For years, Frisco enjoyed sales tax revenue growth of more than 10% year over year, which has been used to fund the city’s general fund and economic and community development.
As of October, Frisco’s sales tax revenue had grown 2.26% year over year. Sales tax revenue growth also slowed in the past few years, according to Texas Comptroller of Public Accounts data.
The city estimates it will have about $3 million less in revenue than it did in fiscal year 2018-19.
“Even though our population is still growing at about 5%-6%, there’s so much in and out that I think we’re at a level that is just going to be stable,” Assistant City Manager Nell Lange said. “[Revenue] is going to continue to grow a little but not in huge amounts.”
Budget effects
The slowing of sales tax revenue growth, in addition to other factors, prompted the city to add fewer new positions through the city budget this year.
Four new employees, all in the police department, were added to the 2019-20 city budget approved in September, whereas 45 positions were added in the previous fiscal year.
The city could add more employees if revenues increase above projections, but Lange said the city will have to rethink its budget strategy if revenues are indeed stabilizing.
“We’ve been talking through different scenarios and how to do it,” Lange said. “We continue to grow, and yes, we’re going to need to add bodies. We’re going to need to add parks people; we’re going to need to add police and fire; we’re going to have to open another station at some point. We’ll just have to work through our strategies and see how to do that.”
Frisco Finance Director Anita Cothran said other cities budget for sales tax revenue based on the average of the previous three years’ revenue totals. She said the city may consider a similar strategy in the future.
Possible factors
City staff has pointed to several factors that could attribute to the slowing growth, including increased retail competition in surrounding cities, the closure of several major stores in Frisco and the growth of online shopping.
“The economy generally is slowing down, but we’ve also had a lot build up around us,” Lange said.
Consumers in general are not spending less money, but where they spend their money has changed, said Linda Mihalick, the senior director of the Global Digital Retailing Research Center at the University of North Texas.
“There’s not a slowdown; it’s a shifting of where the sales are coming, what types of retailers, where consumers are buying and how they’re buying,” she said. “But it’s not a negative.”
Consumers in the Dallas-Fort Worth area have more options than ever before for shopping and dining, Mihalick said.
New stores in the region, such as Nebraska Furniture Mart in The Colony and Costco in McKinney, may be drawing residents and visitors outside of Frisco, Lange said.
On top of increased competition, a number of prominent stores have closed in the past year in Frisco, including the Sears department store and the Apple Store, both inside Stonebriar Centre.
Some consumers are also increasingly choosing to shop online rather than in a physical store, Mihalick said. Estimates show that 10% of all sales in the U.S. come from online, and that number has grown from previous years, she said.
Frisco likely has been losing out on sales tax revenue as online retailers used to not be required to pay local sales taxes in Texas.
New revenue
It is unclear how a new state law affecting online sales and upcoming major developments could affect revenue projections this year. Lange said both could either generate more revenue or just offset decreases.
A new law that went into effect Oct. 1 requires many online retailers to pay state and local sales taxes. Any online retailer that generated at least $500,000 in sales in Texas in a year is subject to the new law.
More than a dozen other states implemented similar laws this year.
“Back when the internet started, when only 2% of people were on the internet buying things in the early ’90s, the old tax laws weren’t set up to deal with this,” Mihalick said. “It didn’t really bother anybody back then. But now, everybody’s on the internet.”
The state currently levies a 6.25% sales tax, and local entities have the option to levy a sales tax up to 2%. Frisco imposes the full 2%, for a total sales tax of 8.25%.
When retailers submit their sales taxes to the state comptroller’s office, the state keeps its portion and sends the remainder back to the taxing entities each month, said Kevin Lyons, Texas Comptroller of Public Accounts spokesperson. The same process will be in place for online retailers, he said.
The one exception is that online retailers have the option to collect a flat 7.75% sales tax rather than collecting differing sales taxes based on the jurisdiction in which the sale is made, Lyons said. The state would still keep its portion of sales taxes and send the remaining 1.5% in taxes back to the local entities regardless of the sales tax levied in each entity, he said.
The first online sales tax collections are due to the state in November, and cities will receive their revenue in December, Lyons said.
Lange said it is unclear how much revenue Frisco will receive from online sales.
“It’s anybody’s guess,” she said. “Sales tax is one of the most volatile [revenue sources] we’ve got.”
Upcoming development
New developments are also expected to bring in more sales tax dollars.
KidZania, an interactive education and entertainment center for children, is slated to open at the end of November in Stonebriar Centre. The 85,000-square-foot facility will be the first in the U.S.
An Amazon 4-star store is also opening soon at the mall and will feature products that are top sellers, have received four or more stars or are new and trending on Amazon’s website.
More development that will generate sales tax revenue is planned for the coming years at Hall Park, The Star in Frisco and Frisco Station, Lange said. The Professional Golfers’ Association of America’s development will also draw crowds to see championship tournaments.
Even with slowing sales tax growth, Frisco is still one of the strongest markets in the Dallas-Fort Worth area, said Ian Pierce, vice president of communications for Weitzman, a Texas-based commercial real estate company.
“Stonebriar saw the Sears store close last year, but considering that the mall is one of the best in DFW, retailers should see that space as an opportunity,” he said. “And with experiential retail like KidZania added to the mall, we expect to see increased traffic and cross-shopping.”
