Austin sales tax revenue lower than expected

City Council has known for months that it would struggle to come up with the money needed to cover many of the programs its members hope to put in place in the coming year. However, the most recent data on sales tax revenue suggests things might be even worse than anticipated.

In June, the most recent month available for analysis, city sales tax revenue was 7.2 percent lower than at the same point last year.

It hasn’t been bad all year; revenue in May was 7.3 percent higher than May of 2016. The month-to-month data has been extremely volatile.

However, the general trend has been disappointing. Revenue has only grown 2.5 percent over the first nine months of the fiscal year, far lower than the 3.75 percent growth city staff had projected.

Deputy Chief Financial Officer Ed Van Eenoo said Tuesday that the lackluster sales figures seemed to be at odds with other seemingly positive economic indicators, both nationally and regionally.

Nationally, consumer confidence is high and unemployment is low, suggesting that people should be eager to spend. In Austin, the jobless rate is not only lower but the population continues to grow, fueling a development boom that one would expect to lead to robust sales of appliances, furniture and all of the other things that new homeowners typically buy.

“It’s a bit of a conundrum,” he said in an interview with the Austin Monitor, although he noted that incomes, both nationally and regionally, have not risen much.

The lower-than-expected sales tax revenue has some Council members wondering whether the city should establish a more robust reserve fund in anticipation of an economic downturn. Current policy is to reserve an amount equal to 12 percent of the General Fund, but Van Eenoo has suggested in the past that Council could set aside an even greater amount, such as 12.5 percent or 13 percent.

Council Member Ellen Troxclair asked what the implication would be of Council increasing its reserve amount by 1 percent over each of the next three years, with the goal of reaching 15 percent.

Van Eenoo warned that Troxclair’s suggested policy would be “hard to achieve” unless Council was willing to accept cuts to existing programs. Each percentage increase, he pointed out, amounts to roughly $10 million.

The city’s credit rating is also unlikely to be in jeopardy even if its reserve amount drops below 12 percent in the next year, said Van Eenoo. Rating agencies would be unlikely to penalize the city as long as Council responded responsibly to the dip in revenue by shoring up the reserves.

“They would want to see the leadership of taking corrective action to avoid that being an ongoing trend,” he said, adding that he thinks the city is generally in a good financial position as it stands.

Even if tax revenue drops significantly in the next year, he said, the $120 million Council has in reserve would go a long way in helping the city maintain its services.

Council Member Ora Houston voiced concerns about the effect that national and global events might have on the city budget. She noted a variety of troubling events, including a likely showdown in Congress over raising the debt limit as well as a “looming war that we might be engaged in.”

Council Member Delia Garza, without suggesting specifics, said that she was also inclined to support a more “conservative” budgeting approach.

“I’m up to holding on and seeing what happens at the national and state level,” she said.

Council Member Leslie Pool suggested another way the city could generate some revenue: End the tax break that the Domain currently enjoys. The incentive agreement, which Council offered as an incentive to spur the mixed-use development in 2007, results in an abatement of more than $460,000 a year in property taxes and $1.3 million a year in sales taxes.

Mayor Steve Adler expressed concern that Pool’s suggestion might harm the city’s ability to strike future deals with businesses. “I always thought that it was a bad policy to make a deal with somebody and then back out of a deal,” he said.

Pool replied that the city has withdrawn from similar deals, including ones with Facebook and National Instruments, and that the terms of withdrawal are spelled out in the original deal. The Domain, which is located in Pool’s district, is thriving, she noted, and hardly dependent on a city subsidy to succeed.

The Austin Monitor’s work is made possible by donations from the community. Though our reporting covers donors from time to time, we are careful to keep business and editorial efforts separate while maintaining transparency. A complete list of donors is available here, and our code of ethics is explained here.