Hitchcock’s troubling financial position leaves the city facing difficult decisions and deep staffing cuts, among other sacrifices. Questionable management is partly to blame and, theoretically, fixable.
But Hitchcock’s troubles also illuminate a broader problem facing cities everywhere — the heavy reliance on sales tax and the nearly impossible task of predicting and budgeting revenue from those taxes.
On Aug. 21, Hitchcock commissioners approved a general budget of about $4.58 million in both total revenues and expenditures. The city expected to receive $1.15 million from property taxes and $1.08 million from sales taxes. The rest would come from fees, permits and such.
In 2015, Hitchcock received about $2.38 million in sales tax revenue from the state comptroller’s office. That number declined to $1.53 million in 2016 and down to $1.19 million in 2017, according to records. That was about a 50 percent decline in two years.
Earlier this month, consultants advised Hitchcock it needed to cut operating expenses by $860,000 through service reductions and by eliminating staff positions in the police and street departments.
The reduction is necessary to keep the city out of the red, consultant C.B. “Bix” Rathburn said. The city had planned to cover about $690,000 in operating expenses with fund balance money but had only $390,000.
There were other issues. The severity of Hitchcock’s fiscal woes was reduced somewhat when city officials found a duplicate payment to a Tax Increment Reinvestment Zone.
But it’s becoming increasingly clear that Hitchcock and other cities who make projections based on sales taxes are playing a guessing game. And a losing one at that.
Texas imposes a 6.25 percent state sales and use tax on all retail sales, leases and rentals of most goods, as well as taxable services. Local taxing jurisdictions — cities, counties, special purpose districts and transit authorities — can also impose up to 2 percent sales and use tax for a maximum combined rate of 8.25 percent.
Hitchcock’s sales tax rate is 8.25 percent.
Sales taxes put cities at the mercy of the peaks and valleys of the economy. Consumers can and will put off purchasing when the economy is down. But even in good economic times, cities can no longer depend on sales tax as more people shop online and brick-and-mortar stores struggle to stay open.
“As online shopping takes bigger and bigger bites out of the business of brick-and-mortar stores, it’s not only undermining retail employment but also continuing to pose problems for state and local governments, which lose billions of dollars in sales taxes each year to online purchases,” according to Government Technology Magazine.
But the Supreme Court found in 1992 that it’s legal to impose sales taxes only if the vendor has a physical presence in the state where the buyer is located, according to the publication.
Last year, Amazon, the online merchandise juggernaut, said it would collect sales taxes from all states with a sales tax.
Amazon has been collecting sales taxes in Texas since 2012 and since then has remitted more than $270 million to the state, according to Government Technology.
But, until recently, Amazon didn’t collect taxes from the third-party sales that take place on its platform, estimated at 40 percent of Amazon’s total sales, according to the publication. That could be changing, too. Amazon last year warned its sellers that the company, as of Jan. 1, would be collecting sales tax from merchants who ship orders to its home state, Washington, as it sought to comply with a new state law, according to reports, and it was clear more sellers would be affected. While states would benefit, cities would not.
A city’s heavy dependence on sales tax also leads to perverse policies, according to Strong Towns, a nonprofit U.S. group that claims its mission is to support a model of development that allows America’s cities, towns and neighborhoods to become financially strong and resilient.
“An overreliance on sales tax also creates an unnatural competition between cities,” according to Strong Towns.
“Desperate for transactions, local governments use the very revenue they are trying to obtain to bribe retail businesses to move to their communities. … This is not survival of the fittest but a race to the bottom, one that savvy retailers know how to exploit.”
We’ve seen that play out in Galveston County, as cities forego sales tax revenue through abatements and rebates to secure big-name retailers.
But where does this leave cities that depend on taxes to pave streets, fight crime and fires, bring water to our taps, collect trash and more? Property taxes are more consistent and reliable, but there’s a powerful movement to slash those.
One possible solution is for cities to stop chasing big retail and think small again, prospering from homegrown businesses often ignored in favor of national chains. Another is for consumers to shop in stores when they can.
“A more diverse ecosystem of small locally owned businesses can rapidly respond to consumer need while offering experiences that can’t be replicated through e-commerce,” according to Local Government Commission, a group that offers conferences, training forums and resources that grow local knowledge about creating livable communities.
While there aren’t easy answers, it’s clear that cities can’t continue to stake so much on sales tax revenue.
• Laura Elder