Sales tax dip could affect south Montgomery County property taxes

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With property tax revenue expected to flatline as build-out approaches for South Montgomery County communities, taxing entities are working to maintain positive sales tax revenue despite a volatile economy, in hopes of keeping property tax rates steady.

However, because of the Greater Houston area’s oil and gas downturn and competition from neighboring and online retailers, officials with The Woodlands Township, Shenandoah and Oak Ridge North said overall sales tax revenue has experienced a plateau in growth in recent years.

“Oil and gas has semirecovered, but it did cause sales tax to flatten out,” said JJ Hollie, president of The Woodlands Area Chamber of Commerce. “The Houston [area]economy still grows even when oil prices are down because it’s so diversified, but oil acts like a governor of the economy. When oil prices are down, the growth rate slows.”

If sales tax revenue in South Montgomery County is unable to recover, officials said taxing entities may be forced to rely more on property tax revenue in future budgets, meaning residents and business owners would be subject to higher property tax rates.

Economic lags

Since The Woodlands Township began collecting sales tax revenue in 2008, it has experienced an increase in collections year over year until 2016, just after oil and gas prices plummeted to $35-$40 per barrel in December 2015, The Woodlands Township Chairman Gordy Bunch said.

Between 2015 and 2016, sales tax revenue dropped  2.1 percent in The Woodlands.

“Sales tax has been stressed by the economy with oil and gas being down,” Bunch said. “It’s also been impacted by online retailers like Amazon, because when online transactions occur within our economic footprint, we don’t receive that sales tax we would normally get.”

Bunch also attributed the lag in the economy to new competition, including developments such as The Grand Parkway Marketplace, Springwoods Village and Birnham Woods Marketplace. A lack of new construction within The Woodlands’ taxing authority is another contributing factor, Bunch said.

In The Woodlands Township’s fiscal year 2017-18 budget, mining and oil and gas extraction account for 2.9 percent of The Woodlands’ sales tax revenue, while construction makes up 1.7 percent.

“Retail is definitely king when it comes to sales tax revenue, but we also get sales tax from the oil and gas industry and from construction projects,” Bunch said. “We had a lot of development from 2012-15 with Hughes Landing, Creekside Park and Town Center, but now that those projects are completed, we’re seeing a decline.”

Other South Montgomery County communities are experiencing similar sales tax trends. Between 2015 and 2016, Oak Ridge North’s sales tax revenue decreased by 2.5 percent, and Shenandoah’s revenue fell by 5.7 percent. Both Shenandoah and Oak Ridge North officials predict 2017 sales tax revenue to be lower than 2016 revenue, while The Woodlands anticipates a slight 2.6 percent uptick.

Heather Neeley, Oak Ridge North’s economic development director, said the city anticipated a shortfall for sales tax projections for FY 2016-17. However, sales tax revenue has begun to stabilize in the last quarter, she said.

“We are fortunate that although oil and gas have an effect [on]our economy overall, the larger downturn was in downstream oil, while most of the industries in our area are upstream,” Neeley said. “Because of that, there wasn’t as large of a margin of upset, [however], these industry downturns still have an effect on service industries, construction and retail.”

Build-out barriers

As taxing entities craft their annual budgets, sales tax revenue projections play an influential role in determining property tax rates, local officials said.

In the FY 2017-18 budgets for each entity, sales tax makes up 66 percent of Oak Ridge North’s budget, 63 percent of Shenandoah’s budget and 41.9 percent of The Woodlands’ budget. In those same budgets, property tax revenue accounts for 23 percent of Oak Ridge North’s budget, 10 percent of Shenandoah’s budget and 36.4 percent of The Woodlands’ budget.

As developable land in South Montgomery County becomes scarce, taxing entities expect property tax revenues to plateau without much room for future growth. Because of this, future budgets are expected to rely more heavily on sales tax revenues unless property tax rates increase, officials said.

With space for 5,515 more residential units in The Woodlands, the master-planned community is expected to reach residential build-out by 2019, according to The Woodlands Development Company. The community also has roughly 7.5 million square feet left for commercial and industrial development.

“Once we’re built out—that’s it,” Bunch said. “We don’t have expansion rights, so, unlike other cities that could just annex a new community to grow their tax base, The Woodlands is what it is.”

Although an influx of new residential development is not on the horizon for The Woodlands, redevelopment of older areas of the community, like the Village of Grogan’s Mill  is probable, Bunch said.

“We very likely will have redevelopment in the future, but most additional development on raw land would be commercial-oriented,” Bunch said. “Right now, the local commercial demand isn’t such that it would warrant additional commercial development.”

Neeley said although there is little developable land left in Oak Ridge North, approximately 200 acres of vacant land are available within the city’s extraterritorial jurisdiction—the land outside a city’s boundaries that can be annexed.

The majority of the city’s ETJ is included in Tax Increment Reinvestment Zone No. 1, which was established by Oak Ridge North, east of the railroad tracks, in 2015. The TIRZ is a financing tool to use future gains in taxes to pay for public improvements needed to make gains happen. Neeley said having parts of the ETJ in the TIRZ enables the city to leverage future incentives for development with possible annexation.

“Future property tax revenues will rely heavily on commercial development within the TIRZ,” Neeley said. “Without commercial growth, inflation alone would drive up the need for increase in revenue, [and]the increase will fall on residents and existing businesses.”

Also nearing build-out, Shenandoah has approximately 20 acres left of developable land within city limits, interim City Administrator Kathie Reyer said. On the east side of I-45 in Shenandoah, mixed-use developments MetroPark Square and Centro are underway and expected to add commercial and residential value to the city. Developed by the Sam Moon Group and Palmetto MDR, respectively, both properties are expected to improve sales tax revenue and increase tourism upon completion, city officials said.

Reyer said she estimates Shenandoah will reach build-out within the next decade.

Despite the recent sales tax plateau, The Woodlands Township was able to maintain the same property tax rate it has carried since FY 2015-16, while both Oak Ridge North and Shenandoah councils managed to lower their respective property tax rates.

This trend may not continue in the future, however, depending on the state of sales and property tax revenues, officials said.

Sales tax strategies

As the oil and gas industry recovers, Shenandoah, Oak Ridge North and The Woodlands Township officials said they expect their economies to bounce back as well.

The taxing entities are working on various initiatives to promote tourism in hopes of expediting the recovery process.

Oak Ridge North’s Economic Development Corporation began a shop local campaign in June called #buyorn. Neeley also said the organization compiled a citywide business directory and is working to spotlight local businesses in its weekly newsletter.

Gil Staley, The Woodlands Area Economic Development Partnership CEO, said he is also hopeful Oak Ridge North will have its first hotel in the near future, which could attract increased tourism and, in turn, increased sales tax revenue.

Reyer said Shenandoah is also working to increase commercial foot traffic through a variety of outlets, including the Shenandoah Convention and Visitors Bureau, which underwent renovations in 2016.

“The city will continue to explore new business development opportunities and continue with our Shenandoah Business Association to build relationships with our current businesses to help achieve increased sales,” Reyer said.

Shenandoah is also considering a $20 million-$40 million special events center, which would be able to accommodate large-scale events, such as conferences, sporting events and graduation ceremonies. Although a feasibility study is included in the city’s budget and the Shenandoah Municipal Development District’s budget for FY 2017-18, a funding source has not yet been determined.

With a variety of tourist attractions, such as The Cynthia Woods Mitchell Pavilion, The Woodlands Mall and Market Street, Bunch said The Woodlands Township relies heavily on tourism for the majority of its sales tax revenue. Approximately 12.5 percent of The Woodlands’ sales tax revenue comes from accommodation and food services.

As such, the township completed a feasibility study for a cultural arts complex in The Woodlands in August as an additional way to attract visitors. The proposed center would include a performing arts center and a science museum, which could either be combined or operated separately.

Bunch also said he hopes to continue capitalizing on the hotel industry in The Woodlands, which promotes sales tax in retail, dining and entertainment venues. With this strategy, improvement in the tourism industry could be the key to sales tax recovery.

“I think that we’re going to have to be more creative in marketing our community,” Bunch said. “We’re very dependent upon our tourists and our peripheral communities, so we need to shop in other communities, and they need to shop here—we all need each other.”

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