Public Finance of the States: Texas

Texas’s Fiscal Model

Texas is the most influential fiscal model in American state government—a large, fast-growing state that has maintained no personal income tax, attracted enormous business investment, and used its model as a competitive wedge against higher-tax states. Whether Texas’s approach represents a sustainable model of governance or a set of deferred costs and distributional choices that will eventually come due is one of the defining debates in state fiscal policy.

Revenue Structure

Texas has no personal income tax, a position enshrined in the state constitution since 1993. Revenue comes primarily from:

Sales tax: The state sales tax is 6.25%, with local governments able to add up to 2% for a combined rate up to 8.25% in many areas. Sales taxes are regressive—lower-income households spend a higher share of income on taxable consumption—and Texas’s reliance on them is one of the main distributional criticisms of the model.

Property tax: Texas has among the highest property tax rates in the country at the local level, which partly offsets the absence of a state income tax and creates its own fiscal and political complications.

Oil and gas severance: The Permanent School Fund and the Permanent University Fund receive severance tax revenues from oil and gas extraction. These funds provide substantial endowment income for public schools and the University of Texas and Texas A&M systems, creating a revenue base unavailable to most states.

Franchise tax: A business gross receipts tax, restructured multiple times, that serves as something of a compromise corporate tax.

Expenditure Profile

Education: The school finance formula has been the subject of repeated litigation, with courts finding the distribution unconstitutional on multiple occasions. The Robin Hood system that redistributes property tax revenues from wealthy to poor districts is politically contentious.

Medicaid: Texas has not expanded Medicaid under the ACA, leaving a significant coverage gap for low-income adults without children. This is a major policy choice with fiscal implications—the state foregoes federal matching funds but also avoids the state expenditure required to draw them.

Infrastructure: The size and growth of the state creates massive infrastructure demands. The “Texas miracle” of growth also means enormous capital needs that property and sales taxes must fund.

Pension and Debt Position

Texas’s pension systems are moderately funded, better than Illinois and New Jersey but below ideal. The Teacher Retirement System has carried meaningful unfunded liabilities. The state’s debt is low relative to its size.

Key Tensions

• The property tax contradiction: No income tax doesn’t mean low taxes—it means high property taxes, which fall heavily on homeowners and small businesses and create affordability problems in booming metros
• Infrastructure stress: The electrical grid failure during Winter Storm Uri in 2021 exposed deferred investment and regulatory gaps with enormous human and fiscal cost
• The growth premium: Texas’s model depends on continued in-migration and business formation; if growth slows, the revenue base has less cushion than states with income taxes
• Distributional outcomes: Texas ranks near the bottom on many measures of poverty, education outcomes, and access to healthcare, raising the question of whether the fiscal model’s costs are falling on those least able to bear them

What to Watch

Texas is large enough to succeed or fail on its own terms. The key questions are whether infrastructure investment keeps pace with growth, whether the absence of Medicaid expansion creates unsustainable pressure on hospitals and public health, and whether the energy transition affects severance tax revenues in ways that require structural fiscal adjustment.