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Texas Metropolitan Economies

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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

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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.

Changing Tax Base in Dallas County

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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.

Property Tax Rates in Dallas County Cities

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Introduction

Tax rates are probably the most important policy decision a city government can make. These rates determine the scope and scale of the city services that the community can afford. The needs of businesses and households differ, and those tax rates are an important signal to them about the type of government services and level of operations they might expect in that community. The property tax is especially important in Texas. This post will summarize how the property tax rates of cities in Dallas County have changed over the last two decades. Tax rates have generally increased in Dallas County, but these increases have been concentrated in some cities and happened during certain periods.

Setting Tax Rates

According to the Texas Municipal League, 89 percent of cities and towns in Texas impose a property tax. This tax accounts for 41 percent of all municipal revenue in the state. The property tax is the most flexible revenue source available to a municipality. The city council may set a tax rate without the need for a referendum. Case law has also shown that the property tax rate, if imposed according to state law, is not subject to repeal by any voter initiative. Before imposing a rate, the city council must approve a budget that reflects a property tax. Upon adoption of that budget, the council votes to set a tax rate. As long as the annual increase in that tax is less than 108 percent of the effective tax rate, the levy is not subject to potential voter challenge. The effective tax rate is the rate that would bring in the same revenue as last year given the changes in appraised values. Senate Bill 2 is now under consideration by the Texas House of Representatives and would reduce the trigger for a roll-back election to 105 percent.

The maximum tax rate a city may impose varies according to its classification under state law. Home rule cities, essentially those operating under their own charter, may impose a rate up to $2.50 per hundred dollars of property value. We are not aware of any city in the state that has imposed a rate anywhere near that level. Most cities have rates that are less than a third of that.  General law cities, depending on type and population, have various maximum rates: Type A over 5,000 population, $2.50, under 5,000 population, $1.50; Type B, 0.25; Type C cities’ maximum rate varies between $0.25 and $2.50, depending on population.

The Data

The following analysis is based on tax rates for the 25 cities that are primarially in Dallas county. These cities 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. Portions of many of these cities lay in surrounding counties, but they are required to impose a uniform tax rate on all their jurisdiction. The same tax rate applies to all property types: residential, commercial and personal property. We obtained historical tax rates from the Dallas Central Appraisal District for 1998 to 2016. These tax rates were in effect for the fiscal years immediately following. For example, the 2016 tax rate was used to collect property tax revenue for the fiscal year that ends in September 2017.

Changes in City Tax Rates

In Dallas county, property tax rates are generally higher today than in 1998. The average tax rate in 1998 was 0.5772. The average rate in 2016 was .6677. This amounts to an increase in the average rate across all cities of 9 cents per $100 in property value. The median tax rate, that is the rate of the city with the middle tax rate, grew about 8 cents over the period.

This growth was not uniform. The pattern of increase since 1998 is a stair step. Tax rates increased after the 2001 recession and remained level until the Great Recession, when they increased again. This is evident in Figure 1, which shows the median tax rate over the period.

Rates increase after recessions in 2001 and 2008.

The property tax base responds slowly to economic recessions. As the economy declines, appraisals tend to take several years to fully reflect the impact of the downturn. When we look at the five years following the last two recessions, we can see how these Dallas County cities responded. Five years after the 2001 recession, 12 of the 25 cities in Dallas county had higher tax rates compared to the year of the recession. These cities increased their rate by 7 cents on average. Five years after the Great Recession, 18 of 25 cities had higher rates five years later. Their average increase was 8 cents. This is similar to the pattern nationally, where cities struggled with declining appraisals for three years following the end of the recession.

Another interesting feature of this data, is that the difference between the highest tax rate and lowest tax rate each year also increased, especially after the Great Recession. See Figure 2. This gap became dramatic in recent years and probably reflects a combination of factors and sharp tax rate increases in just a few cities.

The range in tax rates across cities has increased in recent years.

Tax rates have changed in Dallas County for many reasons. In some cases, increases in tax rates were a response by cities to recessions. Many of these cities also decreased the rate of growth in their budgets and cut many programs. In other cases, taxes were increase to accommodate higher debt loads. Most cities in Dallas County are relatively mature and have streets and water mains that are reaching the end of their useful life. Decisions about operations and infrastructure will continue to weigh heavily on local leaders.

Next week we will look more closely at the tax base of these cities to better understanding reasons for these tax rate changes.

Economics and Politics of Property Taxes

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Introduction

Property taxes are the largest source of general fund revenue for local government in Texas and across the U.S. This tax is more stable than sales taxes when it comes to economic cycles. It is also more important in Texas than in most other states. It often escapes public perception, but cities account for a very small share of the total property tax burden.

Property Tax Nationally

The Rockefeller Institute refers to property taxes as the financial backbone of local government in the U.S. It accounts for nearly three-quarters of total local tax collections and is the main way localities fund K-12 education, police, fire, parks, and other high-profile services. Property taxes are also the foundation of a local government’s capacity to issue debt for capital projects. Local governments collect over $400 billion annually in property taxes.

Texas Property Tax

The current property tax system in Texas dates from 1979. In that year, reforms were implemented to the local property tax process and the final vestiges of the statewide property tax were eliminated. In Texas, counties, cities, school districts, municipal utilities, community college districts and other special districts may levy a property tax.

Property tax is levied on land, improvements (structures) and revenue-generating personal property (also known as business personal property.) When homeowners and businesses receive their estimated tax bills in the fall, they are seeing the combined tax owed to all local governments. According to data from the Texas Comptroller, in 2014, $49.1 billion in property tax revenues were collected by local governments. The largest share was for school districts. Schools consumed 55 percent of all Texas property taxes. Counties took the second largest amount at 17 percent. Cities accounted for only 16 percent of the total. Special districts claimed the remaining 13 percent.

Residents and businesses often fail to notice the distinction when faced with the total tax bill. This can be a challenge to city leaders. Not every household has children in the local schools, but core city services are familiar to all and used by many. In the public eye, their total property taxes may appear to go entirely to support police, streets, parks and libraries. It is easy for citizens to note deficiencies with these city services and then compare them to their total tax bill.

The risks for city leaders is compounded because total collections by other local governments is increasing faster than for cities. Since 2009, total property tax collections have increased by 23 percent. City property tax revenue increased by 19 percent. At the same time, school districts took in 23 percent more revenue. Counties saw a 25 percent increase in property taxes. City leaders may need to assume a greater role in educating constituents on this issue.

Economics of Property Taxes

Property taxes are a sort of stabilizer on municipal budgets. In economic downturns, appraised property values respond slowly. The full effect of a downturn may take several years to be registered in property values. Nationally, property tax revenue fell for three years after the bottom of the Great Recession. If that decrease had been as quick and automatic as the decrease in sales taxes, the necessary budget cuts would have been devastating to local governments. The slower decrease gave local leaders time to streamline and reorganize services. Further, since cities set their rate annually, they have some flexibility in adjusting to changing economic conditions.

In Texas, state “Truth in Taxation” automatically gives cities an effective tax rate that yields the same revenue as last year. Falling property appraisals drive up these effective tax rates automatically. By simply adopting the effective rate, a City Council can avoid the risk of a roll-back proposition and election. In very difficult economic times, however, City Councils may choose to adopt a lower than effective rate, but they need not do so under state law.

This process works in reverse as well. In a booming real estate market, the slow adjustment of appraisals, and in Texas, the threat of a roll-back election, puts a damper on municipal budget growth. This also helps city leaders by encouraging them to plan carefully. There is a perpetual need for basic services regardless of where we are in the economic cycle.

Next Week

Come back next week where we will look at the second largest general fund service for most cities – fire / rescue operations. In the meantime, sign up for email updates and let us know how we can help.