Thanks to higher than expected tax revenues from the 2021-2022 biennium, lawmakers in the Lone Star State have begun their legislative session with a historic $32.7 billion budget surplus.  In the coming months, the legislature and Governor Greg Abbott (R) will have to make tough decisions to ensure that the surplus is spent prudently and does not go to wasteful, duplicative, or unsustainable projects.

Texas’ surplus comes from money left over at the conclusion of the last legislative session in 2021 and tax revenues generated over the past two years.  As a result, state legislators face a general revenue balance that exceeds the constitutional limit of what they can spend, barring special action by the legislature.

Several lawmakers have already called for caution when allocating the funds.  Speaker of the House Dade Phelan (R-HD 21) has called on lawmakers to avoid funding unsustainable programs by spending a portion of the surplus on infrastructure spending.  The state received a C average rating from the American Society of Civil Engineers in 2021, with dams, highways, roads, levees, and wastewater receiving either a D+ or a D.  The Texas power grid has been under scrutiny after its near total shutdown and massive power failure during extreme cold in 2021 and 2022.  Both Governor Greg Abbott (R) and Lt. Governor Dan Patrick (R) have listed its improvement as a legislative priority.

Speaker Phelan’s call to focus on one-time expenditures shows a recognition of the need to resist the temptation to spend money just because its available or to create new programs that will need more funding in the future.  In addition to not starting unsustainable programs, the legislature must also resist spending money on unworthy projects.  Flush with cash from the federal COVID-19 relief bills, school districts in the Lone Star State and across the country chose to invest in a variety of one-time projects ranging from an urban bird sanctuary to athletic facilities.  Instead of funding similar boondoggles, lawmakers should ensure that the surplus goes to verifiable public needs.

One option legislators should consider is agreeing with Lt. Governor Patrick’s request to use some of the surplus to increase the size of the state’s Economic Stabilization Fund (ESF).  According to Comptroller Glenn Hegar, the ESF will hold approximately $27.1 billion at the end of 2025.  Moving some of the surplus revenue to the state’s rainy-day fund follows Citizens Against Government Waste’s repeated advice to state lawmakers in the wake of the COVID-19 pandemic.

Of course, Lt. Governor Patrick’s efforts to build reserves will be pointless if state lawmakers fail to tap into their reserves when the time comes.  During the economic downturn caused by the COVID-19 pandemic, many states did not tap into their reserve funds.  Instead, they relied on massive sums of money made available by the federal government.  These federal funds not only allowed for unchecked spending on projects with no relation to the pandemic, but also wasted the investment of taxpayer funds in reserves.  The ESF offers no benefits to Texans if state leaders never tap into it when the need arises, something lawmakers should keep in mind as the economy seems likely to slip into a recession in 2023.

Legislators must also take note of the fact that of the $32.7 billion surplus, $10 billion will be split between the ESF and the state’s highway fund.  While Speaker Phelan has called for infrastructure spending and Lt. Governor Patrick has recommended adding to the ESF, lawmakers will also consider efforts to return money to taxpayers.  Both Governor Abbott and Lt. Governor Patrick have called on the legislature to use the surplus for property tax relief.  As the cost of home ownership in Texas continues to climb, lawmakers should consider any opportunities to provide relief to taxpayers.

Texas lawmakers would be wise to look to California’s recent experience with a budget surplus before making their final decisions.  In 2022, the Golden State experienced a significant surplus caused by high tax revenues and federal aid.  Less than a year later, Governor Gavin Newsom (D) has announced billions of dollars in budget cuts and spending delays in response to a significant budget shortfall.  Most notably, Newsom’s new budget calls for cuts in programs that were created during several years of budget surpluses. 

The opportunity for Texas legislators to spend massive sums of money thanks to a greater than expected budget surplus also brings the great responsibility to put the best interests of taxpayers first.  However Texas’ lawmakers choose to allocate the surplus, they must ensure that all expenditures include proper oversight and accountability, avoid unsustainable projects, and put the needs of Texans first.