Photo by Jimi Filipovski on Unsplash

Government entities in the Greater Houston region are increasingly struggling to provide urban-level services to all residents, particularly those in unincorporated suburban areas. Raising or allowing high-growth urban counties to collect sales tax could improve the provision of public services to all residents.

Municipal governance in the Greater Houston region is split between hundreds of special districts, cities and counties. Last week, a new report from the Kinder Institute detailed how the region is struggling to keep up with service provision. The issue, in brief, is development and urbanization outside of incorporated boundaries has created city-like communities without city-like revenue sources, namely, sales tax.

In Texas, sales and use tax are capped at 8.25 percent. The state collects 6.25 percent statewide and then allows municipal governments to collect up to an additional 2 percent. Usually, this is split between a city and a local special district. In Harris County, METRO collects 1 percent throughout most of the county. There are also 48 special purpose districts in Harris County currently collecting sales tax. These funds are then used towards specific functions, including, transportation, emergency services, crime prevention, etc.

As the report details, there are also several Limited Purpose Annexations (LPAs) with the City of Houston that allow for sales tax to be collected. These LPAs allow the City of Houston to collect 1 percent sales tax in a special district and then return half the revenue to the special district without having to provide any services. In FY2017 the city collected $106.6 million in sales tax across LPAs, meaning the city and the special districts received approximately $53.3 million each. Under an LPA, the sales tax is collected and split between the city and district. The county still provides services within the limited annexed territory – especially road and stormwater maintenance – but is not given access to any of the collected sales tax.

Harris County has had to keep up with urban-level service demands despite its limited statutory powers. The biggest gap between city and county governments is county governments cannot directly collect sales tax. There are vehicles available for counties to collect sales and use tax, in fact, 124 counties, or approximately 49 percent of all counties, in Texas collect sales and use tax as a form of property tax relief. These counties either directly have a sales tax, have a county-wide special purpose district (SPD), have an SPD in part of the county or use multiple SPDs to collect sales tax.

However, Harris County cannot collect sales tax – the Texas Tax Code prohibits counties with transit authorities from collecting sales tax. Harris County faces a mounting challenge maintaining solvency and a consistent level of service as more and more residents, and their tax revenue, move to unincorporated areas. The report identifies several options to address county-level revenue shortfalls by creating an Urban County designation, providing sales tax or ordinance-making power to urban counties and reforming Limited Purpose Annexations.

An Urban County designation in the Local Governance Code would allow high-growth urban counties to collect sales tax, despite having a transit authority in its boundaries, and grant it ordinance-making power. In effect, the county would become the primary municipal government providing public services and amenities. This, of course, could be explored in segments by simply granting the two major powers, sales tax and ordinance-making powers, separately or in stages.

The report also explores raising the sales tax, in lieu of raising property tax, to fund county revenue shortfalls. In this case, the state would have to propose to raise the sales tax cap from 8.25 percent to 9.25 percent in high-growth urban counties for residents in the county to vote on. According to the State Comptroller’s Office, gross sales in Harris County accounted for almost $500 billion in 2017, including $82.7 billion subject to state sales tax. Leveraging a 1 percent sales tax on this amount would total over $827 million in additional revenue.

The final option explores reforming the current Limited Purpose Annexations. Currently, counties are cut out of the revenue these agreements create, despite having to provide services in these areas. Counties could gain access to this revenue if the state-mandated cities and special districts to share this revenue where annexation is not the ultimate plan of the agreement. The report highlights, this could be as easy as splitting the revenue three ways between the city, county and special district or split between city and county for services rendered within the district.

The additional sales tax revenue could be designated for certain uses such as infrastructure maintenance. If pursued separately from ordinance-making powers this revenue could be used to support existing costs associated with maintenance of roads and storm sewers across the county, including cities. Additional revenue would allow counties to keep up with growth-induced demand.