Options are many for added sales tax

In News by Reporter News

Keenly aware of the money left on the table, Friendswood leaders are looking hard at the various options for the city’s yet-to-be-imposed half cent of sales tax.

City Council again reviewed and discussed the issue during a Dec. 8 work session.

“Sales tax is one of the banes of local government, because there’s so much competition,” said Russell Gallahan, senior economic development analyst with the Economic Development & Analysis Division of the Texas Comptroller’s Office. “When I was last here back in 2012, the special purpose district count was only about 230, and it’s now blown up to 281 special purpose districts. These can be various types of entities, such as fire protection district, emergency medical services or a library district.”

Friendswood is one of the few communities of its size in a suburban are that does not charge the maximum rate, Gallahan pointed out.

The Texas sales and use tax rate is 6.25 percent, but local taxing jurisdictions such as cities, counties or special purpose districts can impose sales and use tax up to 2 percent, for a total maximum combined rate of 8.25 percent.

Friendswood now receives 1.5 percent in sales tax on items purchased within the city.

But adopting a tax requires voter approval at either the November or city election in May.

Options for sales tax include street maintenance, he said, though it is only for the purpose of repairing streets that existed on the day the tax is imposed.

“If there is a new street you want to construct, it has to come out of another budget,” Gallahan said.

The street maintenance and crime control and prevention district taxes must be reapproved by voters after several years.

Another possible use is for “venue,” such as a convention center, stadium, water park, etc.

“Once the stadium was paid for, the tax would be ended,” Gallahan explained, “and it could be supported by a number of other things beyond sales tax.”

An “economic development” tax is widely used, he added.

Cities, counties or cities and counties in any combination may join to form a venue district.

Also, the “Better Jobs Act,” allows a city to create a municipal development corporation funded by a sales and use tax to pay for a variety of services. Those can include job training, early childhood education, literacy promotion and other projects.

An unrelated option, known as the “municipal development district,” is more like an economic development corporation, and can also fund a convention center but without being dissolved after it is funded – and also reaches outside the city limits.

“This is the oddest sales tax out there,” Gallahan said. “In a municipal development district, the extra-territorial jurisdiction (areas not yet annexed by the city) are being taxed as long as you don’t exceed that 2 percent cap.”

With fire control, prevention and EMS districts, cities with a population of between 25,000 and 550,000 or more than 1.9 million may create an EMS district that can finance the operation of a fire control, prevention and EMS program.

Property taxes are the largest revenue source for cities and counties – followed by sales tax revenue, according to the Texas Municipal League.

Should the city not pick up on the additional sales tax left on the table, it is possible that the county can.

“I can’t speculate on what that risk is,” said Gallahan, who mentioned that county-only sales tax can be used to fund a “county assistance district” or “emergency services district.”

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