How do oil and gas revenues affect federal aid flows to Texas compared with other no-income-tax states?
Executive summary
Texas collects roughly $26–$27 billion a year in state and local taxes and royalties from oil and gas, money that funds schools, the Rainy Day Fund and other state priorities [1] [2]. That flow contrasts with other no-income-tax states’ budgets because Texas relies heavily on severance/property taxes and saves in a Rainy Day Fund, while some peers (e.g., New Mexico in the comparative report) derive larger shares from federal and state lease royalties and use more of those proceeds for permanent funds and education [3].
1. Oil and gas cash for Texas: big, recurring, state-directed revenue
Texas industry reports and state summaries show oil and gas generate roughly $26.3–$27.3 billion in state and local taxes and royalties in recent years, a sum TXOGA and reporting outlets say pays for schools, roads and other services [1] [2]. State officials and industry groups also note that production has set multi‑year records, sustaining this revenue base [4] [5]. Those receipts feed general state budgets, specific education funds and transfers into Texas’ Rainy Day Fund, which historically has received large cumulative deposits from production taxes [6].
2. How Texas collects: severance and property taxes, not lease-dominated
Available sources emphasize that Texas derives more of its oil and gas revenue from severance taxes and property taxes than from public‑land lease royalties, distinguishing Texas’ mix from states that depend on federal/state lease royalties [3]. TXOGA and related reporting highlight property and sales tax increases tied to the industry—figures that rose materially in FY2023—underscoring the role of state/local tax mechanisms rather than federal lease proceeds [1] [2].
3. Rainy Day vs. permanent funds: Texas’ approach compared with peers
Texas saves a portion of production taxes in its Economic Stabilization Fund (Rainy Day Fund), which held large balances and is used to smooth budget shocks rather than to operate as a perpetual sovereign‑wealth vehicle; authors of the comparative report explicitly do not classify it as a permanent fund [3]. By contrast, that same analysis shows New Mexico invests a substantial share of royalties into permanent funds that primarily support education—reflecting an alternative policy choice where lease and royalty income is directed into long‑term endowments [3].
4. Federal revenue channels: leases and rule changes matter for other states
The RFF comparative briefing highlights that changes in federal royalty rates and lease policies can materially shift the revenue picture for states that depend on federal land royalties—New Mexico is singled out as sensitive to the 2025 One Big Beautiful Bill Act (OBBBA) change that reduced federal royalties from 16.67% to 12.5%, which analysts estimated would cut New Mexico’s federal leasing receipts by about $1.7 billion through 2035 without offsetting state policy changes [3]. Available sources do not describe an equivalent federal-royalty sensitivity for Texas because Texas’ mix leans on severance/property taxes rather than federal lease royalties [3].
5. Implications for federal aid flows to Texas vs. other no‑income‑tax states
Sources do not provide a direct, numerical mapping between oil‑and‑gas revenue levels and federal aid allocations to Texas versus other no‑income‑tax states; in other words, available sources do not mention a one‑to‑one formula tying state oil revenues to federal grant flows [3]. However, because Texas raises large state/local revenues from production [1] [2] and holds sizable Rainy Day balances [3] [6], Texas starts from a stronger state revenue position than some peers that use royalties differently—potentially reducing Texas’ relative dependence on federal aid for state services, although direct evidence on reduced federal transfers is not supplied in the available reporting [3] [1].
6. Competing perspectives and implicit agendas in the sources
Industry sources (TXOGA) emphasize the scale and benefits of industry payments—$26–$27 billion—and frame federal regulation as a threat to that revenue, an argument intended to influence policy and public perception [2] [1]. The RFF comparative report takes a policy‑analytic view highlighting structural differences in revenue sources and savings choices between states; its focus on the impact of federal royalty changes reveals a different policy priority—long‑term revenue stability and distributional effects across states [3]. Readers should weigh industry advocacy framing against independent policy analysis when assessing how revenues influence public finance and federal aid interactions.
7. Limitations and what is not in the reporting
Available sources document Texas’ production revenues, tax mixes and savings choices and compare those to New Mexico and Pennsylvania’s royalty structures, but they do not provide a comprehensive accounting of how federal grant formulas shift in response to state oil revenues, nor do they quantify net federal aid differentials among all no‑income‑tax states [3] [1]. For a precise, dollar‑for‑dollar comparison of federal aid receipts adjusted for oil wealth, further data—federal grant flows by state and an explicit analysis linking state revenue balances to federal program eligibility—would be required; those elements are not found in the current reporting [3].
Bottom line: Texas’ oil and gas sector generates large state and local revenues via severance, property and sales taxes and funnels material sums into a Rainy Day Fund and public services [1] [6]. Other no‑income‑tax states can rely more on lease royalties and permanent endowments, making them differently exposed to federal leasing policy changes—an important distinction for anyone comparing federal aid reliance across states [3] [1].