What is the House Value Needed to “Breakeven” in Your City?

Dear Lewis:

My mayor wants to know the value of a single-family residential home necessary to “breakeven,” meaning for residential to pay its own way?

Dear Colleague:

Thank you for asking me my least favorite question. However, it is an important question, and I will try to answer. But be forewarned, I’m going to give you my shortest answer or at least one you can work through on a cafe napkin. There is a reason.

This is a tough one. The answer has to be understood in the context of mix. If you had nothing but property taxes and nothing but residential, then the answer would be easier. It would be exactly the average value of a single family home available from your appraisal district. I know I can’t satisfy you with that answer that fits into a non-existent world. Yet it is instructive to frame your response starting with a pure single family residential community. Undertanding this one point makes the remainder of the explanation easier to digest.

Yet when the mix of all General Fund revenues is considered, and the tax base internal mix is considered, then the portion paid by the residential class forms the basis for saying the average home value is paying their share – and higher than average value is paying more than their share of their pie with the opposite also being true.

That sounds like circular thinking, but there you have it.

Try Harder, Lewis!

A better way of looking at the cost question is to ignore revenues for a minute and look only at the expenditure side initially.

If you are spending $36 million in the General Fund budget, and you have a population of 50,000, then the services equate to $720 per capita. If you have 3 people per household, then you need $2,160 per household. You can conclude the need for an AVERAGE house value of $540,000 ($2,160 / $0.40 O&M Rate * 100) to carry the costs before other revenues help lower the property tax requirement.

If you have a revenue base that yields 40% from other sources, then you only need an average house value of $324,000 ($540,000 * 60%), net of exemptions.

So, what is your average home value on the tax rolls?

It is $200,000, you say. Hmm! That’s a respectable amount. Let’s dig deeper to understand $540,000 on one end of the spectrum and $200,000 on the other end.

I expected your average home value to be considerably less since we’ve left out a million things, most notably the non-residential tax base. And here’s the deal. Some cities have little and some have much.

Here’s the way I would answer the question with necessary generalities included:

“If City of Fiscal Bliss had only property taxes (and then only a residential tax base) to cover the cost of general government services, it would require an average house value of about $540,000 to cover costs or else a very sizable tax rate increase applied to our average house value of $200,000 currently. Fortunately, we do have a respectable commercial tax that lowers the burden on the homeowner. We also have sales taxes, franchise taxes and some user fees to help lower the property tax burden. Therefore, we conclude that our average house value times our General Fund tax rate of $0.40 per $100 or $800 is our net breakeven cost even though property taxes alone would not cover the true service cost of $2,160 per home.”

Oh my! You aren’t going to like my answer, are you?

As I said, it’s complicated. The clue that this was not an easy question was when the  Mayor said average. That was the signal that the Mayor’s field of view was going to be too narrow. Here is the trap. You want to explain, but the Mayor wants the time, not how a watch is made. So, blurt out $540,000 and then ask if you can explain. I’m pretty sure you will have the Mayor’s attention with the obligatory pregnant pause following your incredulous number.

If you have an average home value of $200,000 in your community, then that should mean you are striving to add house values much greater than the average. It is a fact that the true cost is $2,160 per home, and it is also true that it would take a $540,000 at an O&M Rate of $0.40 per $100 to generate the true cost of service.

But thank goodness you have other revenue sources. Your citizens pay a sizeable amount cost recovery in the form of sales taxes and franchise taxes. You also have direct fees for some services. Otherwise, your average SF value would have to be $540,000 or else your tax rate on an average of $200,000 would have to be $1.08! ($2,160 / $200,000).

Did I just blow your ears back?

But We Paid a High-Priced Consultant for Another Answer

A more elaborate analysis would be necessary to offer much more help here. And while the calculations could get more sophisticated, and the wording much more verbose, I’m not sure the accuracy would be better or the conditional wording more understandable.

Does this help?

Lewis

What Does a Recession Mean to Texas?

We generally don’t get hit as hard nor do we get hit in lockstep with the National Economy. But we are not immune to recessionary forces. And that is good.

You may think the flashing signs of a recession just happened overnight with interest rate inversions moving to the front burner this weekend. That is not the case. The yellow flag believed to be reliable is when the interest rates for the short-term government securities rise higher than the long-term. It’s a worry indicator. Why else would someone accept a lower interest for holding a 10-year government bond then for a 90-day T-Bill? It’s an inversion. We don’t like it when things are askew.

Our accepted correlation that a recession follows an interest rate inversion isn’t something dreamed up by economists. The chart below from the best source of government (and business) information is from the FRED, the Federal Reserve Economic Data site provided by the St Louis Fed. See http://www.fred.stlouisfed.org. They allow all of their graphics to have an overlay showing past recessionary periods.

Here you can see recession frequencie and durations. You can also see how the widest distance between these two investment instruments begins almost immediately when a recession is over and then goes into a slow decline until the point of inversion and another recession begins. So, the last recession ended in June 2009. As these rate differences zig and zag, they eventually move close together. But we’ve only had almost exactly 10 years to play Carnac the Magificant. (See https://en.wikipedia.org/wiki/Carnac_the_Magnificent). Hardly a magic trick or an academic secret.

Note, please, that we are way overdue for a recession. You might recall that for years the Federal Reserve has been manipulating the system with their toolbox of policies to stave off an inflation and keep employment high as long as possible. Recall, too, that economic cycles are part of a capitalistic system. We don’t like ugly, and job layoffs are as ugly as it gets, but that is part of wage management and pricing equilibrium. Beware when we allow our decision makers to abandon the Invisible Hand Theory. See https://economictimes.indiatimes.com/definition/invisible-hand. The penalty might prove to be severe in our future. But then, what do I know? I thought we were going to have the cataclysmic implosion in late 2007.

This inversion phenom is why you started hearing about the signal being flashed over the weekend and why you may likely hear it a lot more in coming weeks and months. The big worry is just how serious the stock market (another early indicator in most cases) might buy into this cautionary flag.

By the way, you should know that the powers at be declare a new recession well after it has actually started. The same goes for the end of a recession. The official finding comes many months after it is over. It takes some time for two sequential negative GDP quarters to be measured. Interesting, huh?

FredFed10YrVs3Month

Not To Worry – We’re The Great State of Texas!

Actually, that is a fact. We have buffers. We also have things in motion that don’t change directions quickly, like a huge cruise ship headed out of the gulf. Well, one in calm waters, anyway.

We’re insulated but not immune from turbulent waters and high winds. Fortunately, we have a two-month, not two-quarter, early-warning system. My sales tax chart below shows the rolling 12-month sales tax collections for local governments since the early 1990s. We busted through $9 billion annual collections (in the dark blue) with ease just a few months ago. Yet my favorite indicator is the percent change in the annual growth (in the red). I also marked the last two recessions on my chart this time.

The takeaways include that our sales tax collections locally have been slowing in the growth rate. That means we are increasing in dollars while decreasing in the rate of growth.

Can it go back up without going down any deeper? Yes, and that has happened many times. Is it natural to start declining? Yes, history shows that it is very difficult to grow at large rates and sustain that growth forever. In fact, you can see that almost every time we approached the upper boundary of the 1-STDev channel of about 10%, we pull back toward the statistical mean. That works in both directions.

Keep in mind that the overall average for the last three decades is about 5.93%. That’s not an accidental number. The average is the result of 1) population growth, 2) inflation, 3) the wealth factor as well as changes to the 4) sales tax rate and 5) base over this long period of time. If we averaged about 6% without the huge swings, we could describe that scenario as near to perfection as possible.

Also, please note how you could use the chart below to say with confidence that the Texas Local Government Sales Tax Collections may be able  to announce a national recession ahead of time with the red line AND YET we can safely say that we tend to lag the recessions by quite a few months. That may be a stretch, but this can be a compelling argument in light of historical data.

SalesTaxesAndRecessions

Conclusion

What are we to do with this information? First and foremost, just watch. If the rate inversion goes deeper and the sales tax growth rate decline continues and even accelerates, then we can confirm we are sliding into a recession.

It’s way overdue. Job-cut announcements started months ago and are increasing in frequency. In Texas, there is a huge business commitment in place that doesn’t stop overnight due to the inertia.

Take shelter mid-year? Not really unless we get slammed in a hurry? But FY 2020 might be facing a challenge.

Look ahead, but I offer you this challenge. Recessions have typically not lasted long (18-24 months). Please don’t make the mistake of start cutting back on things unnecessarily.

Why do you have those fund balance reserves? I would say it is to continue basic operations without cutting jobs that you will be hiring back not too long after the cuts. Provide those services, keep productive staff and don’t gut the programs.

And keep your hands off the dang libraries, ball fields and animal control!

Instill deep quarterly reviews of all revenues and expenditures with your staff. Announce to the rating agencies that programs are important or else they wouldn’t be there. A reduction in fund balances will be followed by a restoration to policy levels.

A Rainy Day Fund is meant to be used during these kinds of pullbacks.

In closing, a little jab. If you are waiting for a good recession to force yourself into making cuts you should be making every day as a manager, that’s cheap management. Just saying. LFM

A Huge Local Government Expense Not Being Disclosed

Hold off on shooting me with the GASB Gun for a minute. Let’s go back to Accounting 101. There is a principle that says you should not record the Net of items that should be separately disclosed. For instance, if you buy a big piece of equipment for $250,000 and get $25,000 for the trade-in or sale of the old piece of equipment, you shouldn’t record the piece of equipment at $225,000. There were two transactions or events. You record the piece of equipment for $250,000 and the sales or trade-in of the old piece of equipment at $25,000.

Two different pieces of information.

Another example where the separation is distinguished is with property tax collections. You record your property tax revenues as a revenue and the cost of tax collections as an expense: sound accounting with a focus on the expense side of things. If you netted the expense into the revenue, you might never see the cost of the contract.

You get a grant for police overtime and record the revenue separately from the overtime expense.

This is pure accounting logic.

Then We Fly Off The Cliff

The State Comptroller collects the sales taxes for every local government in the state. There are 1,658 Cities, Counties, Transit Districts and Special Districts. The Comptroller charges a “fee” of 2% for this service. In the fiscal year ending September 30, 2018, the fees collected totaled $183,421,882.77. One year!

So, please show me where any of the 1,658 entities are showing $183,421,882.77 in their budgets or audited financial statements. They are out of the spotlight. And so the years roll by with the expense amounts rolling up. The last 10 years alone, this expense has been $1,471,718,694.39.

Or to take a page out of the Legislative Playbook, accentuated with the obligatory gasp and deer-in-the-headlights look, Local Governments have paid a “fee” that has increased 53.9% in just 10 years. Where is the outrage?

Is This Really a Fee?

A service fee is supposed to bear some resemblance to the the cost of the service. A tax does not. So how much is the cost of service for collecting and distributing sales taxes to local governments? Well, that’s not easy to tell. You can take a look here in an attempt to find out. In all fairness, the cost of service (the numerator) should include all of the direct costs of collecting sales taxes plus administrative overhead and facility costs. Heck, it could even include some kind of return, a few percentage points.

But the denominator should be the 8.25% with 6.25% being borne by the state and 2.00% being paid by the Local Governments. If this is a fee.

The next logical test is that if Local Governments are being charged $183,421,882.77, then are there $756,615,266.43 ($183,421,882.77 / 2% x 8.25%) in sales tax collection costs involved here? I don’t see it in the link above. Not by a long shot.

So, Isn’t It Really a Tax?

Sure looks like it to me. And a huge one! Wow! Talking about ironies. This tax has increased 53.9% in the past ten years. It’s staggering and flies in the face of all the ultra-conservative rants about egregious spending.

What Should We Do?

From everything I can tell, State Comptroller Glenn Hegar is the fairest and most professional state elected official in Texas. In fact, I understand he is assembling local government officials to provide him with feedback on the sales tax processes October 10th in Austin. There should be a plea for him to put the service fee on a true fee basis. Ask him to conduct a cost of service study to show the full costs of collecting and distributing sales tax checks, including the audits.

Then allocation to Local Governments a 2.00% / 8.25% share.

The difference should be refunded to Local Governments.

Or there could be an alternative. Local Governments are spending $millions to hire consultants to find missing or mis-allocated sales taxes. In today’s GIS technology, there is no reason the Comptroller couldn’t provide detailed maps that show that every payer within the boundaries of a local government is being credited to the correct Local Government. It is insane to be paying $183,421,882.77 to the Comptroller and not be able to reduce the extra outside consultant expense of paying for zero-sum overall work. A consultant finds my money being paid to adjacent city, and then finds my city getting money from an adjacent city. That’s nuts.

There is so much more that the Comptroller could do. If a Local Government wants to see their confidential data, and have not requested the data in the past, they can only get the current calendar year plus the previous calendar year. They can’t even pay for the older data, although they could have more than ten years’ worth if they had requested all along. There simply is no excuse for not having access to that data given Local Governments paid the Comptroller $1,471,818,694.39 for services over the past ten years.

I also recommend that Local Governments record the money paid to the State Comptroller as an expense, along with a ten-year history in the Statistical Section of the CAFR. Okay, holster your GASB Gun, and just think through this sizable expense that nobody sees. It’s just not right. LFM

 

TOP 100 SERVICE FEE PAYERS
ENTITY FY 2018 LAST 10 FY
HOUSTON MTA $15,361,118.74 $128,778,118.43
HOUSTON $13,834,219.14 $119,675,201.80
DART $12,102,684.18 $96,457,914.20
SAN ANTONIO $7,123,770.08 $55,973,579.44
DALLAS $6,174,655.08 $50,817,283.63
AUSTIN MTA $4,912,997.85 $37,947,647.15
AUSTIN $4,501,162.52 $35,435,387.02
FORT WORTH $3,170,699.72 $25,015,008.73
SAN ANTONIO MTA $3,076,589.76 $24,641,435.31
ARLINGTON $2,219,554.11 $19,104,724.93
EL PASO $1,822,050.20 $15,694,629.71
PLANO $1,825,602.08 $14,654,342.83
CORPUS CHRISTI $1,601,425.38 $14,375,510.67
AMARILLO $1,556,903.62 $13,866,968.91
ROUND ROCK $1,652,458.97 $13,633,749.50
FRISCO $1,760,066.77 $12,449,367.34
FORT WORTH MTA $1,581,857.22 $12,234,380.67
LUBBOCK $1,423,145.53 $12,083,596.67
MCALLEN $1,256,629.69 $11,975,359.06
FORT WORTH CRIME CTRL DIST $1,498,063.00 $11,509,551.40
IRVING $1,368,553.42 $11,343,913.50
SAN ANTONIO ATD $1,393,679.69 $11,247,208.26
MIDLAND $1,343,112.17 $10,880,266.43
SUGAR LAND $1,064,268.06 $9,296,012.76
GRAND PRAIRIE $1,158,254.94 $9,060,253.59
EL PASO COUNTY $984,366.81 $8,419,147.39
MCKINNEY $1,090,433.95 $8,286,018.26
ABILENE $929,552.21 $8,076,564.57
ODESSA $1,333,220.96 $7,956,553.78
MESQUITE $895,256.60 $7,843,212.97
EL PASO CTD $897,755.60 $7,784,597.54
BEAUMONT $893,369.08 $7,708,526.39
TYLER $872,384.49 $7,702,418.21
GRAPEVINE $858,074.78 $7,617,770.02
LAREDO $847,208.61 $7,588,217.27
CONROE $983,471.07 $7,551,793.18
ECTOR CO HOSP DIST $1,055,593.34 $7,234,169.75
BROWNSVILLE $776,629.29 $6,992,229.32
MIDLAND COUNTY $1,135,900.69 $6,964,687.15
WACO $797,908.34 $6,638,438.31
ALLEN $807,651.79 $6,490,283.11
LONGVIEW $653,952.04 $6,189,432.57
CORPUS CHRISTI MTA $684,638.60 $6,058,247.70
LEWISVILLE $786,461.53 $6,025,063.44
WICHITA FALLS $639,148.79 $5,892,314.81
RICHARDSON $752,399.61 $5,885,538.19
PASADENA $693,306.84 $5,797,550.16
CARROLLTON $800,454.13 $5,711,078.50
COPPELL $781,511.52 $5,546,727.18
DENTON $748,902.86 $5,394,389.41
JEFFERSON COUNTY $614,518.93 $5,128,554.10
PEARLAND $671,736.32 $5,104,639.21
NEW BRAUNFELS $636,155.25 $4,972,018.84
SAN MARCOS $696,280.24 $4,884,031.36
SAN ANGELO $569,693.76 $4,861,878.87
VICTORIA $509,933.03 $4,846,560.21
GARLAND $581,891.15 $4,809,790.45
BRAZORIA COUNTY $683,020.36 $4,693,231.84
COLLEGE STATION $558,512.89 $4,591,624.75
THE WOODLANDS TOWNSHIP $566,894.72 $4,451,978.93
HARLINGEN $515,516.14 $4,319,363.18
DENTON CTA $568,921.08 $4,295,995.78
LOVING COUNTY $501,889.91 $4,167,991.23
KILLEEN $473,129.85 $4,142,585.33
SOUTHLAKE $585,815.19 $4,025,304.40
TEXAS CITY $461,344.06 $3,999,540.80
CEDAR PARK $583,660.03 $3,936,826.55
GEORGETOWN $523,324.40 $3,785,135.05
TEMPLE $443,364.36 $3,785,106.83
GALVESTON $427,354.93 $3,746,206.02
EDINBURG $450,221.71 $3,670,199.59
ROCKWALL $474,143.35 $3,637,845.13
MANSFIELD $467,429.37 $3,604,736.31
THE WOODLANDS TOWNSHIP EDZ $469,257.78 $3,601,842.03
SHERMAN $438,472.36 $3,546,488.54
SMITH COUNTY $373,708.72 $3,296,506.95
BELL COUNTY $391,111.34 $3,289,384.68
LEAGUE CITY $474,237.27 $3,283,983.43
BRYAN $406,889.80 $3,251,463.72
BAYTOWN $441,180.82 $3,196,052.66
WEBB COUNTY $345,070.07 $3,152,808.70
STAFFORD $339,895.96 $3,145,208.76
WEBSTER $359,497.34 $3,074,961.16
HURST $326,454.61 $3,063,773.43
GREGG COUNTY $316,354.01 $3,037,652.00
BURLESON $367,294.36 $3,032,756.95
MCLENNAN COUNTY $367,618.37 $2,981,097.38
TEXARKANA $332,270.03 $2,980,873.77
EULESS $367,093.16 $2,957,350.90
ROSENBERG $405,017.66 $2,935,111.20
THE COLONY $573,739.85 $2,917,157.71
MISSION $308,031.87 $2,916,947.54
PORT ARTHUR $314,769.35 $2,915,125.13
PHARR $372,817.34 $2,871,553.92
BRAZOS COUNTY $364,087.63 $2,834,916.46
HAYS COUNTY $417,860.60 $2,817,597.20
FLOWER MOUND $373,709.84 $2,768,979.25
NORTH RICHLAND HILLS $309,456.92 $2,739,693.78
FARMERS BRANCH $291,967.84 $2,709,455.24
CEDAR HILL $303,371.39 $2,668,111.18

 

Is McKinney Sandbagging Revenue Estimates?

McKinney is asking for citizen input for the upcoming budget at tonight’s meeting. Since most citizen comments are limited to only three minutes, I am opting to blog my observations on sales tax revenue assumptions.

I monitor sales tax revenues for every city, county, transit authority and special district in Texas every month. That would be over 1,600 local governments. Due to the beating levied on the oil patch regions in Texas, the total collections have been relative flat for about 18 months. But the total $8 billion annual local government base has been stable and is now growing again.

However, while many regions have suffered, that is not the case for others such as in North Texas. The collections have been robust in the DFW area. Let’s look at McKinney in particular. On a Rolling 12-month (R12) basis, there has been constant growth at an impressive rate since the Great Recession. As of April 2017, the City has collected $48,852,787 in the last 12 months, the highest ever. Just about every month is another record breaker.

The annualized growth rate is 11.34%! The R12% is the most telling and sensitive indicator of growth. It will announce slowing, peaking, bottoming and recovering points way before you can grasp the changes in dollars. The R12% is an incredibly robust metric for McKinney. Double-digit growth is difficult to sustain. But half that amount isn’t.

April 2017’s check was $216,062 higher than April 2016 or 6.57% more.

By the way, you can see the anomalies such as the positive $5 million + Audit Adjustment McKinney received back in 2011. The R12 spiked for exactly 12 months and then returned to its strong growth trend.

But let’s shift our attention to the Sales Tax Per Capita calculation. On a statewide level, Texas local governments are receiving $161.86 per capita on a 1-cent basis. McKinney is collecting $139.32 on that same basis. That can be translated into $3,951,225 below average or twice that amount since McKinney collects the full 2-cents allowed for local governments. But we knew that even before the City spent money to have a “leakage” study done in recent years.

McKinneySalesTaxChart

But let’s put $139.32 per capita into perspective. I prepared the chart below a few months ago and have not updated it. However, the value remains. It is instructive to look at McKinney’s Sales Tax Per Capita when you can see several years of history and adjust the calculations for inflation (CPI).

You can see the fluctuations that come from a mix of population growth and economic peaks and valleys.  You can see clearly where McKinney has been in recent years. This metric was $133.26 at the end of the fiscal year 2016. I had projected that it would rise to at least $137.81 at the end of the current fiscal year and then up to $139.61 at the end of FY 2018, the budget year for which input is being requested. I was intentionally slightly conservative. I used an inflation rate of 1.75% when it is likely to be above 2.00%.

This estimate translates into the following, again, on a 1-cent basis:

  • FY 2016 $23,594,961 Actual without any audit adjustments.
  • FY 2017 $24,917,139 or 5.60% higher than FY 2016.
  • FY 2018 $26,367,347 or 5.81% higher than FY 2017.

So, there’s my input.

PerCapita

In looking at the agenda packet for tonight, I find a presentation that indicates a sales tax growth rate of 2.06%! It does not say whether the growth rate is going to be applied to the 2017 Budget, the 2017 Revised Budget or any other base. That’s important. It appears to be scientific in that it is the composite of the Fed Median GDP Projection; the 10-Year Dallas Fed PCE; the 10-Year Rolling Average; and the Low 5-Year Average.

Hold on a second. I’m not sure any those are logical linkages. Here is what I do know. I have prepared some very sophisticated sales tax modeling algorithms in my career. And no matter the degree of complexity or academic statistical excellence I worked into the model, my last step had to include dividing the numerator by the denominator (residential population and employment) to come up with a Sales Tax Per Capita value.

Questions Abound

On the surface, the concept of making conservative estimates sounds noble and smart. But here is the problem. Actually, there are several problems. If you are too conservative (lowering revenue estimates and raising expenditure assumptions), then what is there to manage?

One can brag about how the spending came in under budget. Big deal. Not to hard to do with enough padding.

One might even brag about how money has been “found” mid-year to come in and save the day for new need, especially a political need. In my career, I have seen how eventually nobody needs to fight for resources during the budget. Just know that the real budget “tightening” will come when the budget is revised mid-year in face of the true income and spending levels. Except “tightening” can turn into new-found money (oh how I hate that phrase).

The net result of being overly conservative, other than the kudos for rescue funding mid-year, is that reserves get boosted. But then that argument gets abused. If you have 60 days of operating reserves, wouldn’t 90 be better? Well, if big is better, then why not build reserves up to 180 days. Where do you stop?

Next, comes the most insincere and most abused argument of them all: “the bond rating agencies want big reserves or else they will drop the bond rating.”

Rage sets in on me. I’ve watched the McKinney finance staff shut down a legitimate question asked by a councilmember by simply invoking the “Bond Rating Agency Threat.” Grounds for dismissal in my book. Especially the Deputy City Manager who directs the financial staff. He knows the game, and recent abuses have been on his watch.

But here’s the deal. The bond rating agencies place a high degree of emphasis on fiscal management, including controls and planning. They will even hang with you if you are in trouble. They mainly want to know a couple of things: 1) do you know you are in trouble; and 2) do you know how to get out of trouble?

Want to know how the bond rating agencies will react to something? Go ask them! They are approachable. Plus you pay them a big fee to be rated.

Here’s something else I know. McKinney is flush with reserves after years of overly conservative budgeting. I won’t be handing out a badge of honor for big reserves when there are legitimate needs for spending – or to cut the tax rate.

And I know this. Overly conservative sales tax budgeting boosts the need for property tax revenues. It works like this. A penny on the tax rate produces about $1,700,000. A one percent change in the sales tax revenue equals about $260,000. Low ball the sales tax revenue by 4% and you need the property tax rate equivalent of $1,400,000 or a TRE of about 6/10 of a penny. ($260,000 x 4) / $1,700,000.

So, do this at the McKinney meeting tonight: ask for the Budget vs Actual for Sales Tax Revenues for the past five years. Ask what the revised FY 2017 sales tax revenue estimate is expected to be now that nearly half the year has gone by. LFM

BTW, if you want to see the first chart for every entity in Texas, you can download my charts I prepare monthly. It’s a big PDF file.

You can view “StatewideCharts201704.pdf” at: https://files.acrobat.com/a/preview/8bd7f399-4e3a-48e0-a717-50b9b92e7125

Are We Chasing Our Re-Tails Too Much?

Are We Chasing Our Re-Tails Too Much?

By Lewis F. McLain, Jr.
President, CityBase.Net
lfm@CityBase.Net

Introduction.

The borders for Retail shopping are disappearing with the exponential increases in online sales. My wife is within a fraction of a percentage point of buying all of our Christmas items online. In fact, we’re close to 100% of all purchases being via the Internet with the exception of food. The red flag was actually raised a few years ago as not just old malls, but relatively new malls have been torn down. We don’t even have time to get nostalgic about a mall before they head toward bankruptcy or the wrecking ball. Worse, when blight attacks strip centers way before the neighborhoods around them, we have a different world to face. You know things are different when there is a Web site called http://www.deadmalls.com.

I’ve been intrigued with the number of studies being conducted in search of Retail Leakage to adjacent communities. We even have all kinds of illogical connections being made in my own City of McKinney where a mayoral candidate is convinced that if we create a Restaurant Row, businesses will be beating down our door to move to our swell town. This is a particularly bizarre movement since McKinney is not without restaurants, and many of them are in areas that fit the definition of a Restaurant Row.

When lunching with a colleague recently, our conversation turned to this concept of chasing pretty things like Retail. His community has an exceptionally large portion of warehouses. You know, those ugly boxes. Those boxes that have a very attractive amount of property tax revenues with a minimal amount of demand on public services. However, if you look closer, there is also an impressive amount of sales taxes that may be associated with inelegant structures in your city.

 

Let’s Look At Some Data.

Below is a recap of Texas cities with a population of greater than 50,000. It is helpful to look at these kinds of numbers before you get dizzy with excitement over some study numbers that give the impression that there are $billions within your grasp if only you know who to chase. You don’t need to spend a lot of money to get a relatively good picture of where your expectations might be reasonably placed. The average of these cities below is $185.94 on a per capita basis placed on a one-penny equivalent. The median is $169.82 on the same basis.

Yes, there are some wide variances. And without a doubt the main consumer-driven sources make a difference. However, don’t overlook that some of the above-average results are coming from cities with a large portion of business- driven transactions. Remember that the actual correct label is not just Sales Taxes; it is Sales & Use Taxes.

The bottom line is that you need both to have a healthy income stream for both Sales Taxes and Property Taxes. In all cases, realize that there is just so much that can be squeezed out of the consumer. And when squeezed too much (credit cards, HELOCs), a painful recoil is just a matter of time. Before you celebrate that a new Kroger has just opened, realize that you might be seeing an equivalent size grocery store closing within a couple of years. You might be just seeing a zero-sum situation except now you have to figure out what to do with an empty grocery store.

c1

 

Where did I get the Consumer/Business allocation data? Actually, from two places. Similar but different. The first review was from the top level categories as compiled by exact information I have from over 25 cities of all sizes (total population of about 3.5 million in population and with collections of about $872 million in the last year) across the state based on NAICS codes that I have cleaned up. By cleaned up, I mean that many of the codes used by the State are in error. Apple Stores, for instance are classified as Manufacturing vs Retail.

A summary of the scrubbed data is in the table below. To no surprise, the dominant consumer categories are on top. However, you might be surprised at the level of sales tax that comes from Wholesale and Manufacturing and others.

c2

Second, I took each of the cities in my first table and allocated into Consumer vs Businesses groups based on data that can be obtained from the state for all cities and then used my judgment to allocate. It is not scrubbed, but the accuracy should be sufficient to make a meaningful comparison. My allocations are in the table below. No doubt you and I might allocate the Categories a little differently. However, this is the best I can do with the public data I have.

c3

Conclusion.

It seems pretty obvious to me that many cities may be chasing the wrong things for sales tax purposes. It is acknowledged that I am focused only on sales taxes and not the production of property taxes nor on the number pf pure jobs and the pay levels for jobs. I can’t resist being Captain Obvious here by saying go for everything that helps provide a healthy balance in your revenue base.

However, now that Amazon and most of the prominent companies do in fact collect sales taxes and remit based on the city from which the order is placed, the potential for a city to get a substantial amount of retail sales taxes whether you have a business located in your jurisdiction has changed in your favor if you care to have your citizens’ money out of pocket coming back to their home city.

Don’t overlook the other Categories that are likely to generate a substantial amount of revenue and actually be more stable over time. LFM

 

 

 

 

 

Is Texas Charging A Hidden Tax To Local Governments & Citizens?

Introduction.

I fully understand that all local governments (counties, cities, transit authorities and special districts) in Texas are subdivisions of the state. One way to look at that fact is say everything you have, children, is because we gave it to you out of our generosity. Be grateful, stop complaining and leave me alone.

But that is not how I see it.

Local governments are taking a beating from the State in many ways. In small General Law cities (under 5,000 population), the State says we will give you the Charter. You can’t do anything unless the State law says you can. In Home Rule cities (mostly those over 5,000), the State says you can do anything you want unless the State law specifically says you can’t.

Perhaps with at least some justifiable reasons, the State continues to take away local control from cities. Their actions are actually pretty insulting in that the treatment is as if the cities aren’t accountable to the local voters. Again, you are too dumb and evil to be trusted, local governments, so we have to step in to throttle you back as we see fit for the sake of your citizens.

The net result involves several areas of constraints, but the biggest is revenue caps. If we can cut off your oxygen, local governments, we can reform you into good soldiers in our self-professed image.

It’s Two-Faced.

This blog is about an example of how the State is two faced. The mantra is taxes are bad. Actually, that translates into your taxes are bad, local governments, but ours are okay. In fact, here is a deal for you, ungrateful local governments, we will let you charge a sales tax up to 2.00%. This will be added to the State sales tax of 6.25%. Oh, by the way, even though we are collecting sales taxes for us anyway, we will collect and remit your portion. For this privilege, we will charge you 2.00% of your take. We will call it a service fee.

A fee implies there is some rational nexus (logical connection) to the effort it takes to provide a service. Logic would say that the State should charge the local governments about 2.00%/8.25% of the actual cost of the service. The State would recognize (in a logical business setting) that the State’s portion to bear is 6.25%/8.25%.

If the amount paid by local governments is well above the cost of services, then it is a tax.

Whoa, buddy! There goes that nasty word.

So are you saying, Lewis, that the State is taxing the local governments and their citizens?

Well, Let’s See.

Do we want to look at the State’s true cost of service first or the amount that is taxed by the State to the local governments?

I have tried to get the actual cost of service for the Sales Tax Division from the Comptroller’s Web site. It does not appear to be separated. There may be a good reason for that. If you can get me a good number, please send it to me.

Meanwhile, let’s approach this junior high story problem a different way. How much are local governments paying to the State for collecting the local portion of sales tax? I am so glad you asked, because I happen to have that number to the penny.

In the last 12 months, the local governments have paid the State $164,148,777 to handle those collections. In a fair cost allocation model that would mean the entire cost is $164,148,777 divided by 2.00% times 8.25% or $677,113,707.

Do you think it costs the State $677,113,707 to collect sales taxes every year?

I don’t either. To say that is a lot of money is the understatement of the century.

Conclusion.

So, if our State leaders are so emphatic about cutting taxes for the citizens of Texas, as all of their campaign rhetoric states as well as the continuing mantra they chant to local governments, why not do the noble thing:

1)     Determine the real cost of service for sales tax collections.

2)     Charge local governments for their proper share, which is the simple calculation of 2.00% divided by 8.25%.

Otherwise, the State of Texas is imposing a tax disguised as a cost-based fee to the citizens of Texas.

Below is the recap of the annual tax charged to local governments along with the Top 50 payers.

ENTITY GROSS COLLECTIONS 2% SERVICE FEE
GRAND TOTAL

$8,207,438,785

$164,148,777

HOUSTON MTA

$706,588,797

$14,131,776

HOUSTON

$649,877,508

$12,997,550

DALLAS MTA

$549,512,086

$10,990,242

SAN ANTONIO

$326,024,050

$6,520,481

DALLAS

$286,439,874

$5,728,797

AUSTIN MTA

$224,847,374

$4,496,947

AUSTIN

$207,111,910

$4,142,238

SAN ANTONIO MTA

$139,467,030

$2,789,341

FORT WORTH

$139,043,247

$2,780,865

ARLINGTON

$103,856,316

$2,077,126

EL PASO

$84,544,840

$1,690,897

PLANO

$79,127,702

$1,582,554

FRISCO

$76,561,830

$1,531,237

AMARILLO

$76,188,475

$1,523,770

CORPUS CHRISTI

$73,886,344

$1,477,727

FORT WORTH MTA

$69,078,582

$1,381,572

ROUND ROCK

$67,996,147

$1,359,923

LUBBOCK

$66,316,817

$1,326,336

IRVING

$66,009,062

$1,320,181

FORT WORTH CRIME CTRL DIST

$65,433,451

$1,308,669

SAN ANTONIO ATD

$63,220,054

$1,264,401

MCALLEN

$61,739,232

$1,234,785

MIDLAND

$54,979,855

$1,099,597

SUGAR LAND

$53,198,028

$1,063,961

GRAND PRAIRIE

$51,143,821

$1,022,876

MCKINNEY

$46,632,047

$932,641

EL PASO COUNTY

$45,826,233

$916,525

MESQUITE

$43,412,130

$868,243

GRAPEVINE

$42,358,646

$847,173

CONROE

$42,325,549

$846,511

EL PASO CTD

$41,951,196

$839,024

ABILENE

$41,233,710

$824,674

TYLER

$40,309,897

$806,198

ODESSA

$39,931,872

$798,637

BEAUMONT

$39,684,062

$793,681

LAREDO

$39,468,031

$789,361

ALLEN

$37,741,460

$754,829

WACO

$37,621,206

$752,424

BROWNSVILLE

$37,556,119

$751,122

LEWISVILLE

$35,782,795

$715,656

CARROLLTON

$35,274,253

$705,485

RICHARDSON

$33,472,183

$669,444

COPPELL

$33,098,877

$661,978

CORPUS CHRISTI MTA

$32,885,321

$657,706

PASADENA

$32,755,524

$655,110

MIDLAND COUNTY

$32,588,281

$651,766

ECTOR CO HOSP DIST

$31,148,828

$622,977

BRAZORIA COUNTY

$31,121,946

$622,439

DENTON

$30,871,972

$617,439

LONGVIEW

$30,430,549

$608,611

Texas Local Government Sales Taxes Are Flat

One always has to remember that you can drown in a pond that only averages being 6-inches deep. I’ll get back to you on that one.

For the most part, local governments (cities, counties, transit authorities and special districts) take advantage of the maximum sales tax rate of 2-cents. That amounts to just over $8 billion each year. The state collects their 6.25%, so it is easy to see how significant this revenue source is in Texas. They also collect on auto and boat sales while the locals get none of that slice. Sales taxes are one of the major ways we keep from having an income tax in Texas. It is usually either the number one or number two largest revenue sources for the cities’ General Fund, often trading places with Property Taxes. Sales taxes are the Property Tax Rate Equivalent of about $0.35-$0.45.

When you look at sales tax data that is seasonal, while also being tied to the economic cycles (two different factors), it is hard to make sense of it unless you view the data on a Rolling 12-Month basis (R12). That way you are always looking at a year’s worth of data. As you can see in the chart below, the trend has always been to the upside except temporarily during recessions. Texas is not immune from hurting badly when the consumers (70% of the economy) decide to slow down their spending, willingly or unwillingly. There is also a significant amount of business-to-business (B2B) sales and use taxes that make up this important revenue base.

Interestingly, you can use this data to identify the exact month that it was clear to the chart reader that we were entering into the Dot Com recession as well as the Great Recession. We can also see the exact month we had a confirmed bottom. The depth and length of the recessions and the rate of the recoveries are also critical to understand. Part of the understanding of recessions is simple: they happen! Economic cycles are treated as an injury that demands all kinds of rescue efforts and major surgery. Hence the Federal Reserve as well as the Political Machinery jump into action and sometimes do dumb things to prevent a natural economic cycle from playing out as it should.

As a whole, the local governments in Texas have collected $8,040,691,221 in sales taxes for the 12 months ending May 2016. However, the amount collected for the 12 months ending May 2015 totals $7,966,819,038! That’s almost perfectly flat. In fact, we are in our 15th month (it really went flat in March 2015) of almost zero growth.

Even more revealing than the absolute dollars is the R12% growth rate, the red lines. This is a more sensitive indicator and announces a slowing and changing of a trend quicker than can be seen just looking at the blue dollar bars. There are several stories in the red lines. Since 1992, the average has been 6.14%. That is a very robust number that takes into consideration 1) population and business growth; 2) inflation; and 3) a “wealth/debt” factor. We are a relatively wealthy state, but we have also been as foolish as the rest of the nation with consumers spending more than we have via HELOC loans, credit cards and any other kind of money we could borrow.

As a rule, as the historical data proves it, any time the R12% growth rate has even approached 9-10%, a recoil soon follows. The recoils can be ugly and as deep as the preceding rises were steep. This makes sense in that the third factor listed above cannot be sustained for a long period of time without bursting. If the consumer lived with their means, there would not be as many booms and busts. Also, full-employment has the unwanted and unsustainable pay increase pressures that breakdown at some point.

So, where are we? The most recent R12% peak was at 8.02% in March 2015. If you are studying the chart below carefully, you should be asking about the previous recent spike that declined to the average and then rose again before the current roller-coaster dip started. The answer is that we were recovering from the Great Recession just fine, peaked and then were pulling back when something happened. Gasoline prices plunged giving the consumer a few extra bucks to spend. Wal-Mart keeps metrics and can actually tell when tax laws change or some event gives or takes away $20 per week of people’s spending money.

But in Texas, cheap oil and gasoline is a double-edged sword. Hence, the downward pressure of the economy overwhelmed the state. An extra $20 per week for the majority can’t offset $30,000 to $100,000 jobs being lost by the thousands. The interconnectedness of our state started showing up in a big way 15 months ago.

The R12% growth rate peaked and has declined in 14 of the 15 past months. That statistic dropped to a brutal low of +0.93% in May 2016. It is possible that it could stay near-flat for months, but there would be every reason to believe we could go negative in the R12 and the R12% as early as next month.Yes, it is possible the sales tax levels could rise again. But I’ll let you make the call.

Today there were several stories in the news about some of the major bellwether retail companies suffering big declines. The job market has been softening for several months at both the national and state level. Fitch came out today with a report that housing prices in the North Texas were 15-20% too high. My goodness, we have learned absolutely zero from the causes of the Great Recession!

So if this is statewide information, how are individual regions, sub-regions and cities doing? Well, that’s why the 6-inch drowning comment was made in the introduction. While the state as a whole is grinding to a stop, some cities are getting killed. Mostly in the oil patches and where local economies heavily support the oil & gas industries.

See the TML Regional Map following the chart. Most of the regions have been falling steeply for months and have been negative for at least a few months. As of May 2016, these are the following R12% results:

TML Region 02: -2.10%. (Amarillo area)
TML Region 03: +0.65%. (Lubbock area)
TML Region 04:-5.90%. (Midland-Odessa area)
TML Region 05: -1.58%. (Wichita Falls area)
TML Region 06: +3.88%. (Abilene area)
TML Region 07: +0.40%. (San Antonio area)
TML Region 08: +12.28%. (Fort Worth area)
TML Region 09: +4.53%. (Waco area)
TML Region 10: +7.24%. (Austin area)
TML Region 11: -2.97%. (Corpus Christi area)
TML Region 12: +4.62%. (Rio Grande Valley area)
TML Region 13: +17.96%. (Dallas area)
TML Region 14: +18.29%. (Houston area)
TML Region 15: +8.13%. (Tyler-Longview area)
TML Region 16: -1.39%. (Beaumont area)

Yes, North Texas and a few other regions of the state don’t know what everybody is talking about regarding slow growth. There have been some huge corporate moves in motion that don’t stop until  done. And remember that these TML Regions are quite large. Region 14 is doing well, but Houst0n itself is down -2.71%.

Here is what I do every month, and I invite you to dive in and see for yourself. First, look at the state as a whole. Then look at the 15 Regions. Appreciate the economic diversity across the state. Then look at any of the 1,600+ individual entities.

You can train your eyes fairly quickly to just look at the shapes and directions. Then with the roll of the wheel on your mouse, you can spend just a few seconds on each chart to size up the magnitude and direction of sales taxes. A dozen people looking at 50 charts are highly likely to arrive at the same conclusion regarding the overall direction and health of this key metric.

Appreciate the fact that sales taxes are just about as early of a warning system as we could have. The sales tax checks we received last Friday are for the actual business activity through March 31, 2016. Imagine that. Buy an iPhone on March 31, and the sales tax is in the local government’s bank account about 40 days later. That is dang near real time.

The collection of charts can be found at this link. It is a large file that may take a few minutes to download. I can download on my iphone and iPad, but it is best downloaded to your laptop or desktop. For those of us who like real data in addition to charts, a recap of the last 25 months can be found at this location.

Let me know if you have any questions. LFM

ScreenHunter_03 May. 12 16.40

TMLREGIONSmap

You can go to http://www.tml.org/regions to see the exact counties in each Region.