Legal References

The Texas Constitution, Article VIII, Section 22(a), restriction on rate of growth of appropriations, commonly referred to as the tax spending limit, was established by the passage of a constitutional amendment in 1978. It states that:

In no biennium shall the rate of growth of appropriations from state tax revenues not dedicated by this constitution exceed the estimated rate of growth of the state's economy. The legislature shall provide by general law procedures to implement this subsection.

This provision does not alter, amend, or repeal the Texas Constitution, Article III, Section 49a, known as the pay-as-you-go provision.

To implement this provision of the Texas Constitution, the Sixty-sixth Legislature, 1979, passed Article 9, Chapter 302, Laws 1979 (the Texas Government Code, Chapter 316), which placed with the Legislative Budget Board the responsibility for approval of a limitation on the growth of certain state appropriations. A part of the procedure for approving the limitation is set forth in Sections 316.003 and 316.004 as follows:

Section. 316.003. Before the Legislative Budget Board approves the items of information required by Section 316.002, the board shall publish in the Texas Register the proposed items of information and a description of the methodology and sources used in the calculations.

Section. 316.004. Not later than December 1 of each even-numbered year, the Legislative Budget Board shall hold a public hearing to solicit testimony regarding the proposed items of information and the methodology used in making the calculations required by Section 316.002.

These items of information are identified as follows in the Texas Government Code, Section 316.002:

1. the estimated rate of growth of the state's economy from the current biennium to the next biennium;

2. the level of appropriations for the current biennium from state tax revenues not dedicated by the constitution; and

3. the amount of state tax revenues not dedicated by the constitution that could be appropriated for the next biennium within the limit established by the estimated rate of growth of the state's economy.

In this memorandum, each item of information is discussed in this same order.

Estimated Rate of Growth of the State's Economy

A definition of the "estimated rate of growth of the state's economy" is set in the Texas Government Code, Section 316.002(b), in the following words:

(b) Except as provided by Subsection (c), the board shall determine the estimated rate of growth of the state's economy by dividing the estimated Texas total personal income for the next biennium by the estimated Texas total personal income for the current biennium. Using standard statistical methods, the board shall make the estimate by projecting through the biennium the estimated Texas total personal income reported by the United States Department of Commerce or its successor in function.

(c) If a more comprehensive definition of the rate of growth of the state's economy is developed and is approved by the committee established by Section 316.005, the board may use that definition in calculating the limit on appropriations.

The U.S. Commerce Department's Bureau of Economic Analysis defines state personal income as follows:

...the income received by persons from all sources, that is, from participation in production, from both government and business transfer payments, and from government interest. Personal income is the sum of wage and salary disbursements, supplements to wages and salaries, proprietors' income, rental income of persons, personal dividend income, personal interest income, and transfer payments, less contributions for social insurance.

Table 1 shows the U.S. Commerce Department's personal income account for Texas for calendar year 2021. The largest component of Texas personal income is wage and salary disbursements, estimated at $861.4 billion during calendar year 2021. Salary and wage disbursements are added with supplements to wages and salaries, primarily employer contributions to private pensions and welfare funds, and proprietors' income to arrive at total earnings by place of work. Texas total earnings by place of work reached an estimated $1,221.4 billion in calendar year 2021.

In deriving Texas total personal income, adjustments are made to total earnings by place of work. Personal and employee contributions for social insurance, principally Social Security payroll taxes paid by employees and self-employed individuals, are deducted. A place-of-residence adjustment also is made to reflect the earnings of workers who cross state borders to live or work. Dividends, interest, and rent income are then added, along with transfer payments. The major types of transfer payments include Social Security, various retirement and unemployment insurance benefits, welfare, and disability and health insurance payments. Texas total personal income is estimated to be $1,767.7 billion for calendar year 2021.

The U.S. Department of Commerce reports personal income estimates by calendar quarter and year. Because the state's fiscal year begins on September 1 and ends August 31, an adjustment is required to present these data on a biennial basis. The Legislative Budget Board uses the data for the first three calendar quarters of a year plus the fourth quarter of the preceding year to represent the state's fiscal year. A biennium is the sum of two fiscal years. Table 2 shows the historical record of the rate of growth in Texas personal income for the past 20 completed biennia, using the data published by the U.S. Department of Commerce.

Forecasting Texas Personal Income

In reviewing standard statistical techniques for forecasting or projecting Texas personal income, the Legislative Budget Board has obtained the latest economic forecasts from the following sources, listed alphabetically: (1) Moody's Analytics, (2) Perryman Group, (3) S&P Global, (4) Texas A&M University - Department of Economics, and (5) Texas Comptroller of Public Accounts. These forecasts are based on econometric models developed and maintained by the forecasting services listed.

Although each forecasting service approaches the development of economic projections differently, several characteristics are common to the econometric models from which the Texas total personal income estimates are derived. First, each model assumes that the U.S. economy is the driving force behind Texas economic activity. As a result, forecasts of U.S. economic variables are needed to drive each model. Secondly, each of the econometric models is structural in nature, representing certain assumptions about the structure of the Texas economy, consistent with economic theory. Structural models typically entail detailed modeling of key sectors of the state's economy, followed by statistical testing to establish relationships with other sectors of the economy. Previous memoranda published on the constitutional limit include additional discussion of the forecasting methods used and can be found in the following issues of the Texas Register: 5 TexReg 4272, 7 TexReg 3727, 9 TexReg 5219, 11 TexReg 4590, 13 TexReg 4599, 15 TexReg 6876, 17 TexReg 7702, 19 TexReg 9053, 21 TexReg 10919, 23 TexReg 11472, 25 TexReg 11735, 27 TexReg 10977, 29 TexReg 10612, 31 TexReg 9641, 33 TexReg 9109, 35 TexReg 10081, 37 TexReg 9031, 39 TexReg 9391, 41 TexReg 9360, 43 TexReg 7571, and 45 TexReg 8620.

Table 3 shows details of the Texas personal income growth rates of the various forecasting services for the 2024-25 biennium over the 2022-23 biennium. These forecasts range from 9.48 percent to 14.57 percent.

The personal income growth rates shown in Table 3, or any more recent forecasts if available, will be presented to the Legislative Budget Board for its consideration in adopting this item of information. The Board is not limited to one, or any combination of the growth rates, when adopting a Texas personal income growth rate for the 2024-25 biennium.

Table 4 shows the sources and dates for the Texas personal income growth rates presented in Table 3.

Appropriations from State Tax Revenue Not Dedicated by the Constitution 2022-23 Biennium

The amount of appropriations from state tax revenue that are not dedicated by the constitution in the 2022-23 biennium, the base biennium, is the second item of information to be determined by the Legislative Budget Board. As of November 16, 2022, the Legislative Budget Board (LBB) staff estimates this amount to be $101,582,185,996. This item multiplied by the estimated rate of growth of Texas personal income from the 2022-23 biennium to the 2024-25 biennium produces the limitation on appropriations for the 2024-25 biennium pursuant to the Texas Constitution, Article VIII, Section 22.

Calculating the 2024-25 Limitation

The limitation on appropriations of state tax revenue that is not dedicated by the state constitution in the 2024-25 biennium, the third item of information, may be illustrated by selecting a growth rate and applying it to the 2022-23 biennial appropriations base. A change to the 2022-23 biennial appropriations base would result in a corresponding change to the 2024-25 biennial limit.

Method of Calculating 2024-25 Appropriations from State Tax Revenue Not Dedicated by the Constitution

As previously stated, LBB staff estimates the amount of appropriations from state tax revenue that are not dedicated by the constitution in the 2022-2023 biennium to be $101,582,185,996. This section details the sources of information used in this calculation.

Total appropriations for the 2022-23 biennium include those made by the Eighty-seventh Legislature, Regular Session, 2021, in Senate Bill 1; by the Eighty-seventh Legislature, Second Called Session, 2021, in House Bill 5 and House bill 9; by the Eighty-seventh Legislature, Third Called Session, 2021, in Senate Bill 8; and other legislation affecting appropriations. Any subsequent appropriations made by the Eighty-eighth Legislature, 2023, for the 2022-23 biennium also would be included in total appropriations.

Table 5, Section B, shows General Revenue Funds appropriations, which is the method of finance for general-purpose spending. General Revenue Funds appropriations are financed with revenues in the following General Revenue Funds: General Revenue Fund (Fund No. 0001), Available School Fund (Fund No. 0002), Technology and Instructional Materials Fund (Fund No. 0003), Foundation School Fund (Fund No. 0193), and Tobacco Settlement Fund (Fund No. 5040). Section B shows the total amount of General Revenue Funds appropriations, the amount of appropriations financed from constitutionally dedicated tax revenue, the amount financed from nontax revenue and the remainder--the amount financed from tax revenue that is not dedicated by the constitution--which is the amount subject to the limitation.

I. General Revenue-Related Funds

A. Appropriations are classified in this table as the following: (1) "estimated to be" line item appropriations, and (2) sum-certain line item appropriations.

1. "Estimated to Be" Line Item Appropriations:

Each of these items under the subheading "estimated to be" may change under certain circumstances. For purposes of this calculation, most fiscal year 2022 amounts are based on actual 2022 expenditures. Most amounts for fiscal year 2023 are taken from Senate Bill 1, Eighty-seventh Legislature, Regular Session, 2021.

2. Sum-certain Line Item Appropriations:

As calculated in Table 6, the amount shown for "Total Sum Certain Line Item Appropriations" is the difference between total appropriations and the items listed separately as "estimated to be appropriations." General Revenue Funds appropriations in Table 6 include those made by the Eighty-seventh Legislature, Regular Session, 2021, in Senate Bill 1; by the Eighty-seventh Legislature, Second Called Session, 2021, in House Bill 5 and House bill 9; by the Eighty-seventh Legislature, Third Called Session, 2021, in Senate Bill 8; and other legislation affecting appropriations.

B. Source of Funding - General Revenue-Related: Table 5, Part B, shows that of the $118,180,850,900 of General Revenue Fund appropriations, $92,825,708,111 is subject to the limitation because it is financed from state tax revenue that is not dedicated by the Constitution.

Constitutionally dedicated state tax revenues deposited into General Revenue Funds are estimated to total $9,742,327,325 during the 2022-23 biennium. Appropriations from General Revenue Funds financed from nontax revenue are estimated at $15,612,815,463 for the 2022-23 biennium. Revenue analysis in this calculation applies actual fiscal year 2022 revenue collections and the most recent revenue estimates by the Comptroller of Public Accounts for fiscal year 2023.

II. Appropriations from Funds Outside of General Revenue

Certain tax revenues are deposited into funds and accounts outside of the General Revenue Funds. Appropriations from these funds and accounts financed with state tax revenue that are not dedicated by the constitution are included in this calculation.

The state imposes a sales and use tax on boats and boat motors, of which 95.0 percent is deposited into the General Revenue Funds and the remaining 5.0 percent is deposited into General Revenue-Dedicated Account No. 0009, Game, Fish, and Water Safety. The state imposes an insurance companies maintenance tax, which is deposited into General Revenue-Dedicated Account No. 0036, Texas Department of Insurance.

A portion of the motor vehicles sales tax, franchise tax, and cigarette tax is deposited into the Property Tax Relief Fund (Fund No. 0304). Similarly, sales tax revenue collected by marketplace providers on the sales of taxable items made through the marketplace is deposited to the Tax Reduction and Excellence in Education Fund (Fund No. 0305). The state transfers revenue in the General Revenue Funds to the Economic Stabilization Fund (Fund No. 0599) based on the amount of severance tax collections during the previous year. Most of the transferred revenue is tax revenue.

General Revenue-Dedicated Account No. 5066, Rural Volunteer Fire Department Insurance, includes deposits of taxes on the sales of fireworks. Part of the sales tax and the motor vehicles sales tax is deposited into General Revenue-Dedicated Account No. 5071, Emissions Reduction Plan. In addition, General Revenue-Dedicated Account No. 5144, Physician Education Loan Repayment, includes deposits of tobacco tax revenue.

Additionally, certain unappropriated General Revenue-Dedicated balances are used to certify General Revenue Fund appropriations as a result of funds consolidation. When General Revenue Fund appropriations exceed General Revenue Fund revenues, General Revenue-Dedicated balances are considered when determining how much General Revenue Fund appropriations are subject to the spending limit. To the extent that those General Revenue-Dedicated balances contain tax revenues not dedicated by the Constitution, the General Revenue-Dedicated balances are subject to the limit when appropriated.

Grand Total

A grand total of $127,578,542,711 in 2022-23 biennial appropriations is included in this analysis. Of this amount, $9,742,327,325 is financed out of taxes dedicated by the state constitution. Another $16,254,029,390 is financed out of nontax revenue. The remaining $101,582,185,996 is financed out of state tax revenue that is not dedicated by the state constitution. This amount serves as the base for calculating the limitation on 2024-25 biennial appropriations from state tax revenue that is not dedicated by the constitution, as required by the Texas Constitution Article VIII, Section 22.

IMPLEMENTATION OF THE LIMIT ON GROWTH OF CONSOLIDATED GENERAL REVENUE APPROPRIATIONS

Legal References

The Texas Government Code, Chapter 316, restriction on the rate of growth of consolidated general revenue appropriations, referred to as the CGR limit, was established by the passage of Senate Bill 1336, during the 87th Regular Session of the Texas Legislature. It states that:

"The rate of growth of consolidated general revenue appropriations in a state fiscal biennium may not exceed the estimated average biennial rate of growth of this state's population during the state fiscal biennium preceding the biennium for which appropriations are made and during the state fiscal biennium for which appropriations are made, adjusted by the estimated average biennial rate of monetary inflation in this state during the same period..."

This provision does not alter, amend, or repeal the Texas Constitution, Article III, Section 49a limit, referred to as the pay-as-you-go provision, or the Texas Constitution, Article VIII, Section 22 limit, referred to as the tax spending limit.

Prior to passage of SB 1336, the Article VIII, Section 22 limit was referred to simply as "the spending limit"; however, the Article VIII, Section 22 limit will now be referred to as the tax spending limit to differentiate it from the CGR limit.

Senate Bill 1336 placed with the Legislative Budget Board the responsibility for approval of a limitation on the growth of consolidated general revenue appropriations. A part of the procedure for approving the limitation is set forth in Sections 316.003 and 316.004 as follows:

Section. 316.003. Before the Legislative Budget Board approves the items of information required by Section 316.002, the board shall publish in the Texas Register the proposed items of information and a description of the methodology and sources used in the calculations.

Section. 316.004. Not later than December 1 of each even-numbered year, the Legislative Budget Board shall hold a public hearing to solicit testimony regarding the proposed items of information and the methodology used in making the calculations required by Section 316.002.

These items of information related to the CGR limit are identified as follows in the Texas Government Code, Section 316.002:

1. the limit on the rate of growth of consolidated general revenue appropriations for that state fiscal biennium, as compared to the previous state fiscal biennium;

2. the estimated average biennial rate of growth of this state's population during the state fiscal biennium preceding the biennium for which appropriations are made and during the state fiscal biennium for which appropriations are made;

3. the estimated average biennial rate of monetary inflation during the state fiscal biennium preceding the biennium for which appropriations are made and during the state fiscal biennium for which appropriations are made;

4. the level of consolidated general revenue appropriations for the current state fiscal biennium; and

5. the limit on the amount of consolidated general revenue appropriations that could be appropriated for the next state fiscal biennium.

In this memorandum, each item of information is discussed in this same order.

Limit on the Rate of Growth of Consolidated General Revenue Appropriations

The methodology for calculating the limit on the rate of growth for the CGR limit is set in the Texas Government Code, Section 316.002(a)(2), in the following words:

(2) the limit on the rate of growth of consolidated general revenue appropriations for that state fiscal biennium, as compared to the previous state fiscal biennium, by subtracting one from the product of:

(A) the sum of one and the estimated average biennial rate of growth of this state's population during the state fiscal biennium preceding the biennium for which appropriations are made and during the state fiscal biennium for which appropriations are made; and

(B) the sum of one and the estimated average biennial rate of monetary inflation during the state fiscal biennium preceding the biennium for which appropriations are made and during the state fiscal biennium for which appropriations are made.

Mathematically, the formula described by the statute looks like:

Attached Graphic

Estimated Rate of Texas Population Growth

The statute does not define the state's population, rather Texas Government Code, Section 316.001(e) directs the LBB to determine the rate of growth of the state's population as follows:

(e) The Legislative Budget Board shall determine the rates described by Subsection (c) using the most recent information available from sources the board considers reliable, including the United States Bureau of Labor Statistics Consumer Price Index and the Texas Demographic Center.

The U.S. Census Bureau defines the state's population as follows:

The resident population includes all people currently residing in the state on a specific date. The population estimate at any given time point starts with a population base (e.g. the last decennial census or the previous point in the time series), adds births, subtracts deaths, and adds net migration (both international and domestic).

The Texas Demographic Center (previously the Texas State Data Center) was initiated in 1980 to establish a state level liaison to the U.S. Census Bureau for better dissemination of Texas census data. In the mid-1980s, the Texas Population Estimates and Projections Program was established with the overall objective of providing annual estimates of the population of Texas counties and places and biennial projections of the population of the state and counties. The Texas Population Estimates Program produces annual estimates of the total populations of counties and places in the state and estimates of county populations by age, sex, and race/ethnicity. The Texas Population Projections Program produces projections of the population of the state and all counties in the state by age, sex and race/ethnicity.

Table 7 displays the most recent breakdown of the Texas population estimate from the Texas Demographic Center. Table 9 shows historical growth rates of Texas population over that last 20 biennia.

Estimated Rate of Monetary Inflation

The statute does not define monetary inflation, rather Texas Government Code, Section 316.001(e) directs the LBB to determine the rate of monetary inflation as follows:

(e) The Legislative Budget Board shall determine the rates described by Subsection (c) using the most recent information available from sources the board considers reliable, including the United States Bureau of Labor Statistics Consumer Price Index and the Texas Demographic Center.

The U.S. Bureau of Labor Statistics defines the Consumer Price Index as follows:

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Prices for the goods and services used to calculate the CPI are collected in 75 urban areas throughout the country and from about 23,000 retail and service establishments. Data on rents are collected from about 50,000 landlords or tenants. The weight for an item is derived from reported expenditures on that item as estimated by the Consumer Expenditure Survey.

Table 8 shows the U.S. Bureau of Labor Statistic's Consumer Price Index broken down by the weights applied to each of the large expenditure categories for the most recent month available. As an example, the largest weighted expenditure in the Consumer Price Index is consumer expenditures on shelter.

The U.S. Bureau of Labor Statistic's reports the Consumer Price Index on a monthly basis. Because the state's fiscal year begins on September 1 and ends August 31, an adjustment is required to present these data on a biennial basis. The Legislative Budget Board uses the average of the Consumer Price Index over the 24 months of a biennium to represent the rate of monetary inflation during the state's fiscal biennium. Table 9 shows the historical record of the rate of growth in monetary inflation for the past 20 completed biennia, using the data published by the U.S. Bureau of Labor Statistics.

Forecasting Texas Population and Monetary Inflation

In reviewing standard statistical techniques for forecasting or projecting Texas population and monetary inflation, the Legislative Budget Board has obtained the latest economic forecasts from the following sources, listed alphabetically: (1) Moody's Analytics, (2) Perryman Group, (3) S&P Global, (4) Texas A&M University - Department of Economics, and (5) Texas Comptroller of Public Accounts. These forecasts are based on econometric models developed and maintained by the forecasting services listed. In addition, the Legislative Budget Board has obtained the most recent population projections from the Texas Demographic Center.

Although each forecasting service approaches the development of economic projections differently, several characteristics are common to the econometric models from which the Texas population and monetary inflation estimates are derived. First, each model assumes that the U.S. economy is the driving force behind Texas economic activity. As a result, forecasts of U.S. economic variables are needed to drive each model. Secondly, each of the econometric models is structural in nature, representing certain assumptions about the structure of the Texas economy, consistent with economic theory. Structural models typically entail detailed modeling of key sectors of the state's economy, followed by statistical testing to establish relationships with other sectors of the economy.

Table 10 shows details of the Texas population and monetary inflation growth rates of the various forecasting services for the average of the 2024-25 biennium over the 2022-23 biennium and the 2022-23 biennium over the 2020-21 biennium. These forecasts range from 2.07 percent to 2.62 percent for Texas population and from 9.38 percent to 10.17 percent for monetary inflation.

The Texas population and monetary inflation growth rates shown in Table 10, or any more recent forecasts if available, will be presented to the Legislative Budget Board for its consideration in adopting this item of information. The Board is not limited to one, or any combination of the growth rates, when adopting a Texas population growth rate or monetary inflation growth rate for the 2024-25 biennium.

Table 11 shows the sources and dates for the Texas population and monetary inflation growth rates presented in Table 10.

Consolidated General Revenue Appropriations 2022-23 Biennium

The amount of consolidated general revenue appropriations in the 2022-23 biennium, the base biennium, is the fourth item of information to be determined by the Legislative Budget Board. As of November 16, 2022, the Legislative Budget Board (LBB) staff estimates this amount to be $124,165,562,000. Table 12 details the calculation of this amount.

Calculating the 2024-25 Limitation

The limitation on consolidated general revenue appropriations in the 2024-25 biennium, the fifth item of information, may be illustrated by selecting a growth rate, adding one, and multiplying it by the 2022-23 adjusted biennial appropriations base. A change to the 2022-23 adjusted biennial appropriations base would result in a corresponding change to the 2024-25 biennial limit.

Method of Calculating 2022-23 Consolidated General Revenue Appropriations

As previously stated, LBB staff estimates the amount of consolidated general revenue appropriations in the 2022-23 biennium to be $124,165,562,000. This section details the sources of information used in this calculation.

Texas Government Code, Section 316.001 (a) defines "consolidated general revenue appropriations" as follows:

(a) For purposes of this subchapter, "consolidated general revenue appropriations" means appropriations from:

(1) the general revenue fund in the state treasury;

(2) a dedicated account in the general revenue fund in the state treasury; or