgets. In particular, the state should avoid using the one-time federal reimbursement to fund permanent spending commitments and preserve sufficient reserves to absorb economic volatility and possible reductions in federal support.
The central challenge, the paper concludes, is balancing a favorable near-term economic outlook with the possibility of a more constrained fiscal environment. Texas’ revenue rebound provides a foundation for continued investment, but prudent budgeting will require preparing for a future in which federal funding may no longer support state programs at current levels.