Texas remains flush with cash amid revenue slowdown in Southwest

Kansas Gov. Laura Kelly, a Democrat, called for pumping the brakes on further tax reductions that impact the state’s bottom line.

Bloomberg News

With a $23.8 billion budget balance forecast for the start of its fiscal 2026-27 biennium, Texas’ financial cushion remains plush, but other Southwest states are feeling a fiscal pinch in the wake of tax cuts.

The Lone Star State’s current two-year budget was boosted by a record $39.35 billion surplus, fueled by federal pandemic funding and inflation-boosted sales tax collections, that was $8.7 billion more than the total of the state’s budget balances over the previous six bienniums. Texas Comptroller Glenn Hegar, who dubbed that balance level “a once in a lifetime” event, expects more moderate revenue growth ahead.

The lower upcoming projected balance is still huge with Texas Gov. Greg Abbott boasting his state “has the largest budget surplus of any state in America,” in a post last week on the X platform.

That surplus is sparking talk of further tax relief after the state enacted an $18 billion, state-funded property tax cut in 2023.

In his revenue estimate presentation last week, Hegar noted other states that reported big balances now have deficits, and said Texas, which is nearing a cap on contributions to its hefty rainy day fund, will keep its eye on the horizon to determine what fiscal discipline and responsible government spending will keep the economy moving in the right direction.

Budget stress is looming for Southwest and other states as federal COVID-19 pandemic funding is depleted and a spate of tax cuts drains revenue.

In fiscal 2024, inflation-adjusted tax revenue fell in 40 states compared to fiscal 2023 collections, although collections show signs of stabilization, according to a report this month from The Pew Charitable Trusts.

“Most states saw more moderate annual declines than they did in fiscal 2023, reflecting a return to growth rates more aligned with historical norms after four years of extreme fluctuations,” the report said. “Unlike past revenue declines tied to recessions, this contraction is driven mainly by waning temporary pandemic-related factors and the adoption of widespread tax cuts.”

Texas and New Mexico were in the positive category along with only 10 other states when comparing states’ inflation-adjusted fiscal 2024 second quarter tax collections with their 15-year trend, according to Pew.

New Mexico’s recurring general fund revenue growth is projected to slow partly due to tax cuts after climbing an estimated 12.6% in fiscal 2024.

“As legislative changes to the tax code take effect and economic activity softens, revenue growth is expected to grow 1.6% in FY25 and 2.6% in FY26 before returning to more typical growth of over 3% in FY27 and beyond,” the state’s December consensus revenue estimate report said.

Fiscal 2025 is expected to end on June 30 with $3.92 billion in reserve balances, representing 38.4% of recurring spending. Democratic Gov. Michelle Lujan Grisham proposed a $10.9 billion fiscal 2026 general fund spending plan, which is 5.3% higher than the current budget and pegs reserves at 30.4%.

Kansas tax cuts led to a 4% lower forecast for fiscal 2025 general fund receipts. For fiscal 2026, the receipts are expected to rise 1.2% to $9.845 billion, according to the latest state estimates.

Democratic Gov. Laura Kelly called for pumping the brakes on further tax reductions that impact the state’s bottom line.

“While I would prefer that we postpone discussions about taxes until next session, when we’ll have a better handle on the full impact of the tax cuts we passed last year, I will consider proposals to modify our tax structure that pay for themselves and don’t threaten our state’s long-term financial health,” she said in her State of the State address last week.

Kelly proposed $10.65 billion in general fund spending for fiscal 2026, which is just 0.7% over legislatively approved fiscal 2025 levels.

Colorado officials are bracing for a tight fiscal 2026 budget with Democratic House Speaker Julie McCluskie warning earlier this month about the need for nearly $1 billion in spending cuts.

“As a result, there may be some unpopular decisions ahead — choices that put truly deserving efforts and priorities in competition with each other for funding,” she said in a speech to the chamber.

Colorado’s fiscal situation was exacerbated by voter approval in November of Proposition 130, which requires the state to provide an additional $350 million for the recruitment, training, and retention of local police officers and $1 million death benefit payments to families of officers killed in the line of duty.

Democratic Gov. Jared Polis submitted an amended proposed $46.4 billion all-funds fiscal 2026 budget that includes $18 billion in general fund spending to lawmakers on Jan. 2 and a one-time transfer of $350 million from the general fund reserve that would be paid back in seven annual installments of $50 million.

A Jan. 13 report from the Legislature’s Joint Budget Committee said the move would push the reserve below a 15% statutory requirement.

“If the General Assembly approves proposed transfers of $350 million from the General Fund associated with Proposition 130, then staff estimates that the reserve would fall $352.6 million short of the requirement under the (Legislative Council staff) forecast and $412.8 million short under (Office of State Planning and Budgeting),” the report said.

Arizona’s general fund cash balance estimated at $469 million at the end of fiscal 2025 is projected to fall to $367 million in fiscal 2026, $194 million in fiscal 2027, and $159 million in fiscal 2028, according to the Joint Legislative Budget Committee’s October revenue and budget update.

The state’s budget has been squeezed after lawmakers in 2021 ditched graduated income tax rates for a 2.5% flat rate. In addition, a universal school voucher program adopted in 2022 has proven to be more expensive than expected with 83,032 students enrolled as of Nov. 18.

In her State of the State address last week, Democratic Gov. Katie Hobbs called for guardrails on the program, including “responsible income caps” and greater transparency on how the money is spent by parents and guardians.

In Oklahoma, where bills have been introduced this session to eliminate or cut personal income taxes, authorized general fund revenue is forecast to shrink by nearly $107 million to $8.22 billion in fiscal 2026 from $8.33 billion in the current fiscal year.

The certification of the estimate last month took a dramatic turn when Republican state Attorney General Gentner Drummond refused to participate in a meeting of the Board of Equalization, which is made up of statewide elected officials, and called for more legislative involvement in the process.

“After sitting through several of these meetings, as well as briefings from the governor’s chosen staff, I can tell you that I have no confidence in the accuracy or completeness of the governor’s budget numbers,” said Drummond, who recently announced a bid to replace term-limited Republican Gov. Kevin Stitt in the 2026 election.

The Arkansas Department of Finance and Administration forecast a $310 million revenue decrease in fiscal 2025 due to income tax cuts passed by lawmakers last year. For fiscal 2026, net available revenue is expected to increase by $203 million to nearly $6.8 billion.

Republican Gov. Sarah Huckabee Sanders, who wants to eliminate the state sales tax on groceries, unveiled a $6.49 billion fiscal 2026 general fund budget in November that projects a $299 million surplus.

Republican Utah Gov. Spencer Cox’s $30.6 billion all-funds budget includes $12.1 billion in general fund, income tax fund, and uniforms school fund spending in fiscal 2026 that marks a 4.8% decrease from fiscal 2025 levels. The budget is based on a consensus estimate that forecast revenue would increase 3.2% over a revised estimate for fiscal 2025.