Recent Local Tax Shortfalls Point Toward Declines In Revenue Across The State

This article originally ran in The Texan on April 30.

With less than two months of data from the COVID-19 lockdown, the long term revenue picture for Texas state and local governments is still unclear. But the short term is beginning to come into focus. 

Cities, which rely heavily on various sales taxes, have been among the first to be hit. 

Earlier this month, San Antonio furloughed close to 300 employees in departments funded by the city’s hotel occupancy tax. It also suspended payments through its arts programs to groups like Guadalupe Cultural Arts Center and the Public Theatre of San Antonio.

San Antonio receives the most revenue of any Texas city from the hotel occupancy tax, totaling almost $93.5 million last year from its 9 percent room tax. 

The general sales tax is also beginning to show signs of weakness. Though collections by the top 20 cities are up 4.3 percent this year, revenue dropped for most cities in April. The state’s payments to cities each month generally reflect sales tax collections from the prior month. 

The hardest cities hit are Midland and Odessa, with respective declines of 11.3 percent and 20 percent. Unlike most Texas cities, both have experienced year-to-date (YTD) declines due to the dramatic drop in oil prices and the downturn in the oil and gas industry. 

Houston’s sales tax revenue was down only 0.7 percent in its April payment, yet the city is already making plans for much steeper declines. 

“I’m not trying to hide it,” said Houston Mayor Sylvester Turner. “These are the realities. This will be the worst budget that the city will deal with in its history.”

He said the COVID-19 lockdown will affect “every facet of city governance” and require furloughs of city workers.

Houston’s $5.5 billion annual budget relies heavily on sales taxes, which supply almost 15 percent of its revenue. The city’s largest source of revenue is the property tax at just over 25 percent.

Unlike with sales taxes, local governments have some control over the revenue they receive from the property tax, normally possessing the ability to increase their revenue by 3.5 percent annually without voter approval. However, Governor Greg Abbott’s COVID-19 emergency declaration may have opened up an opportunity for cities, and counties, to increase revenue by as much as 8 percent.

It is unclear whether the state will allow local governments to do this. If they are given the green light, it would represent a major tax increase on residents still reeling from the effects of the economic downturn. 

At the state level, state tax collections through March are actually up 10 percent YTD over last year. April numbers are not yet available. 

This is a testament to the state’s strong economic performance prior to the recent downtown. March collections began to show the effects of the slowdown, dropping almost 4% from March 2019.

The biggest drop among the state’s major revenue sources occurred with the natural gas production tax, which has declined 26.8 percent YTD from last year. Surprisingly, state revenue from the oil production tax is up almost 15 percent, though that is not expected to last. 

State revenue numbers for April will be soon available from the Texas Comptroller’s office, along with the state’s sales tax payments to local entities. Once those figures are available, both state and local policymakers should have a much better idea of what the longer-term revenue picture looks like. 

Texas residents worried about their tax bills will have to wait a while longer to find out whether state and local governments are going to respond to their revenue shortfall with spending cuts or tax hikes. 

Most cities, counties, and school districts are in the midst of their budget process. Houston, for instance, usually adopts its annual budget in June. The state’s response will come later; it will convene in January to take up its budget, which should be finalized in May.