This month: Sales tax can be used to reduce reliance on property tax.
Partnering for Impact
Lighten the load on property taxpayers
Local Government Tools that Made the Difference
Sales Taxes
Local Sales Tax —
Who Gets What?
Local sales and use tax is a valuable revenue generator for a wide variety of public purposes.
In Texas, the local component is capped at 2 percent – all of which can go to a city.
If the county has a sales tax it can range from 0.5 percent to 1 percent. A special purpose district – such as crime control, library or hospital – can impose a sales tax ranging from 0.125 percent to 2 percent. Transit districts or transportation authorities can set a tax from 0.25 percent up to 1 percent.
Examples of how local sales taxes can be split:
Eagle Pass:
- City — 1 percent
- County — 0.5 percent
- Special Purpose District* — 0.5 percent
Irving:
- City — 1 percent
- Dallas MTA** — 1 percent
Midland:
- City — 1 percent
- 4A — 0.25 percent
- 4B — 0.25 percent
- County — 0.5 percent
*Maverick County Landfill Waste and County Detention Center
** Metropolitan Transit Area
In slow economic times, cities and counties often re-evaluate their expenditure priorities and sometimes raise property taxes, but many overlook opportunities to diversify their revenue sources.
Using sales tax to reduce the property tax rate is one way these entities can reduce reliance on real estate taxes.
Like property tax revenues, funds generated by a local sales tax can be spent for any general revenue purpose. However, the taxing entity must use an estimate of the anticipated sales tax when calculating the effective and rollback property tax rate, typically lowering the rate threshold required for calling a property tax rollback election. During the first three years of the sales tax, any revenue collected in excess of the estimate must be set aside in an “excess sales tax fund” to be used only when there is a revenue shortfall from other revenue sources. Beginning in the fourth year, excess funds must be used to reduce debts.
A city or county may adopt a sales tax to reduce the property tax rate as long as the combined local sales tax rate does not exceed 2 percent and no area within the entity’s jurisdiction is also located in the boundaries of a mass transit district or authority. The rate for this special sales tax must be uniform throughout the city or county. Voter approval is required before any sales tax is implemented.
Cities may impose the sales tax even if they do not currently levy a property tax. Permissible tax rates for cities are from 0.125 to 0.5 percent in increments of 0.125. Counties may impose the tax only at a rate of 0.5 percent unless the county has no incorporated municipalities. For these counties, the rate must be 1 percent.
Most cities in Texas have already reached the 2 percent maximum sales tax cap. This is due to other entities imposing sales tax within a city’s boundaries or special purpose sales taxes imposed by the city. Sales taxes imposed for special purposes include economic development, street maintenance and repair or crime control and prevention. Cities at the cap are not prohibited from using sales tax to reduce the property tax rate, but must hold an election to reduce or abolish an existing special purpose sales tax to impose the new tax.
Currently 123 counties and 353 cities use sales tax to reduce the property tax rate in their communities. TR
For more information on using sales tax to reduce the property tax rate contact the Comptroller’s Local Government Assistance Division at (800) 531-5441 ext. 3-4679 or visit “Economic Development Tip Sheets and Reports” on our Web site.