Texas’ sky-high sales tax growth is falling back to earth

Texas is showing signs of a soft landing — on the expense side of the ledger.

In November, monthly sales tax allocations for all taxpayers increased 7.1% year over year, the Texas Comptroller reported. That’s less than half of its 17.5% average monthly gain over the past 12 months.

In Plano, where strong profits were the norm for 17 months, sales tax revenue actually fell slightly — 2% — year-on-year.

“When things got into high gear, the question in everyone’s mind was, ‘How much longer is this sustainable?'” said Casey Srader, senior budget manager at Plano. “Everyone knows it can’t be forever. Now we are in a time where things are starting to turn.”

The sales tax allocated to cities in November mainly reflects September’s receipts. After taxes are collected and shipped to Austin, the appropriate portions are later returned to cities, counties, transit systems, and special tax districts.

That means the slowdown in sales tax growth in September occurred across much of the state.

“People are withdrawing a bit,” Srader said. “There’s a lot of talk about recession, and all of that just makes people more cautious.”

Sales didn’t really fall in September for the vast majority of Texas cities. But the pace of growth has slowed, and those numbers are being compared to the sometimes spectacular gains of the pandemic recovery.

In the first 11 months of 2022, sales tax profits rose an average of 14.1% for all Texas cities, the Comptroller reported. But in November alone, sales tax payments rose by an average of 5.9% — not even keeping pace with inflation.

“While the North Texas economy is outperforming the national economy, we are not immune to national trends,” said William Adams, chief economist at Comerica Bank.

Comerica’s Texas Economic Activity Index rose an annualized 1.5% for the three months ended August. In the same period last year, the index was up 7.6%.

The decline in the housing market, driven by much higher interest rates, is taking its toll, Adams said. Higher electricity and gas prices are causing many low- and middle-income families to retreat. Even high earners are less flush after the slump in the stock and bond markets.

“With these headwinds, it’s no surprise that slower spending is reflected in sales tax revenue,” Adams said.

Arlington, which has one of the region’s premier entertainment districts, had made huge gains in sales tax revenue. There is strong demand for live events, including concerts, Dallas Cowboys games and other sports, said Trey Yelverton, Arlington City Manager.

From January through November, sales tax allocations to Arlington increased by over 24%. But in November alone, Arlington’s allocation was just 1.5% higher than a year ago, nowhere near inflation.

“One month doesn’t make a trend, does it?” said Yelverton

In the last two fiscal years ended September, Arlington’s total sales tax revenue increased by more than 28%, he said. Part of that comes from higher sales amid the pandemic, and part of that comes from a Supreme Court decision that allowed local governments to levy sales tax on online sales, he said.

Those gains are now burned into the city’s baseline model, and he believes future growth is likely to resemble past patterns.

“It’s a return to more normal sales tax trends,” Yelverton said. “We could see VAT up a few percent or down a few percent. But we’re not going to see those big, big swings.”

He’s more worried about the impact of inflation. Some recent construction projects have offered bids as much as 30% over budget, often due to supply shortages. This has prompted Arlington to narrow the scope of some projects and use value engineering to fill in the gaps.

The city is also considering other revenue streams, such as federal dollars, to expand its spending plans, he said. If necessary, Arlington could tap into debt to pull off some important projects.

“We haven’t done that yet,” Yelverton said. “If prices stay high for a while, we may have to do that.”

There are still strong indicators in the economy, particularly in the labor market and consumer spending. For October, US retail sales flash estimates came in higher than many had expected, suggesting consumers are continuing to spend.

Retail and hospitality sales were nearly $695 billion in October, up 1.3% from September.

That’s an annual gain of 8.3%. Inflation is a big contributor, and the annual growth rate is slightly lower than in September. Adams said October’s annual gain was the smallest since April.

“Year-over-year, we’re seeing a slowdown — or I think you could call it a moderation — in retail sales growth,” Adams said.

The Texas Comptroller recently reported that state sales tax receipts totaled $3.8 billion in October, up 11.9% from October 2021. It said the growth was driven by corporate spending.

That’s not surprising, Adams said: Corporate spending tends to follow macroeconomic activity and corporate earnings, and those metrics have been compelling.

Amid ongoing supply constraints, Adams said, “Many companies have had great pricing power, which helps them stay profitable.”

The Federal Reserve’s push to raise interest rates will affect corporate spending plans as they often borrow for large investments.

“In the future, we’re also likely to see companies becoming more cautious,” Adams said.

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