Can Texas afford to fund its own government?

This is the core of it. Two ledgers.

What Texans pay

Texans pay two governments: Washington and Austin. Here is the six-year average.

That federal number is not a guess. It is the IRS's own "Gross Collections by State," Table 5 of the annual Data Book. Here is what it was made of in fiscal 2024, so you can see there is nothing hidden in it:

That share holds up two independent ways. Texas is 8.2 percent of federal taxes by the IRS's own where-filed collections, and 8.2 percent again by the residence-based measure USAFacts uses. The reframe in Part III does not hinge on where a return is filed. And the burden keeps climbing: the FY2025 Data Book, published since, puts Texas at 479.5 billion dollars, up almost 15 percent in a single year. We hold to the six-year average throughout, because it is the conservative number and it cannot be accused of catching a good year.

Notice the top line of the FY2024 table. The IRS lumps withheld income tax and payroll taxes (FICA) into one figure and refuses to separate them by state, which is the kind of thing that matters when you get to Social Security. Our best estimate, built from Texas wages and the U.S. payroll-tax ratio, puts the FICA piece at roughly 120 billion dollars a year on average. We come back to it in Part V.

The state number is the Comptroller's. Texas funds itself without an income tax. The sales tax does most of the work, with the rest coming from the franchise (margins) tax, motor-vehicle and motor-fuels taxes, severance taxes on oil and gas production, and a long tail of fees. In fiscal 2024 the state took in 181.1 billion dollars across all funds excluding trust. Strip out the 58.9 billion that was federal money passing through, and about 122 billion was genuinely Texas's own. The six-year average of that own-source revenue is 101.7 billion.

What it costs to govern Texas

Now the harder side, and the one where we are most careful, because this is where the standard studies cheat.

Start with the broadest possible measure of federal spending in Texas: the Rockefeller Institute's, which captures everything, 431.4 billion dollars a year on average. Then take out the portable individual benefits that are not a cost of governing anything, itemized here with their sources:

Then strip out the one-time COVID relief, an average of 50.7 billion dollars a year across the window, almost all of it in 2020 and 2021, because no honest person counts emergency stimulus as a permanent cost of government.

What is left is the real cost of governing Texas:

What is inside that 203.8 billion of federal government-function spending? The big pieces are defense (about 60 billion a year on average, and we break that down in Part V), federal grants to the state and local governments for Medicaid, highways, and education (on the order of 60 to 70 billion), the payroll of the roughly 155,000 federal civilians who work in Texas, federal contracts beyond defense, and assistance programs like SNAP. These are real costs an independent Texas would carry, and we count every one of them.

And a fair share of that state-spending line is not Texas's free choice. About a fifth of what Texas spends from its own funds, on the order of 20 billion dollars a year, goes to programs Washington mandates and only partly funds, Medicaid most of all. We count every dollar of it as a cost anyway. A government that carries even the mandates it never voted for, and still pays its own way, does not need Washington to balance its books.

The honest result

Set the two ledgers side by side. Texans pay about 453 billion dollars. Governing Texas costs about 295 billion, or 346 billion if you stubbornly insist on treating even the one-time COVID flood as permanent. Either way, the money Texans already generate covers the full cost of their government.

Now the honest follow-up, the one a sharp economist will raise, and we raised it on ourselves. If you take Social Security and Medicare off the cost side, fairness says you also take the payroll taxes that fund them off the revenue side. Do that, net the entire social-insurance system out of both columns, and account for every dollar the same way on both sides, and the picture narrows to something close to break-even.

Here is that arithmetic in the open, because it is the whole reason we do not claim a surplus. Of the 453 billion Texans pay, about 120 billion is the payroll tax that funds Social Security and Medicare, and those benefits are already off the cost side. Take that 120 billion off the revenue side to match, and Texans pay about 333 billion for a government that costs about 295 billion. The gap that looked like 158 billion is really closer to 38, and once the part of Medicare that runs on general taxes is treated the same way, it lands inside 30 billion of break-even in either direction. That is not a surplus anyone should bank on. It is a people paying almost exactly what their government costs, which is all that self-sufficiency ever meant.

So we stay conservative, and precise, which is more than the other side bothers with. Under every internally consistent way of running the accounting, Texas lands within roughly 30 billion dollars of break-even on its current government functions, at current tax levels. No material subsidy in either direction. And it carries that while taxing its people well below the developed-world norm, with the leaner government a sovereign Texas would actually choose still ahead of it. The defensible finding is self-sufficiency, not a giant annual surplus, and we do not claim one. A nation that pays the full cost of its own government, while also helping foot the bill for other states, is by definition nobody's dependent.

That is the floor of the case, not the ceiling. Because the moment you ask why the balance-of-payments studies make Texas look dependent, the whole picture turns over, and the numbers that fall out of it dwarf anything the 2015 edition reported.

Look at the per-Texan line. Spread across roughly 31 million people, Texans send up something like 14,500 dollars a head to the two governments, and the cost of actually governing Texas runs around 9,400 a head. Net the social-insurance system out of both sides and that gap tightens toward break-even, as it should. What it never does, under any honest accounting, is invert. Texas is not carried. It carries itself, and then some.

Part II proved it. At current tax levels, Texans fund the full cost of governing Texas. That holds even when we count the entire current federal footprint, every base and agency and grant and contract, as a cost Texas has to carry, and even before the leaner government a sovereign Texas would actually choose to run.

We count it that way on purpose, because counting the full cost is what makes the finding unarguable. But that conservatism leaves something out. An independent Texas would not run Washington's government. It would run its own, and the gap between what Washington spends in Texans' name and what Texas would actually choose to spend is not a cost of leaving. It is a dividend of it, and Part VI takes it up in full.

We will be honest about one real obligation that does not show up in the in-state spending figures. An independent Texas would have to run the functions Washington currently handles for it from outside its borders: a central bank, a foreign ministry and embassies, a customs and tax service, and its own aviation, drug, financial, and communications regulators. A serious plan budgets for these instead of pretending they are free.

So we costed them, against what comparable nations actually spend. The genuinely new recurring bill runs about 5 to 15 billion dollars a year, and a good share of it pays for itself. A central bank is funded by seigniorage, not taxes. The financial, drug, aviation, and communications regulators run mostly on fees, the way their counterparts do in Australia, Canada, and Ireland. That is one to three percent of Texas's revenue, well inside the headroom from Part II. Defense is not a gap either. A Texas defending Texas benchmarks to Australia, at about 35 billion, comfortably under the roughly 60 billion of defense activity the federal government already runs in the state on average and that Part II already counts as a Texas cost.

There is a deeper reason the new layer is so thin. Texas already runs the machinery of a modern government, and already pays for most of it. Medicaid is roughly a 51 billion dollar program in Texas, and the state funds about 20 billion of that from non-federal money while the Texas Health and Human Services Commission administers the whole thing. Texas already educates special-needs children through the Texas Education Agency and some 1,200 school districts. It already runs its own environmental regulator, the TCEQ, on about seventy percent state money. It already builds its highways through TxDOT and conducts its elections county by county. The agencies, the workforce, and most of the funding are already in Austin. Independence does not conjure a government out of nothing. It puts the narrow slice Washington still controls under the same roof as the government Texans already run and pay for.

And the present arrangement has a sting. On most of these programs Washington writes the rules and pays only part of the bill, and Texas covers the difference whether it agrees or not. Congress promised to fund 40 percent of the added cost of special education and delivers closer to an eighth, a federal shortfall that runs on the order of 2.3 billion dollars a year in Texas alone. Federal law orders every hospital to treat anyone who arrives at an emergency room and sends nothing to pay for it, which cost Texas hospitals about 3.7 billion dollars in stranded, uncompensated care in 2024. The 1995 law that was supposed to curb unfunded mandates pointedly exempts the conditions attached to grant money, so the most expensive ones are the ones it cannot reach. Even the grants are not gifts. The federal money that makes Texas look dependent arrives only after Texas puts up its own first. The Medicaid match unlocks nothing until Texas commits its own 16 to 20 billion, the highway dollars wait on Texas covering its fifth, the welfare and special-education dollars on Texas meeting a federal maintenance-of-effort test. Much of what critics count as Washington's spending in Texas is money Texans paid for twice, once in the federal taxes that fund the grant and again in the state taxes that unlock it, on terms they had no vote in setting.

So Texans already fund Washington's priorities with their own money, and get no say in the terms. Independence does not add that cost. It ends it, and hands the decisions back to Austin.

The same pattern runs deeper than the mandates that carry a price tag. Texas lives under more than a million federal restrictions, the binding "shall," "must," and "may not" commands counted in the Code of Federal Regulations, up from about 400,000 in 1970. Texans elected no one who wrote them and can unseat no one who keeps them. By the industry-weighted measure Mercatus built for exactly this question, Texas ranks sixth of the fifty states in federal regulatory exposure, because the work Texas actually does, pumping oil and gas, running the largest petrochemical complex on the continent, farming and ranching at continental scale, is the work Washington writes the most rules for. Set aside whether any given rule is right or wrong. That is not the argument here. The argument is that the rules are written in a capital where Texas holds a small and shrinking share of the votes, and an independent Texas would write its own. Independence does not deregulate anything by itself. It only changes who holds the pen.

One number we will not bury, because it is the real hurdle, and it is smaller than our opponents think. A sovereign currency has to be backed by foreign-exchange reserves to be credible, on the order of 10 to 30 percent of GDP, which for Texas is several hundred billion dollars. But look at what that is, and what it is not. It is not a yearly expense, and it is not a bill Texas has to pay to leave. Texas would keep using the dollar from day one, so it needs no reserve at all to stand up a currency, because it is not standing one up. Should Texas ever choose its own currency later, the reserve is a one-time holding it would build gradually, an asset Texas owns and earns a return on, funded out of the fiscal headroom already shown and out of Texas's share of federal reserve and gold assets in a separation settlement. The largest financial fact of independence is an asset Texas accumulates, not a check it writes.