Texas Metropolitan Economies

This is the first in what will be an ongoing series of posts on the Texas economy from the standpoint of its metropolitan areas.

Metropolitan areas are defined by the Office of Management and Budget, a part of the White House. Counties with interconnected commuting patterns are combined into a single metropolitan statistical area (MSA) or, metro area, for short. Each metro area is a common labor market. Companies in that metro area will generally be drawing their workers from the included counties.

Despite its wide open spaces and Hollywood reputation, Texas is more urbanized than the U.S. as a whole. Texas urban areas include 85 percent of the state’s population compared with an 81 percent urban share for the nation. Texas’ 25 metro areas include 82 of our 254 counties. The map below shows the metro areas in green outline. Most of the metro counties are in the eastern half of the state.

Texas MSAs

An urbanized state with a lot of open space

The map also shows the land area of Texas’ 1,700 cities and towns in yellow. Since metros are defined by county, many of the smaller MSAs include only one or a few small cities at the center of a mostly unincorporated metro area. Only the largest metros like Houston and Dallas=Fort Worth are mostly incorporated. This reminds us that population and jobs are even more concentrated than the metro boundaries imply.

Economists and other researchers pay close attention to the health of metro areas. Most major government statistics are published at the metro area. Businesses and others base marketing and expansion decisions on the relative health of metro areas. Government planners and nonprofits need to understand metro area growth to better prepare public services like transportation and public safety.

Today we will take a quick look at a key summary statistic, gross domestic product. When calculated at the MSA level it is often called gross metro product (GMP.) It is defined similarly to the national gross domestic product (GDP) as the total final value of all goods and services produced in a given geography. Economic output is another term for GDP. With a common definition, we can compare GMP performance to national GDP or even state gross state product (GSP.)

Texas’ total economy is over $1.6 trillion. That is slightly larger than the Canadian economy, and 25 percent larger than the Russian economy. Of that total, 93 percent comes from the state’s metropolitan areas. Clearly, it is essential to understand our metro areas if we want to understand the Texas economy as a whole.

The table below lists all Texas metro areas and their GMP growth since the Great Recession in 2008. For comparison at the bottom, we see that the national economy grew 26 percent over the last eight years. Texas’ growth was slightly faster at 30 percent. Metro area performance varies. Only 40 percent, or ten of the 25, of the metro areas grew faster than the state overall. These tended to be the largest metro areas. The state’s smaller metros have not seen as much growth. This uneven pattern is identical to what economists have seen nationwide since the recession. Some communities are prospering, some are continuing to decline, and many are simply marking time.

In future posts we will look closer at our metro areas by digging into the details of different industries and what is happening to jobs, households, and income within and across the state’s metro areas.

Economic and Fiscal Impact of Hurricane Harvey

The slowly unfolding tragedy in southeast Texas is a personal, emotional experience for millions of people. Eventually, however, Hurricane Harvey and its aftermath will also be counted in terms of the material and economic losses for households, businesses and governments. Beyond the immediate effect, there will be long-term fiscal consequences for many.How big might the impact be on local community economies and the local governments that serve them?

There are problems with trying to measure the economic impact of a natural disaster this early, as it is still happening. First, historically, the early estimates of damage and economic impact in natural disasters tend to be higher than the final tally. Several factors contribute to this. Early estimates are made without the benefit of comprehensive data. Many economic statistics are only calculated monthly, quarterly or even less frequently. Structure damage is often over estimated. A building may appear to be a total loss, but often turns out to be salvageable with some repairs. There are also political motives, where local and state officials feel the need to present the worst possible case to maximize federal relief funding. Emotional trauma and media hype can also contribute to worst-case estimates. It is not easy to maintain objectivity in the face of life and death circumstances and continuous media exposure of surreal disaster footage.

We are already seeing preliminary estimates for Harvey in the tens of billions of dollars. Chuck Watson with Enki Holdings threw out a $30 billion number. Kevin Simmons at Austin College speculated that it could exceed Katrina’s economic tally – over $100 billion. Since the storm isn’t over, and flooding will continue, these may prove to be accurate. As the storm moves east into Louisiana, the damages will increase. How can we begin to consider what the total might be. When work for state and local governments, it was helpful to point out to elected officials what the daily scale of economic activity in the community was. A day’s worth of economic output for a city or state is a good metric to compare against major economic events, good or bad.

There are five Texas metropolitan areas in the impact zone of Harvey. These include: Beaumont – Port Arthur, Bryan-College Station, Corpus Christi, Houston-The Woodlands-Sugar Land and Victoria. These five metropolitan areas are home to almost 8 million people (2016 estimates.) Their economic output, according to the latest data from 2015, is about $565 billion. They represent a bigger economy than Argentina, or twice the size of Hong Kong. A simple average daily economic output for those metro areas comes to $1.5 billion. This is ongoing business based on the productive activity of people in the region, using their training and talents and the physical assets that make it possible. These assets include tools, buildings and infrastructure. If everything comes to a complete standstill, then there is a maximum loss of $1.5 billion each day. It is impossible to tell from news reports exactly how much business interruption there has been. The Houston Chronicle has started reporting on restaurants and grocery stores that were reopening as of Tuesday. The daily lost economic output will not be the greatest blow to the economy.

The more important financial damages will be in losses of buildings,  infrastructure, equipment and inventories. A third major impact is from loss of human life. Mercifully, there seems to be relatively few deaths so far. Each of these is a personal tragedy. Beyond that tragedy, each death also means the loss of that person’s talents and productivity forever. This will impact the prospects of the families and businesses involved.

It can be helpful to consider an analogy in thinking about the impact of Harvey. The 2016 Louisiana floods centered on Baton Rouge are a smaller scale event but were similar to what we are seeing today. In that unnamed storm, areas in Louisiana saw over twenty 20 inches of rain in a few days. That storm dumped three times the amount of water on Louisiana as did Hurricane Katrina. In 2016, a LSU study for the State of Louisiana estimated that at the peak, about 20 percent of Louisiana businesses were disrupted, or about 19,000. Almost 5,000 experienced actual flooding. Two weeks after the peak of that flood, there were still an estimated 5,000 experiencing disruptions. The Louisiana flooding hit an economy only about 1/5th as big as our affected Texas metros. Still, the LSU study proposed a $8.7 total economic impact, excluding lost public infrastructure. The study, done shortly after the floods, does not appear to have been revised. It was still being cited in federal disaster relief reports as late as earlier this month. A storm delivering twice the flooding on an economy five times larger could equally rival the impact of Hurricane Katrina. This is not an estimate, but this simple framework is a way of starting to sort through the many conflicting reports we will see in the coming days.

The larger economic impact numbers include potential hits to local governments. There are short-term and long-term impacts. Cities, which already have strained finances must increase their public safety operations in and immediately following a disaster. Clean up and waste disposal during recovery adds additional costs. Long-term, local governments will need to rebuild streets, water systems, traffic signals and replace vehicles. There can also be serious losses to public buildings like libraries, fire stations and schools. A lane mile of road can cost $1.5 million to build. Traffic signals for a four-way intersection can run $300,000. These costs quickly add up. The City of Houston alone, has a massive inventory of physical assets. According to the city’s latest comprehensive annual financial report, the city owned $8.6 billion in buildings, improvements and equipment, and listed $16.7 billion in infrastructure assets. These figures are reported before depreciation. Some damaged or lost assets will be replaced from the city’s annual capital budget. Given the magnitude of the expected losses, much of this will need to be paid for from new debt. That will put pressure on day to day operations for years.

Harvey also comes at a crucial time on the local fiscal calendar. Most cities in the state have a fiscal year that begins October 1. Houston is one of the few that do not, having a July start to their budget year. Elsewhere, city managers and budget directors have already completed their proposed budgets and identified the property tax rates they will need to meet those budget responsibilities. City Councils are poised to adopt those budgets in coming weeks. Hundreds of cities, school districts and counties will be dealing with recovery from Harvey, and scrambling to adjust those budgets. This can also cause misallocations and waste. Quick, chaotic budgeting is seldom wise budgeting.

We will follow developments as this historic disaster unfolds. Though it is almost impossible to maintain objectivity in the face of suffering on this scale, we hope to continue bringing our fiscal sustainability perspective to the situation in Texas and Louisiana in the coming week and months. Our prayers and thoughts go to those living with Harvey’s effects. For official information and ways to help those in need, see the State of Texas emergency website here.

Forecasting Property Tax Base

This week we conclude our series on property taxes by introducing our method for forecasting municipal property tax base if you want to build your own property tax forecast. We have used these variables to build models to support municipal budgeting and they should be helpful for any community in North Texas.

Components of the Tax Base

When doing the forecast you will get more accurate results by creating separate forecasts for the three major categories of property tax base: commercial real property, residential real property and business personal property. Many economic indicators are logical predictors of property tax base, but the following have consistently been statistically significant and contribute to more accurate forecasts.

Variables for Forecasting Commercial Real Property

Three indicators have been effective in forecasting commercial real property. The first is historical commercial real property tax base. This information can come from old budget documents or from your central appraisal district. The second variable is total commercial construction. This can also be obtained from the appraisal district for past years, but another good source may be your municipal building inspection permit data. One or the other may be significant for your community. The final variable is a national statistic, annual gross domestic product (GDP.) This indicator picks up the overall national business cycle, which can have an impact on commercial finance and employment trends which, in turn, influence local demand for real estate and drive up or depress local property values.

Variables for Forecasting Residential Real Property

We find four variables are significant predictors of residential property tax base. The first is historical residential tax base. The second is municipal population. This can come from the Texas Demographic Center. You may need to do your own estimates to obtain the most recent annual values. The third variable is your property tax rate. The final indicator is a national statistic and a subset of the gross domestic product called residential investment. This indicator represents the national housing business cycle and has proven to be a statistically significant predictor of residential tax base in the DFW area.

Variables for Forecasting Business Personal Property

For most cities, business personal property is the smallest of the three tax base categories, but we found it is the most complicated to forecast. We have settled on five indicators that are necessary to predict it. The first is historical business personal property. The second is the Texas Business Cycle Index, which is compiled by the Federal Reserve Bank of Dallas. The third variable is the vacancy rate for retail real estate. You can obtain this from one of the commercial real estate data vendors. A second real estate variable, and the fourth in our model, is total occupied commercial inventory (office, industrial and retail). Finally, annual gross domestic product is also important.

Running the Forecast

We have been using this mix of indicators for many years to track local tax base performance. The art of forecasting means experimenting with various functional forms of these and other variables until you find the equations that do the best job of explaining your city’s historical tax base change. It is best if you build the forecast model in a statistical software program like Eviews or STATA. Once you have finalize the forecast models you can transfer them to Excel to do sensitivity analysis and run scenarios. If you want to learn more about our process let us know. You can use our contact form.

Next week we begin a series on measuring economic wellbeing and how and why economists developed widely used indicators like gross domestic product.

Changing Tax Base in Dallas County

This week we review changes in property market values and tax base for 25 cities in Dallas County since 2007. This builds on the analysis throughout the last month focusing on the property tax and its importance to local cities. Last week we looked at the structure of the tax base in our 25 cities on the eve of the Great Recession in 2007. Since then, there has been substantial change in the local economy.

Total Taxable Value

Our 25 cities saw their combined tax bases grow by 30 percent between 2007 and 2016. The average change for these cities was 45 percent and the median change was 27 percent. The largest and smallest changes were 308 percent and 3 percent, respectively.

Residential and Commercial Changes

Because of some changes in reporting over the period, it is difficult to calculate an accurate change in tax base by commercial and residential categories. Instead, we can present the changes in market value for these categories.

The combined residential market values for the 25 cities grew 29 percent from 2007 to 2016. The average of the individual city changes was 24 percent and the median of the city changes was 27 percent. There was considerable variation across the cities, with the largest increase being 143 percent and a decline of 8 percent on the other end of the scale. The changes for the 25 cities in shown in Figure 1.

Figure 1. Change in Residential Market Value 2007 to 2016.

On the commercial side, the total change for all 25 cities combined was 43 percent. The average of the city changes was 76 percent and the median was 43 percent. There was a very wide range of growth rates across the cities. The largest increase was 533 percent and the smallest increase was 16 percent. The change in commercial market value is shown in Figure 2.

Figure 2. Change in Commercial Property Market Value 2007 to 2016.

Change in Commercial Share of Market Value

Between 2007 and 2016, most cities saw the share of total market value in commercial property increase. That is, commercial property grew in importance compared to residential property. The average change for the 25 cities was a 5-percentage point increase in the share held by commercial property. The median increase was 3-percentage points. The largest shift was a 26-percentage point increase in commercial property’s share of total market value. The largest decrease in share of commercial property was 1 percentage point. The change in the share of property values in commercial property are shown in Figure 3.

Figure 3. Change in Commercial Property’s Share of Total Market Value 2007 to 2016.

Dallas County Property Tax Base Structure

Introduction

We continue our series on the property tax in 25 cities that are primarily in Dallas County. This week, we look at the structure of our cities’ tax bases. That is, how it is distributed in terms of residential and commercial tax base and the extent to which cities have exempted their tax bases for various policy reasons. We are presenting the data from before the start of the Great Recession, 2007. The structure of the tax base can have important impacts on the behavior of local governments. Next week we will look at how these cities’ tax bases changed since 2007 by adding in the data for 2016.

Market and Taxable Values

Taxable values are what counts for delivering local government revenue. Taxable value can differ from market value because of exemptions that local governments offer. These include homestead exemptions and tax freezes on single family residences and various economic development abatements on commercial property, among others. Because each city council sets these exemptions, we can expect the taxable share of property to differ from city to city. This is the case. Figure 1 summarizes the situation for the combined tax base of all 25 cities.

Figure 1. Taxable Share of Different Sectors Varies

When looked at individually, our cities have total taxable values, as a percent of total market value, that range from a low of 68 percent to a high of 93 percent. The average of the 25 cities is 85 percent and the median is a little higher at 87 percent. Figure 2 compares the taxable shares of market value for the 25 cities.

FIgure 2. Taxable Portion of Real Estate Varies by City

The property tax rolls are summarized into three broad categories of property: real commercial property and real residential property include land and improvements (buildings.) The third category is business personal property, which is other income-generating property.

Just as cities present different overall taxable shares, the fraction of property that is considered taxable across property types differs even more. For commercial real property, there is a very wide range. The low and high percentage that is taxable runs from 37 percent to 93 percent. The average taxable amount for commercial real property is 74 percent and the median is 79 percent.

For business personal property, the range is from a low of 53 percent to a high of 100 percent. The average and median percentages are 90 and 97 percent, respectively.

Finally, for residential real property, the share that is taxable varies from a low of 72 percent to a high of 98 percent. The average rate for all cities is 88 and the median is 91.

Share of Tax Base by Sector

Our cities tax bases show different concentrations of commercial and residential. This is because business and residential activity is not uniformly distributed across the region. There are major business centers in the county, such as downtown Dallas, Richardson and Irving. Cities without such a business center or that lack significant highway frontage will have relatively small business tax bases. This means that the residential segment of the market will have to shoulder the burden of supporting property taxes.

The share of commercial real property ranges from 5 percent to 68 percent. The average is quite low at 28 percent. The median share is 26 percent. Business personal property is roughly, but not perfectly, distributed where the commercial real property is located – with an 82 percent correlation between the two.  To get a truer comparison of residential and commercial tax burdens should combine commercial real and business personal property. When we do that, we see that the total share of the tax base in these combined sectors runs from 7 percent to 86 percent, quite a wide range. The average share for these two combined is 41 percent, with a median of 39 percent. So, in general, our cities have more of their tax base in residential property than in commercial property. Actually, only eight of the 25 cities have a majority of their property tax base in commercial property.

Necessarily, the residential tax base makes up what is left. The range runs from a low of 14 percent to a high of 93 percent. The average for all the cities is 59 percent. The median is 61 percent.

Figure 3 shows the share of taxable value that is commercial + business personal property and residential real.

Figure 3. Cities Differ in Their Commercial and Residential Mix

This is the tax base structure our 25 cities had on the eve of the Great Recession. This is what their management and councils had to work with as local property markets began several years of declines. In many cases, the local choices were influenced by these tax base differences. Next week we will see how these cities’ tax bases had changed by 2016 and several years of recovery.

Tax Base in Dallas County Cities

Introduction

Last week we looked at historical changes in the tax rates of 25 cities that are all or primarily in Dallas County. This week we review changes in the tax bases of those cities since before the Great Recession. The cities included in this analysis are: Addison, Balch Springs, Carrollton, Cedar Hill, Cockrell Hill, Coppell, Dallas, DeSoto, Duncanville, Farmers Branch, Garland, Glenn Heights, Grand Prairie, Highland Park, Hutchins, Irving, Lancaster, Mesquite, Richardson, Rowlett, Sachse, Seagoville, Sunnyvale, University Park and Wilmer. These cities vary dramatically in size. Though all saw their tax base grow, their performance also varied. Much of the growth in recent years was making up for loses following the Great Recession.

Total Tax Base

These 25 cities had a total taxable value of over $238 billion in 2016. This was a $57.2 billion increase over 2007 when their combined tax base was $183.7 billion. That was the year before the financial crisis and the beginning of the Great Recession. That change represents a 32 percent increase.

These cities vary in size, with 2016 tax bases ranging from $93 million for the City of Cockrell Hill to almost $109 billion for the City of Dallas. The five largest cities account for 72 percent of the taxable value in 2016. It takes the 14 smallest city tax bases to account for 10 percent of the total taxable value.

Changes in Tax Base

There are three benchmarks that we can use to evaluate the changes in individual city tax base since 2007. First, the absolute change in total taxable value for the entire county was 32 percent. The larger cities have a major influence on this total change. Indeed, the average change for the five largest cities was also 32 percent.

The average of the changes for all 25 cities was 45 percent. The slowest growing city saw an increase of just 3 percent, in Mesquite. The fastest growing city, Wilmer, had an increase of 308 percent over the period.

A final comparative metric is the median change, which was 27 percent. This implies that half the cities saw their tax base grow faster, and half grew slower than 27 percent.

Figure 1 shows the 25 cities in order of their percentage increase. Most cities had growth rates below 50 percent. The 45 percent average is pulled up by the very high growth rates of several small cities.

Figure 1. Percent Growth in Tax Base for Cities in Dallas County

 

Figure 2 keeps the same order for the cities, but shows the absolute increase in tax base. Figure 2 puts into perspective that the City of Dallas, as by far the largest city, has contributed the most to the total increase. The City of Dallas accounted for 44 percent of the total growth of the 25 cities. Irving and Richardson saw the second and third largest tax absolute growth in tax base.

Figure 2. Absolute Growth in Tax Base for Cities in Dallas County

Decline and Recovery

Comparing the difference between 2007 and 2016 misses the important changes that happened annually after the economic downturn. During this interval, these communities actually experienced four years of declining tax base after the onset of the Great Recession. The tax base in the Dallas County portion of these cities fell an average of almost $5 billion each year between 2008 and 2011. This was followed by growth in tax base for the last five years. Forty percent of the growth in the last five years was simply making up for lost tax base from the Great Recession. The annual changes for the Dallas County portion of these cities is shown in Figure 3.

Figure 3. Total Change in Tax Base for Dallas County Cities

*Includes the Dallas County portion of the 25 cities. Small sections of several communities are located in surrounding counties.

Next week we will continue our examination of the property tax base and rates for our Dallas County cities.

Construction in Dallas

Fiscal Impact Analysis and Sustainability

Development agencies, governments and businesses have long used fiscal impact studies. Sometimes these studies are intended to justify a favored project. Sometimes, there is genuine interest in learning whether the project is a good idea for the community. A fiscal impact analysis is a powerful tool for helping local leaders and the entire community understand whether a project or policy change will improve or harm local-government finances. Doing one-off studies of individual projects can mislead local leaders. This is because stand-alone studies can fail to demonstrate a cumulative impact over time that overwhelms departmental service levels, utility and infrastructure capacity. A more holistic approach is better where the fiscal impact process informs public operating and investment decisions throughout city government.

A community can also miss a golden opportunity by only conducting stand-alone studies of its major projects. It misses the opportunity to use the fiscal analysis process to help reorient local public and private decisions to a more financially sustainable way of doing business. Over the next few weeks we will be showing cities how they can take full advantage of fiscal impact analysis not only to help them understand major, individual developments, but to use the fiscal impact process to improve overall operations. Today we will give you a quick overview of fiscal impact analysis as a primer. You can find more information on fiscal impact studies by downloading our local leader’s guide here.

What is fiscal impact analysis?

Fiscal impact analysis measures how local-government revenues and service costs change because of a change in the economy or the local government itself. The change can be a public or private capital investment or a change in government policy. The analysis subtracts government costs associated with completing and supporting the project from the revenues the project generates for local government. Many types of projects can be evaluated with this kind of model:

  • Construction or renovation of residential or commercial real estate
  • Business expansions or closures
  • Public works investments in facilities and infrastructure
  • Changes in government staffing, equipment and operations
  • Fee and tax changes
  • Land use changes (rezoning, annexations and build-outs)

Cities should use fiscal impact analysis to evaluate any major policy change or development. The time and effort are worth it. Some of the benefits of the study include: discovering potential infrastructure bottlenecks, learning the operating budget and revenue consequences of the project and helping the community understand the timing of these costs and benefits. Still, a community doing one-off studies of individual projects can miss the bigger-picture opportunities fiscal impact analysis offers.

Over the next few weeks we will take a closer look at how local governments should rethink their fiscal planning, forecasting and operations using a fiscal impact lens. Essentially, cities can use fiscal impact analysis as a process to make their key development, financial and operating processes work together to put their organization and their local economy on a more sustainable path. This not only helps them understand the implications of individual choices, it helps them:

  • Connect the dots between economic development, planning and budgeting processes
  • Build an organizational culture that makes short term decisions that are consistent with long-term goals and sustainability
  • Improving citizen and elected official confidence that the city resources are being well managed

Next week, we will look at the strategic and tactical choices a community needs to make if it wants to use the fiscal impact process to help improve long-term sustainability.