Texas cities, counties pinch pennies amid slowing economy | State

Despite that growth, Fort Worth officials found themselves in a tight spot this summer, facing a nearly $17 million budget deficit.

They’re not the only ones with budget woes. Texas cities and counties, large and small, have had to pinch pennies as economic uncertainty, inflation, strict state limits on property tax collections and uncertainty around future federal funds have crimped their budgets. That’s left local governments to either cut spending or raise taxes and fees to make up the difference.

The pressure doesn’t appear to be letting up any time soon. Many of the state’s biggest cities project they will face budget shortfalls in the coming years, some sooner than later, making future budget cuts and tax hikes all but inevitable.

“There will have to be some significant belt-tightening,” said John Diamond, senior director of the Center for Public Finance at the Baker Institute for Public Policy at Rice University.

As the state’s economic growth has slowed amid President Donald Trump’s trade war and immigration crackdown, so too has sales tax revenue, which cities use to pay for key services like police officers, firefighters, street lights and sidewalks.

Inflation and the end of pandemic-era lockdowns fueled double-digit sales tax growth, which helped fill local coffers and create budget surpluses at the state level.

Now, sales tax revenues have come back to earth, growing about as quickly as they did before the pandemic in some cases and more slowly in others. Fort Worth’s sales tax revenue grew by double digits in fiscal years 2021 and 2022. City budget writers project sales tax revenue will grow at a more modest 4% in its upcoming budget, slower than it did in the years immediately preceding the pandemic.

In Austin, sales taxes surged by more than 21% in fiscal year 2022. This year, sales tax revenue was flat. Austin budget writers are bracing for that amount to fall in the city’s upcoming budget. They expect sales tax revenue to recover in the coming years, but at a slower pace than it grew before 2020.

That mirrors what’s going on at the state level. Texas’ sales tax revenue grew by 4.1%, an uptick from the previous year but a slower pace than it did before the pandemic.

Texans are spending a larger share of their budget on keeping a roof over their heads and food on the table, costs that largely don’t generate sales tax revenue, and aren’t spending as much of their income on goods and services that do.

Waning consumer confidence has also bitten into sales tax revenue as families pull back on spending. Trump’s tariffs have also created more uncertainty, which could further affect sales tax revenue.

In McAllen, foot traffic from Mexican visitors drives sales tax revenue that helps keep the city humming.

That traffic has slowed amid stricter enforcement on travel on both sides of the Rio Grande. Sales tax revenue has grown at a more modest pace than in recent years, McAllen City Manager Isaac Tawil. But with people making fewer trips between McAllen and Reynosa to spend money in stores and restaurants, city officials are hedging their bets, planning for sales tax revenue to remain flat year-over-year in its upcoming budget.

“The economy is volatile,” Tawil said. “While we anticipate that sales tax will increase, we didn’t want to be over aggressive in that anticipation.”

Hard limits on city and county property tax revenue, too, have strained local budgets. In a bid to blunt the state’s high property tax bills, state lawmakers in 2019 put a tighter cap on how much more in property taxes cities and counties can collect each year without asking voters. Under state law, that limit is 3.5%. City and county officials have frequently mentioned the law as a constraint on their budgets as they try to meet growing community needs.

The law’s proponents credit the cap with curbing tax bills more than they would have absent the law. Tax rates have since fallen on average.

Republican tax-cut proponents aren’t satisfied. State lawmakers have spent tens of billions of dollars in recent years to lower the amount of property taxes collected by school districts, traditionally the biggest chunk of an owner’s tax bill. City property tax collections have risen at roughly the same clip as they did prior to the pandemic, while counties’ property tax levies have grown at a faster pace on average.

“That doesn’t sound like a starved government operation,” said state Sen. Paul Bettencourt, a Houston Republican who crafted the current revenue cap. “That sounds like a ‘hitting the taxpayers hard’ operation.”

If cities and counties need additional property tax revenue, they can ask the voters, Bettencourt said, noting that voters have signed off on property tax increases in Austin, Harris County and Lubbock County.

“What I don’t see is a bunch of elections, people taking stuff to the voters and the voters failing them,” Bettencourt said.

Complicating matters: the red-hot growth in property values amid the state’s recent economic boom that helped keep cities afloat is gone. After years of growth, Austin budget writers project taxable property values in the capital city will fall this year, partially why city officials will ask voters at the November ballot box to sign off on a 20% increase in the city’s property tax rate.

Even more property value may be taken off the tax rolls when voters consider this November a constitutional amendment to give business owners bigger breaks on the taxes they pay on their inventory. The state would pick up the cost of property tax revenue that school districts would have otherwise collected from businesses if not for the exemption. But cities and counties will either have to raise tax rates to make up for the lost revenue or go without it.

At the same time localities’ pocketbooks face constraints, the cost of providing services has only grown with inflation. A common refrain among local budget writers: State lawmakers may have capped property tax revenue growth, but they didn’t cap the cost of asphalt.

“Parts on vehicles have gone up. Purchases of vehicles have gone up. Street materials have gone up. Our seasonal labor costs have gone up,” Longview City Manager Rolin McPhee said. “It’s really just costs that are outside of our control.”

A key driver of city and county budgets: growing public safety costs. The cost of paying and equipping police officers, firefighters and paramedics tends to make up the bulk of any given locality’s budget. And that cost is growing.

The growth in public safety costs accounts for more than two-thirds of the overall growth in Fort Worth’s core budget, or the portion primarily funded by property and sales taxes, for the upcoming fiscal year. The city is boosting pay for its police officers and firefighters.

Austin will give sworn police officers a 6% increase in base pay in the city’s upcoming budget and a 5% pay bump the following year, part of a $218 million, five-year contract struck last year between the city and the union that represents Austin police officers. Paramedics, too, are expected to get pay bumps.

In most of the big cities, the cost of paying and equipping police officers and firefighters exceeds what that city collects in property taxes, often a local government’s biggest revenue source.

Dallas officials expect to collect about $1.1 billion in property taxes in its upcoming fiscal year, but the portion of its police and fire department budgets funded through its general tax revenue exceeds $1.2 billion. That puts the state’s third-largest city in a tough financial spot given that voters approved a November ballot measure to compel the city to hire about 900 new police officers.

Under state law, localities largely can’t cut their public safety budgets unless voters sign off on the cuts.

Costs are going up for civilian employees, too, including pensions and health care.

Hemphill County, a rural community of just over 3,300 people in the Texas Panhandle, saw a 30% decline in taxable property values. County officials raised the tax rate to offset the loss, but increases in medical and liability insurance for county employees, as well as other costs, ate into additional revenue raised by that increase.

“We don’t get to choose whether we want to insure our property. We have to have that,” Hemphill County Judge Lisa Johnson said. “We need to insure our employees.”

Cities and counties are also under pressure to pay employees enough to keep up with cost-of-living increases and retain them. Austin and Fort Worth officials green-lit pay bumps for civilian employees in their upcoming spending plans.

That’s not as easy in other parts of the state.

The budget sustaining Ector County, a rapidly growing industrial oil and gas county of 175,000 residents in West Texas, has remained stagnant for years, said Dustin Fawcett, the county judge. That budget is beholden to an industrial and often unstable economy.

Its most recent budget keeps county employees afloat, he said, but the county’s struggling to offer competitive salaries to its employees, its biggest expense.

“That’s the biggest issue we’ve had in just this year’s budget,” Fawcett said. “We would have loved to have been able to give more salary raises.”

Some places looked to across-the-board cuts to stave off budget woes.

Fort Worth officials found more than $12 million in cuts after asking every city department to look for ways to trim their budgets by eliminating vacant positions, using accounting tricks and nixing certain contracts. City officials pursued those cuts after the Tarrant Appraisal District green-lit a plan to freeze homeowners’ property values for 2025, which officials feared would blow a $16.7 million hole in the city budget.

But property values came in higher than expected, eliminating the shortfall. City officials have opted to keep many of the cuts they had planned, but reversed cuts that would’ve made some city operations too difficult, said Christianne Simmons, the city’s top budget official, recently told Fort Worth City Council members.

In Longview, cuts weren’t optional. The city cut eight positions and a number of vehicles from its operating fleet, McPhee said.

As state lawmakers target cities and counties for additional property tax relief, officials in many of Texas’ biggest cities are looking to enact tax rates that will lead to higher bills for taxpayers. San Antonio, the state’s second-largest city, plans to keep its tax rate flat, but homeowners will pay slightly more owing to higher property values. Officials in Dallas and El Paso plan to reduce their tax rates, but taxpayers in those cities will pay more than they did the previous year because of property value growth.

Meanwhile, Austin officials have asked voters to approve a 20% increase in the city’s tax rate in November. For the typical Austin homeowner, that would mean an increase of about $303 in their tax bill — not including fee increases for homeowners the council approved in the upcoming budget.

That increase has sparked concerns about the city’s affordability. Austin was the poster child of the state’s housing affordability crisis as home prices and rents there skyrocketed in recent years. Council members have enacted several changes aimed at containing housing costs, and an apartment building boom there has driven down rents for two years straight.

Austin City Council member Marc Duchen, who voted against a proposal to raise the city’s tax rate, argued the city needs to find ways to trim its spending and that the increase is “going to make the city less affordable.”

Austin Mayor Kirk Watson acknowledged there’s an “inherent tension” between asking residents to pay higher taxes and fees and the city’s affordability problems. But Watson argued the city needs the additional revenue to sustain its boom.

“We are not managing decay in this community like some other places,” Watson said during the August vote. “But I will tell you, I believe it in my heart that if we’re not making the kinds of investments we need to make in our people and our services, we will be managing decay in a very short period of time.”