Two Texas senate bills that are proposed to reduce taxes for businesses and property owners have the potential to put local municipalities in a budgetary bind if passed.
Senate Bill 178, filed by a local legislator, Wichita Fall’s Republican State Sen. Craig Estes, would repeal Texas’ franchise tax. The franchise tax is a privilege tax imposed on businesses formed or doing business in the state, with the exception of sole proprietorship businesses.
“I think that it’s a tax that will eventually be done away with,” Estes told the Messenger in February. “I was very encouraged when it was cut by 25 percent.
“Total elimination is the end goal.”
Local municipalities receive hundreds of thousands of dollars per year in franchise tax revenue from service businesses like Atmos Energy and CenturyLink.
“It’s really a right-of-way fee,” Decatur City Manager Brett Shannon said. “They’re allowed to erect their poles and string their wires and run their lines in the public right-of-ways for a fee.”
The city of Decatur stands to lose an estimated $550,000 a year if the franchise tax is repealed. Bridgeport Financial Services Director Blu Kostelich estimated they would lose roughly $700,000 a year. Kostelich said he believes the franchise tax repeal simply sets businesses up to make more profit.
“If you look at Estes’ bill, there’s nothing in it for the citizens,” Kostelich said. “When we charge a fee, the corporation ups their fees for service to pay for it. There’s nothing to say the corporation has to reduce that fee for citizens once the bill is passed.”
“It’s putting money back in businesses’ pockets, not citizens’ pockets.”
SB 178 was read in the Senate chambers Jan. 25 and referred to the finance committee, but no further action has been taken.
Another bill, Senate Bill 2, filed by State Sen. Paul Bettencourt, a Houston Republican, is a property tax reform bill. A key component of the bill is limiting how municipalities can raise taxes. In Texas, rollback elections can be called when an entity increases their tax rate by 8 percent or more. Citizens can call for a petition for an election at that point, and if the rollback passes, the tax rate falls back to a set rollback rate. The city of Rhome held a rollback election in January of 2016, and the rollback passed.
Under SB 2, which the Senate Finance committee began discussing this week, if entities passed a tax increase of 4 percent or more, a rollback election would be automatically triggered, no petition required. If property values increase enough, municipalities might hit the rollback threshold without touching their tax rate. This worries cities who fear future growth might require tax increases to keep up services.
“If the Metroplex does expand out into Wise County, the growth may be greater than we can pay for,” Kostelich said. “That’s where it really affects us going from 8 percent to 4 percent.”
For local cities like Decatur and Bridgeport, who’ve generated less revenue due to falling mineral values and are facing increased service costs, it’s difficult to absorb those costs without passing them on to citizens. Bridgeport raised their water and sewer fees for 2016-2017 while keeping their tax rate level, and Decatur did the same. The question is whether that approach will continue to work in the future.
“I’m not sure how we can absorb those increases if we can’t increase revenue,” Shannon said.
A complaint city officials had is that the majority of property tax doesn’t go into their budget – it’s used to fund public schools.
“The legislature doesn’t want to address school tax reform, so this is their way to show the citizens they’re doing something,” Kostelich said.
As cities lose revenue, services paid for under the general fund are what will face cuts – those include police and fire, streets, parks and recreation and personnel.
“Both of these [bills] have huge implications to the city,” Kostelich said. “Both of these go into the general fund.
“They really are starting to hinder the city’s ability to provide services.”
Of course, it’s hard to sell less property taxes as a bad thing to the general public, which local municipalities understand. At the same time, they’re facing potential budget shortfalls with no real solutions.
“We want to be fair to our citizens with rates, but we do have to take into account the services we need to provide,” Kostelich said. “I don’t think we would ever make that 8 percent [tax rate increase] mark. I would like it if we never had to raise property taxes, but I don’t know if that’s feasible or not.
“We just have to see what the future holds.”
Shannon said he doesn’t know what the solution is, but he thinks legislators don’t have their fingers on the pulse of local municipalities. Local governments want local control, he said.
“They want Washington to get out of their business, but what are they doing?” he asked. “The exact same thing.”