So, where does Texas government get the money to operate its three branches and its numerous social and economic programs? Just less than half of total revenue comes from state taxes (45 percent in 2004). The rest comes from various other non-tax sources, including federal government transfers which account for just slightly more than 35 percent of total state revenue - as this chapter's feature The State's Income shows.
The $27.91 billion in taxes collected by the state in 2004 represented 70 percent of the $40.14 billion in state-sourced revenue. State sales taxes constituted the biggest portion of those taxes, bringing in $15.42 billion and accounting for over 55 percent of all taxes (and 38 percent of all state-sourced revenue).
The amount of revenue generated by sales taxes in the state is much higher than that reported here, because counties, municipalities and other special tax districts can add a total of up to two percent in sales taxes.
Other big sources of tax revenue come from taxes on vehicle sales/rental and housing sales ($2.74 billion in 2004), motor fuels ($2.92 billion), franchises ($1.84 billion), and insurance occupation ($1.18 billion). Though taxes in these four areas added up to a considerable sum - $8.68 billion - they totaled much less than the revenue raised by just the sales tax alone.
The other eight areas of taxation listed in the table represented only 6.1 percent of state revenue, and 13.7 percent of all state taxes in 2004.
The majority of state government revenue comes from sources other than state taxes. The largest component of state government income comes from the federal government for funding of programs in education, healthcare, and transportation, to name a few. Just less than one-third of all Texas state revenue comes from the federal government. This federally-sourced revenue can take the form of outright grants or matching funds.
The second major source of non-tax revenue - and the third most important among all sources - is from state licenses, fees, permits, fines and penalties. This is a broad category, to be sure. It can include personal licenses such as drivers' and hunting licenses, as well as professional and business licenses.
During the 2003 legislative session lawmakers responded to the state fiscal crisis in part by raising the cost of a broad range of licenses, permits, and user fees. A similar broad round of fee increases occurred during the state's last major recession in 1991. Even though some licenses and fees apply to large corporations, many of them apply to individuals. As a result, raising the cost of licenses or fees based on a flat rate only exacerbates an already regressive system of revenue generation.
The tendency to raise the cost of user fees and licenses in the face of budget shortfalls reflects the difficulty - or really the near impossibility - of raising tax rates or introducing new taxes in the state. Neither the business community nor the general population is likely to accept the introduction of an income tax, and even raising the sales tax rate is extremely difficult. Although user and licensing fees are merely taxes by another name, it allows politicians to claim that they did not raise taxes. It also allows supporters of such fee increases to defend their policy preferences by pointing out that the users of a specific service should pay for it. Campers should pay camping fees, hunters should pay for hunting privileges, students should pay for university libraries and technology services, etc. How much fairer can you get? User fees can be justified as paying for a service rather than paying a tax for the use of public resources, since not all taxpayers use these resources equally.
However we regard the charging of user fees for public facilities, we should recognize that this need to raise fees indicates the lack of politically viable options for increasing the state's revenue raising ability. Despite having a state economy that ranks among the top ten countries in the world, Texas cannot respond to economic downturns with any more vigorous measures than raising drivers' license fees or tuition at state universities.