What Is the Largest Single Source of Revenue in Texas?

The largest single source of revenue in Texas is the state sales tax, which is projected to account for about 59 percent of all state tax collections during the 2026–27 biennium.¹ Looked at against the full picture of general revenue–related collections, sales tax alone makes up 53.4 percent of a projected $176 billion total for the biennium, far outpacing any other single stream.²

How the Texas Sales Tax Works

Texas charges 6.25 percent on most retail purchases, leases, and rentals of goods, along with certain taxable services. Cities, counties, transit authorities, and special-purpose districts can add up to another 2 percent, pushing the combined rate as high as 8.25 percent in many areas.³ Most Texans in metropolitan areas pay close to that ceiling.

Not everything is taxed. Groceries like bread, milk, eggs, fruits, and vegetables are exempt, as are most prescription drugs and over-the-counter medications that carry an FDA Drug Facts label.⁴ Medical devices, wound care supplies, and dietary supplements are also sold tax-free.⁵ Those exemptions soften what would otherwise be a heavier burden on lower-income households, since the essentials people buy every week fall outside the tax.

Sales Tax Holidays

Texas also runs an annual back-to-school holiday. In 2026, it runs from Friday, August 7 through midnight Sunday, August 9. During that weekend, most clothing, footwear, school supplies, and backpacks priced under $100 per item can be purchased tax-free, with no cap on the number of qualifying items.⁶ A separate holiday for emergency-preparation supplies typically falls in late April.

Why Sales Tax Carries So Much of the Budget

The reason one tax does this much work is structural. Texas has a constitutional ban on taxing individual income. Article 8, Section 24-a of the Texas Constitution states that the legislature “may not impose a tax on the net incomes of individuals, including an individual’s share of partnership and unincorporated association income.”⁷ That language was added through Proposition 4, approved by voters in November 2019. Reversing the ban now requires a two-thirds vote in both chambers plus a statewide referendum.

Texas also levies no state-level property tax. Property taxes here are collected entirely by local governments: school districts, cities, counties, and special districts, which use the money for schools, roads, and emergency services. Neither of the two revenue sources most states lean on heavily feeds the Texas state budget, which pushes sales tax into the dominant role almost by default.

The Other Major Revenue Streams

Sales tax is first by a wide margin, but several other streams keep the budget funded. The Comptroller’s 2026–27 Biennial Revenue Estimate projects general revenue–related collections roughly as follows:²

Sales taxes: 53.4 percent
Motor vehicle sales and rental taxes: 7.1 percent
Oil production tax: 6.7 percent
Franchise tax: 6.5 percent
Insurance taxes: 5.2 percent
Natural gas production tax: 3.0 percent
All other state taxes: 6.1 percent
Fees, investments, and other non-tax revenue: 11.9 percent

Motor Vehicle Taxes

Buying a car in Texas triggers a 6.25 percent motor vehicle sales tax on the purchase price, minus any trade-in credit.⁸ Short-term rentals of 30 days or fewer are taxed at 10 percent of gross rental receipts; longer-term rentals at 6.25 percent.⁹ Combined, motor vehicle taxes are the second-largest tax category in the state budget.

Oil and Natural Gas Severance Taxes

Texas taxes crude oil production at 4.6 percent of market value and natural gas production at 7.5 percent.¹⁰ Together, oil and gas production taxes are projected to make up nearly 10 percent of general revenue–related collections for the 2026–27 biennium.² These revenues swing hard with commodity prices, which is part of the reason the state created its Rainy Day Fund.

Franchise Tax

The franchise tax is the Texas version of a business income tax. Most entities doing business in the state owe 0.75 percent of their taxable margin; retailers and wholesalers pay 0.375 percent.¹¹ Smaller businesses fall below a revenue threshold and owe nothing, which keeps collections modest relative to sales tax.

Insurance, Hotel, and Excise Taxes

Insurance companies pay premium taxes ranging from 1.6 percent for property and casualty insurers to 1.75 percent for life, health, and accident insurers.¹² The state also charges 6 percent on hotel room rentals, separate from local add-ons.¹³

Then there are the excise taxes. Cigarettes carry a state tax of $1.41 per pack of 20, plus a special fee the Comptroller adjusts annually.¹⁴ Gasoline and diesel are taxed at 20 cents per gallon, a rate unchanged since 1991. Alcoholic beverages face various excise rates depending on product type.

The Economic Stabilization Fund

Because oil and gas revenue is so volatile, Texas sets aside a cushion. When oil and natural gas production taxes exceed their 1987 baseline collections, 75 percent of the excess gets transferred out, split roughly in half between the Economic Stabilization Fund (commonly called the Rainy Day Fund) and the State Highway Fund.¹⁵

The fund has a constitutional cap set at 10 percent of certain general revenue deposits from the prior biennium. For 2026–27, that cap is approximately $26.9 billion, and the fund is projected to hit it at the beginning of fiscal 2026.¹⁶ Once the cap is reached, interest earned on the fund’s cash balance flows to the General Revenue Fund instead. The projected ending balance for fiscal 2026 is $27.43 billion.¹⁷ That is a large reserve by any measure, and it exists largely because oil and gas prices stayed strong through much of the 2020s.

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Comptroller of Public Accounts. Sales Taxes and Total Tax Collections
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Texas Comptroller of Public Accounts. Biennial Revenue Estimate 2026-27
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Texas Comptroller of Public Accounts. Sales and Use Tax
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Comptroller of Public Accounts. Grocery and Convenience Stores
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Texas Comptroller of Public Accounts. Sales Tax Exemptions for Healthcare Items
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Texas Comptroller of Public Accounts. Sales Tax Holiday – Tax Free Weekend
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State of Texas. The Texas Constitution Article 8 – Taxation and Revenue
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Texas Comptroller of Public Accounts. Motor Vehicle Tax Guide – Motor Vehicle Sales Tax
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State of Texas. Texas Tax Code Chapter 152 – Taxes on Sale, Rental
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The Railroad Commission of Texas. Texas Severance Tax Incentives
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Texas Comptroller of Public Accounts. Franchise Tax
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comptroller.texas.gov. Insurance Premium Tax (Licensed Insurers)
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Texas Comptroller of Public Accounts. Hotel Occupancy Tax
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Texas Comptroller of Public Accounts. Cigarette Tax
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Texas Comptroller of Public Accounts. Texas Comptroller Glenn Hegar Announces Transfer of $5.5 Billion to State Highway and Rainy Day Funds
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Texas Comptroller of Public Accounts. Fiscal Brief: Economic Stabilization Fund
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Comptroller of Public Accounts. Economic Stabilization Fund Ending Balance