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


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.

Sales Tax and Fiscal Sustainability

The Texas economy has been a top performer for many years. Indeed, even with the ups and downs of the national economy, since 2002, Texas’ economy grew at an 5.7 percent annual compound rate. As the economy changes, however, all states, including Texas are facing a fiscal challenge. As the economy includes more services and fewer goods, traditional sales taxes are bringing in less revenue.

Based on reports from the Texas Comptroller of Public Accounts, Texas has seen its taxable sales activity grow by only 3.1 percent annually.  With no income tax, sales taxes are a major source of state revenue (26.4 percent of the total in 2015).

Another way of looking at this is to compare taxable sales to total economic activity. Even as the economy has grown, the amount of taxable sales has continued to shrink (see chart.) In 2002, a dollar of gross state product generated 6 cents of taxable sales. That amount fell to 5 cents in 2008 and was down to just over 4 cents by 2015 (most recent data.) This is clearly an unsustainable path. Since cities in Texas also rely heavily on sales taxes, they are facing the same situation. Local conditions may differ and some cities have healthier economies than others, but the trend will be the same.

Texas taxable sales per dollar of state GDP

A changing economy means less sales tax revenue even with growth.

With growth, there is more demand for services: schools, police and fire being the largest categories for local governments. But the available resources are not keeping up. If the circumstances get bad enough, a future Legislature will face pressure to broader the sales tax base to cover more services. As a fiscally conservative state, however, cities, towns and the state government in Texas will likely choose to cut spending rather than seek new revenue sources.

This makes it critical for local leaders to focus on how to make their communities more sustainable through their development policies, land-use patterns, regulations and municipal operations.

Issues for 2017


We want to start the new year suggesting some important themes and issues local leaders will face in 2017.


Both presidential candidates promised big infrastructure initiatives. From all indications, the Trump administration will take a different approach than past presidents. In keeping with his campaign themes, the objective appears to be promoting economically viable upgrades in key systems. The method will rely more on incentivizing public-private partnerships than by providing direct funding to states and localities. This may take the form of localities partnering with business to finance projects with the private sector paid back through operating revenue. One consequence may be that communities with weak economies will have fewer infrastructure opportunities. Healthy communities will be in a position to further their advantage by attracting more private investment capital.

This may be a window for localities to implement pilot smart cities initiatives. Broadband should be their priority given its potential to support business and workforce development. Success there will mean finding ways to make it sustainable to serve low-income communities.

Migration and Jobs

Interstate migration rates are returning to pre-Great Recession levels. There has been a long-term decline in migration in recent decades, but the Great Recession caused a dramatic reduction. Lack of new job opportunities outside tech hubs and energy producing regions kept people in place. We should see even more migration to western and southern states in the new year. Growing areas will face new service and infrastructure demands. Communities losing population will be trying to manage their public sector with a smaller economic base.

Migration in 2017 will reflect low oil prices. Energy producing regions will generally not be such strong draws. Though, Texas should continue to see migration to cities in the I-35 Corridor: Dallas-Fort Worth, Austin and San Antonio which have more diverse or tech-focused economies than Houston. Florida, Georgia and North Carolina will continue to grow in the South. The Rocky Mountain West will keep attracting California migrants.

Nationally, we can expect to see continued weak labor markets. 2017 will bring more headlines of workers being replaced by software and machines, the continued growth in the gig / freelance economy. Recent research shows that most new jobs created during the recovery were non-traditional contractor or part time. This trend will continue. Automation will continue reducing the need for corporate-based manufacturing, administrative, retail and even white collar jobs. Local leaders will face fewer more difficult challenges. They will need to adapt their economic development strategy. The objective will be to craft cost-effective ways to make their communities easier places to start businesses and train for a constantly changing and narrowing labor market.

Watch out for the States

As always, one of the biggest factors in local finance and development are policies by state legislatures. With legislative sessions starting soon, local governments can expect more efforts to limit their flexibility and potentially change economic development policies. State budgets are relatively stable, except with lower revenue in energy producing regions. Local leaders who want to preserve their freedom of movement need to pay close attention to these bills and rally their representatives and senators to their position. Restrictions on economic development incentives may emerge in several states, including Texas.

Not So Purple

The presidential election once again highlighted the biggest divide in America – that between urban and rural areas. The fault lines fall somewhere in the suburbs. Older suburbs share many policy and cultural similarities to central cities. Newer suburbs, exurban and rural areas similarly have some political affiliation. Economically, however the nation’s MSAs have little in common with rural America and small towns. Federalism once permitted states to set their own policies in key areas. Today, the individual states are often divided. Solutions will not be easy when it comes to key community building strategies like business and workforce development. Employment and income is increasingly concentrated in a few dozen MSAs. Most other regions need to learn to manage with stable or declining economies.

Holding the Line on Expenses

With housing prices continuing to increase this year, property tax revenues will improve in many communities, especially in the large metro areas. Local leaders will face pressure to restore services cut in recent years. As the largest budget categories, police and fire funding can easily consume all new revenue. Infrastructure backlogs also demand attention. At the same time, cities need to begin thinking of ways to shore up pension and retirement benefit systems. Current asset price highs have papered over structural problems in many public pension programs, but a market correction would reveal many unsustainable systems. Prudence recommends that citizens and local leaders pay close attention to the upcoming budget. These relatively good budget times are opportunities to replenish rainy day funds and have serious conversations on building a more sustainable public finance. These conversations should address the appropriate role of local government, sustainable service levels and innovative ways to achieve acceptable results for less money.

We hope you have a safe and prosperous 2017!

Planning for Fiscal Sustainability


We are continuing our series of posts on building a more sustainable community. This week we introduce a framework for long-range planning that can tie together the elements we have introduced over the last several weeks.

Context and Scope

The Government Finance Officers Association provides a good introduction to long-term financial planning. Their definition of long-term planning as a combination of forecasts and strategy is useful in the context of fiscal sustainability. Forecasts are our best educated guesses of how key economic and finance variables are likely to change. Strategy is simply considering how those forecasts may impact our goals and identifying actions to improve the chance we get outcomes we want. This is all easier said than done.

Every city has an annual budget process, but planning adds new dimensions and takes time. It requires more than just looking further down the road. It also requires a more open and transparent process where city staff can support local leader decision making and help the public understand the costs and benefits of different levels of public services.

Though planning takes time, any community can afford some level of forecasting and strategic assessment. The key is finding the right balance. One option is to include phasing the process in over a few years, adding more functions. Another approach is to do long-term forecasts for select departments every few years so that all city operations are addressed at least once every two or three years.

The most important factor is that long-term planning become part of the annual budgeting process. The forecasts can help assess risks and needs in the upcoming annual budget. The extra value comes from the longer-term forecasts and how their results can inform changes in overall financial policy. These forecasts can also identify the need be proactive with operating procedures and capital projects.

Key Elements of the Planning Process

Using the GFOA outline, here are our recommendations for how to set up a long-range planning process:

  • Time Horizon – five years is adequate for operational planning. Economic forecasts are unreliable beyond five years. If a community wants to consider longer term consequences they should identify a number of long-term scenarios with varying economic conditions and service assumptions. They can then simulate how these would impact their budget and key fiscal sustainability indicators.
  • Scope – The plan should cover all major funds. The general fund is the priority, but enterprise fund analysis can be just as important to maintaining the viability of those fee-based operations.
  • Frequency – Communities should evaluate at least some of their economic, revenue and operating drivers annually. This helps make the long-term approach a recognized and expected part of the process for decision-makers and the public.
  • Content – The plan should include all types of financial indicators discussed last week: economic and demographic, revenue, spending and operations, debt and infrastructure.
  • Visibility – The plan needs to be a highly visible part of the annual budgeting process. As we pointed out previously, community engagement is key to making these key decisions with public input.

Willingness to pay for services and decisions on priorities require solid public involvement up front. If not, a community may find it difficult to sustain those efforts down the road.

Engagement and City Staff

If communities are going to become more fiscally sustainable, dialogue is at the foundation of the process. We recommend community engagement at each phase of the process. Citizen advisory councils can help staff and local leaders communicate the complexities to the public. By carefully nurturing this translation process, city staff and local leaders can make sure that citizens can constructively contribute to the discussion.

Running a more open and transparent process may raise staff concerns. Staff may worry about their ability to deliver effective and efficient services if the public has greater access. The opposite may be true, however. Current budgeting practices wait too long to engage the public. Cities build a proposed budget and have a big reveal when elected officials and engaged citizens can react. This process involves too much confrontation and can feed public cynicism about government and bureaucrats. In the public reaction, sometimes the political consequences are that staff knowledge and experience is ignored and decisions are made based mostly on emotion.

That technical knowledge found in city halls across the country can be better used in a well-coordinated long-term financial planning process – if that process is inclusive and transparent. Staff can support public decision making with their skills and experience. They become like consultants to local leaders and the public in the planning process. They can help others understand the costs and benefits of short term budget decisions. They can also help local leaders understand the long-term consequences of major changes in the economy and city services, (or be the translators of that information if provided by outside consultants.) In this way, a more open, long-range planning process should strengthen the role of city staff, help local leaders make better decisions and lead to results that are more satisfying to the entire community.

Next Week

Next week, we begin a series of posts looking at some of the major causes of current city financial stress.  Axianomics can help your community implement a long-term financial planning process. Let us know what you want to accomplish.

Indicators for Fiscal Sustainability


We are continuing our series on building a more fiscally sustainable community. This week we will look at standard fiscal indicators and how they can help local leaders make more sustainable fiscal and economic choices.

Broad Categories of Indicators

There are two broad categories of fiscal and economic indicators. The first category covers economic or social activity outside the organization. These include measures of community population, jobs and other economic and demographic indicators. These are important because they determine municipal resources through the tax base. They also influence need for municipal services and infrastructure spending.

The second class of indicators measure features of municipal operations and finance. These are internal or organizational indicators. These reflect a combination of policy choices by the city and the influence of external indicators.

There are many metrics in each category. Our review will focus on high-level, summary indicators. After starting with these high-level indicators, each community may want to identify more detailed metrics that are important for its circumstances.

Revenue Indicators

Most cities begin budgeting and planning by reviewing revenue performance and projecting future revenue. This is practical, but communities could just as easily start budgeting by looking at service needs. It would be an interesting experiment if a community were to begin budgeting with an ongoing engagement process similar to the one we discussed in recent posts. The goal would be to developed a budget that citizens were willing to pay for. This might support sustainability by starting with citizen willingness to pay rather than automatically budgeting to the maximum available revenue. Whatever process a city uses, key revenue indicators for sustainable finance include:

  • General operating revenue by source in total and per capita terms
  • Grant and other inter-local agreement revenue

Operational / Service Indicators

City revenue sources differ some from state to state, but spending priorities are similar. Public safety, parks, libraries, streets and other infrastructure dominate general fund spending in every city. Detailed studies of major programs can find potential improvement and efficiency opportunities, but tracking overall spending is a good place to start. Important service indicators include:

  • Growth in total and per resident expenses by function or department
  • Total employment by function and department

Operating Position Indicators

A city’s operating position means its ability to balance its budget on a current basis with current revenues. A sound operating position will support day-to-day liquidity and prevent a city from having to dip into operating reserves for ordinary expenses. Every city will experience periodic emergencies, but repeated drawdown of reserve funds is a sign of long-term structural financial problems. In these cases, a city needs to have a serious conversation with taxpayers. The community needs to decide if it is willing and capable of supporting current service levels or whether city operations need to be simplified. The most important operating position indicators include:

  • Total annual revenue minus total spending
  • Liquidity measured by ratio of cash and short term investments to current liabilities
  • Fund balances

Debt and Infrastructure

It can be helpful to citizens and decision makers to report debt indicators with key infrastructure indicators. This will improve understanding of the conditions of city capital assets in the context of debt capacity. Key debt and infrastructure indicators include:

  • Net debt per-capita
  • Total debt-service as a percent of tax base
  • Road, bridge and other asset conditions

External Indicators

There are many economic indicators that help local leaders understand what is influencing city spending and revenue. The most important to track are total population, total households, household income and jobs in the city. Central cities may also be interested in measuring commuting and other indicators of how their services are supporting nonresidents.

Fiscal analysts and economists have identified hundreds of potentially useful indicators. It is a good idea to start with a small set and learn what you can from them. Any community will gain important insights from the few listed above. For more detailed information you can consult the Government Finance Officers Association and the International City/County Management Association.

Next Week

Next week, we will look at the long-term financial planning process for fiscal sustainability. For more information on how Axianomics can help your community build and use a fiscal trend monitoring system, fill out our contact form.

Macro Trends and Fiscal Sustainability


Last week, we looked at definitions of fiscal sustainability or fiscal stress. Local leaders need to proactively choose policies that improve their community’s long-term financial health. Today, we will briefly look at four major trend areas that influence City Hall. Economic, demographic, political and technological changes create new challenges and opportunities for local leaders. Asking the right questions about trends in these areas is the first step to improving fiscal sustainability.

Key External Trends

Local leaders can have an important influence on municipal priorities, plans and operations. All these issues have implications for municipal financial sustainability. The choices local leaders make can change service levels and costs or alter revenue options. Making the right call on these issues depends on what is happening outside the municipal organization. Four important trend categories to consider include changes in: economics, demographics, politics and technology. Historically, these trends have changed the dynamics and influenced the costs and benefits of local policy decisions. Each of these four areas are extremely complex and deserve careful attention. What follows is merely an overview of some of the most important items, and what questions local leaders should address to their staff and other community experts.

Economic Trends

The most important items for local leaders to consider are employment and income of their residents. (Changes in their local business industry mix and sales are the second most important.) Too often local leaders focus only on the absolute levels of employment to gauge the health of their communities. Measures of family or household income are equally important. Further, it is also essential to look at how economic rewards are being spread across the community.

The distribution of income in a community matters for the tax base. Income growth in a narrow segment of the population is not as beneficial as improvements across the community. This is because municipal funding sources like sales tax and property tax do not grow proportionately with income. At a certain point, household spending and the size of homes reaches a limit. Beyond that point, family income growth goes mostly into non-taxable activities. In the same manner, as business activity changes, there may be gains or loses because sales taxes apply to only a small share of industries. In Texas less than a quarter of business activity is taxable.

Demographic Trends

The most important demographic trends are counts of households, total population and the age and education distribution of the population. Households are a better measure for fiscal monitoring because each household is a separate, independent economic unit. Families may be spread across multiple households. Total population is similarly grouped into households for economic statistics. Demographic variables influence economic conditions such as the size and location of markets. Other important demographic trends are responses to economic conditions. Better economic conditions lead to more in-migration, family formation and fertility. All these factors influence long-term community needs.

Political Trends

Local government takes place within the larger national and state political framework. Changes in policy at the higher level impact the spending and revenue options of cities and counties. Politics often follows long-term economic trends. The relative importance of different levels of government has changed over time. Before the economic and political crises of the early 20th Century, local governments spent more than the federal government. In recent years, state and local governments have increase their responsibilities slightly.

It is critical for local leaders to continuously engage their constituents. What are their thoughts on municipal finance and service levels? Local governments across the U.S. have been facing increasing pressure from activist citizens to reduce taxing flexibility. This action typically takes place at the state level. In some communities, it is through statewide referendum. In other cases, state legislatures are enacting legislation to limit local responsibility and flexibility.

Local leaders also face a continuous struggle to engage citizens. In an age where national politics dominates issues and social media dominates attention, achieving local fiscal sustainability is an even harder challenge.

Technological Trends

Technology influences the way municipal services are produced. New technology changes the relative prices of labor and equipment and the best way to organize a municipal service. Local leaders need to question whether or not new technologies are really an improvement, or just different. The proof is in how they change prices and effectiveness. Some lower-tech approaches may be better from a cost-benefit standpoint. Truly revolutionary changes are few and far between.

Two examples of revolutionary changes for city services include the steam engine and radio. In the mid-1800s, steam-powered fire engines finally gave firefighters the ability to contain major urban fires. This new effectiveness also lowered the manpower requirements of fire brigades. Cities moved quickly to create municipally-funded, full-time fire departments.

Radios dramatically improved the awareness and responsiveness of police patrols. As cities began to grow dramatically in the early 20th century, radio gave departments the ability to better coordinate patrols and dispatch.

Fire engine capabilities and police communications have been continually refined since, but many basic operating principles of these services have remained unchanged. Local leaders should ask whether proposed new technologies represent real cost savings or improvements in effectiveness. Or, are these new tools more of a fad.

Next Week

Next week, we will look at how local leaders need to engage the public as they proceed with reforms to improve fiscal sustainability.

Sales Tax and Retail Sales


This week we look at sales tax revenue. We also report the latest retail trade statistics. In Texas, many industries pay sales tax. Retail sales is a major part of that total, especially in some smaller communities.

Sales Tax System in Texas

For most Texas cities, sales tax is the second largest source of general revenue, after the property tax. According to information we received from the Texas Municipal League, statewide, 28 percent of general fund revenues come from sales taxes. Property taxes contribute 35 percent. Most cities levy a sales tax. Other local jurisdictions also have the opportunity to levy a sales tax under some circumstances.

The Texas Comptroller administers the sales tax. The Comptroller collects the entire sales tax levy statewide. It keeps the State’s portion, then allocates each localities’ share. The State of Texas levies a 6.25 percent tax on certain items. There are many exemptions. In fact, according to the latest Comptroller data, only 25% of gross sales are subject to the sales tax. Total gross sales in Texas were $432 billion in the first quarter of 2016. Of that total, $109 billion was subject to sales tax.

Local governments may levy up to an additional 2.0 percent sales tax. Many cities levy a one cent tax for general revenues. Also, by referendum, communities can levy additional sales tax designated for special purposes such as offsetting the property tax rate, streets and economic development. Transit authorities also absorb some of this local tax capacity. If a city is not using its maximum 2.0 percent, the local county can claim the unused amount and levy a sales tax. This is not common in Texas.

Latest Sales Tax Performance

We assessed the latest Texas Comptroller data. The recent slump in the energy industry continues to take a toll on the Texas economy. For September, total sales tax revenues are down 3.9% compared to September 2015. Because of slower reporting for the local allocation, we will look at data ending in August for local governments. For the twelve months, ending in August, localities pulled in 6.2% less sales tax revenue than in the twelve prior months. The situation will differ from place to place.

Retail Trade and National Retail Sales

In Texas, 24% of gross sales come from the retail sector. Other industries like utilities and media account for the majority of sales tax revenue so local leaders need to consider their overall industry health when assessing their sales tax revenue prospects. The retail share will tend to be higher for small cities, especially if they have a lot of highway frontage or large tourist sectors. Within the retail category, less than half of gross sales are subject to tax. Groceries are a notable and large example of exempt sales.

We can get detailed retail performance information from the Census Bureau’s monthly retail trade survey. Nationally, retail sales are doing better than they are in Texas. From September 2015 to September 2016, national sales are up 2.7%. These number, however, are not as robust as they seem because they are not adjusted for inflation. This means sales are probably positive, but not booming. Over the last year, several retail sectors have seen growing sales including: furniture and home furnishings (+2.7%), building and garden materials (+5.6%), clothing and accessories (0.7%) and food and drinking establishments (+0.8). Sectors that saw falling sales over the year include: electronics and appliances (-3.8%), gas stations (-3.4%) and department stores (-6.4%).

This is not a great report. National data continue to paint the picture of an economy that is moving sideways. There are some benefits to consumers from lower gas prices, but as can be seen in this data, there are even bigger hits to major retail sectors. Since the Great Recession, wage growth has been slow and many jobs added during the last few years do not pay as much as the jobs that were lost.

Local governments in Texas are accustomed to booms and busts. The current slowdown should not be a surprise. There are ways to prepare for lean times. Prudent budget and operational planning, maintaining adequate fund balances and making surgical economic development investments are critical to prevent unnecessary budget pain down the road. It is also essential for local leaders to pay attention to their local economies and the wider state and national situation. We encourage you to reach out to us if you want to discuss how Axianomics can help you make more confident fiscal choices in these uncertain economic times.

What’s Next

Next week, we will look at local property taxes in Texas. Tax bills are going out and a common challenge for local leaders is helping their communities understand the composition of the total tax burden, which supports more than just cities.

Economic Diversity and Community Profile


This week we are introduce the Axianomics, LLC Community Economic and Fiscal Profile. The Profile summarizes over 100 economic indicators into easy-to-understand indexes that can guide local leaders in their planning, budgeting and economic development activities. This post will highlight the Business Health Index which is one of the cornerstone pieces of the Profile. Economic diversity is one of the local conditions this index captures.

Industry Economic Indicators

Every community has a unique economy. The federal government divides the national economy into over 1000 different industries. These industries are organized into a hierarchy with the North American Industrial Classification System (NAICS). Examples of the highest-level groupings of industries include Business and Professional Services, Retail Trade and Manufacturing. Dozens or hundreds of detailed industries make up these summary categories.

The reported industries are different sizes and grow at different rates. Some are highly cyclical and grow and shrink with the business cycle. Other industries are more stable. Some are growing while others are in decline. National economic performance is the sum result of the particular fortunes of all these industries.

For each of these industries we can track employment, wages and number of business establishments. We can use this data to help understand the fortunes of local communities and get an idea of how their economy is changing. These economic changes have a big impact on municipal revenues and budgets.

The Value of Economic Diversity

Economic research confirms that there are many benefits to having a diverse industry base. Diverse local economies tend to grow faster and suffer from less volatility. We can measure these benefits in both employment and wage growth. There are still benefits for a community to be a leader in particular industries, but too much concentration can put the community at risk. Changes in market trends and new technologies can devastate individual industries. Cities that have all their eggs in a declining industrial basket can find themselves in a long-term downward spiral that is difficult to reverse. More diverse communities can fall back on other industries if certain businesses hit hard times.

Community Economic Profile and Business Health Index

Axianomics, LLC created the Community Economic and Fiscal Profile to help local leaders track the overall health of their economies and discover how their revenue and budget performance is linked to that economy.

The Profile includes several performance indexes that summarize over 100 economic indicators. One of these indexes is the Business Health Index. This index includes a number of component measures. Industry diversity plays a big part in this index. We compare local industry diversity to the nation overall and the state. This lets local leaders immediately see how their economy stands relative to these benchmarks. In addition to the industry diversity measure, the Business Health Index also tracks small and big business performance, growth trends, employment, income and number of businesses.

The Profile goes beyond typical economic indicators. By building these custom indexes, we can make more valuable business and community development recommendations to local leaders. Since municipal revenues and budgets depend on the underlying tax base, the information in the Profile makes a valuable contribution to planning budgeting and economic development strategy.

To learn more about the Economic Profile, download our fact sheet. We would be happy to discuss how you can obtain a custom Profile for your community. Contact.


What’s Next

Next week, we will take a look at the economics of public libraries and how cities can position their libraries as powerful economic development platforms.