Texas State Budget Policy

During the 2006 fiscal year, the state of Texas generated $72.4 billion in revenue from all sources including both taxes and nontax sources of revenue. The state of Texas raises 46 percent of its total revenue from taxes. The general sales tax is by far the most important state tax source, generating substantially more money than any other tax. The relative importance of taxes to the state's revenue picture has declined over the last 20 years. The proportion of state revenue generated by taxes fell from more than 57 percent in 1986 to 46 percent in 2006. Since 1986, federal funds have increased from nearly 23 percent of state revenues to 34 percent. Most of the growth in federal funds has been through the Medicaid program.

A sales tax is a levy on the retail sale of taxable items. Texas has a relatively high sales tax rate. The state levies a sales tax of 6.25 percent on the retail purchase of taxable items. Not all sales are subject to taxation. The sale of most agricultural items is tax exempt, including the sale of agricultural machinery and parts, fertilizer, feed for animals, and seed. A tax levied on natural resources at the time taken from the land or water is known as a severance tax. An excise tax is a tax levied on the manufacture, transportation, sale, or consumption of a particular item or set of related items. A sin tax is a levy on an activity that some people consider morally objectionable, such as smoking or drinking. A franchise tax is a tax on businesses chartered or organized in Texas and doing business in the state.

The largest expenditure categories for state government are health and human services, education, transportation, and public safety and corrections. In 2006, those four categories accounted for 87 percent of total state spending. Government expenditures in Texas are below the national average, but not at the very bottom. Texas is the forty-first among the 50 states both in total government spending per capita and in terms of spending as a percentage of personal income. State and local government expenditures per capita for welfare, highways, parks and recreation, the environment, fire protection, and police protection are all below the national average. Texans disagree about the appropriate level of government expenditures. In contrast, liberals argue that the state's low-tax, low-spend philosophy fails to address basic social problems.

The state of Texas uses performance-based budgeting, which is a system of budget preparation and evaluation in which policymakers identify specific policy goals, set performance targets for agencies, and measure results. After agencies submit their budgets, the LBB and the governor's staff hold hearings, at which agency administrators explain and defend their requests. The Texas Constitution, similar to most other state constitutions, prohibits the adoption of a budget that is in deficit. A budget deficit is the amount by which budget expenditures