Economy still blossoming in Texas: the Lone Star State has fared better than most during the recession, but lawmakers will face fiscal woes next year.

• Author: Moritz, John

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As the nation's economy continues to struggle and many states face the daunting task of closing multi-billion budget gaps, some national news magazines have portrayed Texas as a verdant oasis standing against a parched economic desert.

Unemployment in Texas ranks well below the national average. State lawmakers left Austin last June after passing a two-year, $182 billion budget that not only was balanced, but also left a projected $9 billion in reserve in the state's rainy day fund. Texas continues to far outpace the rest of the nation in attracting new residents and new businesses to the state.

A closer examination of conditions in the state, however, shows more than a little wilt on the Texas rose, and even some suggestion that the image of the state as a welcoming oasis could be fading into a gauzy mirage.

"We're certainly not immune from the downturn that has hit all of the other states," says Dale Craymer, president of the nonpartisan Texas Taxpayers and Research Association, an Austin think tank. "Other states may have experienced more severe difficulties than we have. But looking ahead to next January, I think we are looking at one of the toughest legislative sessions in our history from a budget standpoint."

Start with the state's 6.25 percent sales tax that is levied on almost all retail transactions except groceries and medicine. Because Texas is among the few states with no personal income tax, the sales tax has long provided state lawmakers with the largest and most reliable single source of general revenue. But after years of near uninterrupted growth, sales tax collections began plunging in February 2009 and have remained in a downward spiral ever since.

Receipts for FY 2009, which ended Aug. 31, were down 2.7 percent from the year before. Collections for November 2009 were down more than 13 percent. In December 2009, which included the Christmas shopping season, revenue plunged nearly 12 percent from the previous December. And motor vehicle sales tax collections were down 22.5 percent for FY 2009.

Another fault line appeared in Texas' all-important oil and gas sector. The deep plunge in prices of both crude oil and natural gas beginning in late 2008 led to a corresponding drop in energy production tax receipts to the state. After nearly doubling from 2007 to 2008, tax revenues plummeted by some 25 percent last year, and the decline was even sharper for the first three months of FY 2010.

And even as the trend lines on the revenue side of the ledger show a downward spike, the expenditure side is pointing up.

In January, the Texas House Ways and Means Committee heard testimony that the Medicaid...