Cities' sales tax growth yields few Senate Bill 2 concerns

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The Texas Legislature approved legislation in 2019 calling for sales tax on purchases made from remote sellers and a limit on year-over-year property tax revenue growth, both of which could affect cities’ bottom lines.
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Senate Bill 2 limits how much a city or county can increase property tax revenue to 3.5% from the previous year before voter approval is required. Previously, there was an 8% cap. New property is excluded. Effective Jan. 1, 2020
The cities of Tomball and Magnolia have seen sales tax revenue grow over the last decade, which has afforded added revenue for city projects and property tax relief for residents, city officials said.

Sales tax revenue in the cities of Tomball and Magnolia increased 90.9% and 33.65%, respectively, from 2010-19, according to data from the Texas comptroller of public accounts’ office, outpacing population growth in the cities during that time.

Tomball’s property tax rate has remained at $0.341455 per $100 valuation since fiscal year 2011-12, and Magnolia’s property tax rate has decreased since FY 2010-11, according to city information.

As sales tax revenue makes up a larger portion of general fund revenue than property tax revenue in both cities’ annual budgets, city officials said they have little concern about the effects of Senate Bill 2, which took effect Jan. 1. Passed by the 86th Texas Legislature in 2019, SB 2 limits how much certain taxing entities can increase property tax revenue from the previous year before voter approval is required.

“We are more reliant on sales tax than we are on property tax,” Tomball City Manager Rob Hauck said. “Because of that, we are a city that will likely be less affected by SB 2 than many other cities who heavily rely on property tax.”

Contributing to sales tax revenue, House Bill 1525—also passed by the 86th Legislature— requires large marketplace sellers, such as eBay or Amazon, to collect sales tax. The bill brings a new source of revenue for cities, said Kevin Lyons, a spokesperson for the comptroller’s office.

How significant that revenue stream will be is yet to be seen, Hauck said.

“Our sense is it will ultimately have a positive impact; we just have no idea of when or how much,” he said.

Following the cents

Sales tax is collected by the state comptroller’s office and allocated to the proper jurisdiction, Lyons said.

In Tomball, the city collects the maximum allowable 2 cents of sales tax with 25% of revenue going to the Tomball Economic Development Corp. and the other 75% to the city. Of the city’s portion, 0.5 cents is used for property tax reduction, meaning that money complements property tax revenue instead of being deposited in the general fund for daily operations, Hauck said.

In Magnolia, the city receives 50% of the 2 cents of sales tax revenue, and the remaining 50% is earmarked for economic development and road improvements, said Tana Ross, the economic development coordinator and planning technician for Magnolia, in an email. However, future developments at FM 1488 and FM 149 will contribute only 1 cent of sales tax revenue to the city, she said.

“We thrive on sales tax in order to keep our property tax low. We’ve always tried to maintain lower property tax and utilize sales tax. It’s a big deal for us,” Magnolia Mayor Todd Kana said.

Kana said he anticipates a bump in revenue from the proposed H-E-B development at FM 149 and FM 1488 previously said to break ground this year. Ross said the ongoing Hwy. 249 construction has brought additional revenue to the city with equipment leases and other activities.

Although both cities have seen some years of sales tax revenue declines in the last decade, according to comptroller data, the cities saw double-digit percentage increases in revenue overall from 2010-19.

Hauck said he attributes steady sales tax revenue growth to better mobility and new commercial and residential properties, specifically the uptick in interest in the TEDC’s Business and Technology Park, located near Holderrieth and Hufsmith-Kohrville roads.

“If you look at the last couple of years in the business park, I would characterize the growth as explosive,” Hauck said. “We went [through] years of relatively slow and steady residential growth to residential growth now like none we’ve seen.”

Averaging growth

Tomball officials said its growth in sales tax revenue is tied to the rising population in and around the city.

“If we were dependent on just the rooftops within the city limits, we wouldn’t see the [amount of] sales tax. It’s more regional,” Assistant City Manager David Esquivel said.

Tomball’s 90.9% growth in sales tax revenue from 2010-19 outpaced its 11.59% population growth from 2010-18—the most recent data available, according to comptroller and census data.

Esquivel said greater sales tax revenue has allowed Tomball to add sidewalks annually, allot funds for future Main Street projects, expand parks and initiate drainage improvements.

Similarly, Magnolia’s 33.65% sales tax revenue growth over the decade surpassed the city’s 20.53% growth in population from 2010-18.

Numbers used in Community Impact Newspaper’s analysis of Magnolia sales tax revenue do not include the more than $600,000 that city officials believe was overpaid to the city last September.

In Stagecoach, sales tax revenue rose 359.2% from 2010-19, according to comptroller data, or from $14,951 to $68,657. From 2010-18, the city’s population grew 43.2%, from 456 to 653, census data shows.

“We do not have any businesses in our city, so [sales tax revenue] is mainly from home-based businesses, online purchases and services, such as trash pickup, telephone, internet, etc.,” Stagecoach City Secretary Brenda Rutt said in an email.

New legislation

As internet sales increase, cities can look forward to collecting additional sales tax revenue thanks to HB 1525 and HB 2153, which provide a single local tax rate option for remote sellers to charge Texas customers, Lyons said. The single local tax rate—1.75%—is available only to sellers outside of Texas, as sellers in Texas must charge the actual local rate, he said.

Revenue collected as a result of the new legislation is allocated by the state proportionate to how much of the state’s total sales tax revenue a jurisdiction receives, Lyons said.

“If Tomball’s allocations represent 12% of the state’s allocations, they’re going to get 12% of the single local rate collections,” he said.

This means single local rate collections allocated to a city may not reflect the actual amount of remote sales made there, Lyons said. Single local rate collections have contributed more than $22,216 to Tomball, $3,393 to Magnolia and $110 to Stagecoach since the legislation took effect Oct. 1, according to comptroller data.

Because of sales tax revenue growth, Tomball and Magnolia city officials said they have little concern about SB 2, which reduces the amount property tax revenue can increase year over year from 8% to 3.5% before an election is triggered, according to the bill summary. Although SB 2’s limit exempts revenue generated from new property, Community Impact Newspaper previously reported, public notices from Stagecoach, Tomball and Magnolia for FY 2019-20 project the cities to each see more than 3.5% growth in property tax revenue from the previous year when including the value of new property.

“I don’t see [SB 2] necessarily hurting us,” Kana said. “I don’t think it’ll have a big effect on us since we thrive more on the sales tax.”

In Magnolia, sales tax revenue makes up 38.5% of general fund revenue budgeted for FY 2019-20, according to budget information.

In Tomball, sales tax revenue amounts to 51.6% of FY 2019-20 general fund revenue, according to budget information.

“I think there is the potential for us to have adjustments or leveling off at times [in sales tax revenue], but I think that based on everything that we’re seeing, I think we’ll see that upward trend continue,” Hauck said.

Shawn Arrajj and Vanessa Holt contributed to this report.
By Anna Lotz

Editor, Tomball | Magnolia

Anna joined Community Impact Newspaper as a reporter in May 2016 after graduating with a degree in journalism from Cedarville University in Cedarville, Ohio. In July 2017, she transitioned to editor. Anna covers education, local government, transportation, business, real estate development and nonprofits in the Tomball and Magnolia communities. Prior to CI, Anna served as editor-in-chief of Cedars, interned with the National Journalism Center in Washington, D.C., and spent time writing for the Springfield News-Sun and Xenia Daily Gazette.


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