AUSTIN – A $10.7 billion budget surplus predicted this week by Comptroller Susan Combs set Capitol-tongues awagging with plans for tax rebates and self congratulations for cultivating such a robust economy.

But the surplus is actually about $2 billion.

The rest is already dedicated: $5.7 billion for the state's Rainy Day Fund, and $3 billion to pay for property tax cuts approved last year.

While $2 billion still sounds like a lot of money, out of that the state will have to pay for an estimated 160,000 new students expected to enroll in the public school system since the last budget was written. That could eat up about half of the remaining surplus.

Add to that inflation, growing costs and enrollment in federal entitlement programs like Medicare and Medicaid and hundreds of other priorities that will come up when lawmakers convene in January.

And while Texas so far has bucked the national economic slowdown, a state slump may be right around the corner.

"We are seeing a gentle cooling of the Texas economy," said John Heleman, the state's chief revenue estimator. "The last several years have really been growing very robustly ... we were calling for an easing of that growth and we're seeing that now."

According to numbers to be released today, state sales tax returns for the month of April were down 1.8 percent from the previous April. That marks the first decline in years.

Sales tax revenue, which accounts for more than half of the state's income, is a key factor in determining how severely the state will be affected by the national economic downturn.

Still state officials expect to have money to spend when they convene in January to write the 2010-2011 budget.

A spokesman for Gov. Rick Perry said Thursday that the governor would not be opposed to using savings in the Rainy Day Fund, which bolsters the state's bond rating and is held in reserve for economic or natural disasters, for tax cuts. Such a move would take a two-thirds vote from each chamber of the Legislature.

"Given the likelihood that we will have a budget surplus somewhere north of $10 billion in January, the governor believes that we need to look at providing Texans with tax relief in some form or fashion," Perry spokesman Robert Black said. "That could be additional property tax cuts, could be a reduction in the business tax, an increase in the exemption to the business tax or it could be a direct rebate to taxpayers." A rebate would require a constitutional amendment.

Lawmakers are also awaiting results of a new business tax, which is due for the first time next month. It's unclear exactly how much the new tax will bring in, but healthy or weak, it's sure to affect the state's bottom line.