Texas Local Sales Taxes, Part I Vital Services for Two Pennies More

by John Heleman Published May 2016

Some of the best things in life aren’t free. Ask any local government. Many of the services we tend to take for granted — police and fire protection, public libraries, weekly trash collection and bus service — come at a price, and local sales taxes pay much of the tab.

According to the Advisory Commission on Intergovernmental Relations, the first local sales taxes were enacted in New York City in 1934. Today, 38 states allow these taxes.

Nine of the 10 most populous states have authorized local sales taxes (Exhibit 1). Among those with local taxes, only Florida’s maximum local rate is lower than Texas’. The highest local rates typically are levied in major metropolitan areas.

Exhibit 1: State and Local Sales Tax Rates in the 10 Most Populous States (as of July 1, 2015)

State	State Tax Rate	Maximum Local Tax Rate	Maximum Combined State & Local Tax Rate
Michigan	6%	No local tax	6%
Florida	6%	1.5%	7.5%
North Carolina	4.75%	2.75%	7.5%
Pennsylvania	6%	2%	8%
Ohio	5.75%	2.25%	8%
Georgia	4%	4%	8%
TEXAS	6.25%	2%	8.25%
New York	4%	4.875%	8.875%
California	7.5%	2.5%	10%
Illinois	6.25%	3.75%	10%

Note: The 10 most populous states comprise more than 50 percent of the U.S. population.

Source: The Tax Foundation

In Texas, local sales taxes are considered optional, in that they must be approved by voters in the area to be affected. Today, 1,544 jurisdictions across Texas levy the tax, including cities, counties, transit authorities and many special-purpose districts (SPDs).

In 2015, these entities received slightly more than $8 billion from local sales taxes — far less than the $40 billion raised by local property taxes, but still an important element of local government finance.

In Texas, the total local sales tax rate in any one particular location — that is, the sum of the rates levied by all local taxing authorities — can never exceed 2 percent. For instance, if a city imposes a 1 percent sales tax and the county in which it resides levies a 0.5 percent sales tax, an emergency services district in that city could not establish a sales tax rate higher than 0.5 percent.

In many Texas metro areas, the combined local sales tax rate is at the full 2 percent allowed by law.

Local Sales Tax Types

Texas was relatively late in adopting local sales taxes; the Legislature first authorized a 1 percent municipal sales tax in 1967. Austin and El Paso adopted the tax on Jan. 1, 1968. Houston, Dallas, San Antonio and Fort Worth quickly followed suit on April 1 of the same year. At present, 1,150 Texas cities levy sales taxes.

Many additional city sales taxes for specific purposes were approved in the ensuing years, to support causes including economic development and municipal development corporations; sports and community venue projects; property tax relief; and street maintenance and repairs (Exhibit 2). Many cities have more than one of these additional taxes.

Transit authority sales taxes were authorized in the 1970s to support community transportation needs, primarily bus service. San Antonio was first out of the gate, adopting its metropolitan transit authority (MTA) tax on Jan. 1, 1978.

Today, 10 transit authorities levy local sales taxes in Texas, including six MTAs, which generally serve a city as well as its smaller neighboring communities and unincorporated areas; two city transit departments; one county transit authority; and one advanced transportation district (ATD) that serves only the city of San Antonio. Current transit authority tax rates range from 0.25 percent to 1 percent.

Texas county sales taxes were first authorized in 1987, when most city and transit sales taxes were already in place — and many were already at the 2 percent cap. For this reason, most county sales taxes are applied outside metropolitan areas, with the notable exception of El Paso County. At present, 123 Texas counties levy sales taxes, most at a rate of 0.5 percent. County sales tax revenue generally is earmarked by statute for property tax relief.

The newest local sales taxes are special-purpose district sales taxes, first levied in January 1991. Like transit taxes and additional city taxes, SPD levies are narrowly focused, generally supporting:

• health or hospital districts;
• crime control districts;
• emergency services districts (fire and/or emergency medical services);
• library districts; and
• management, municipal development, special improvement, county assistance and economic development districts.

SPD tax rates range from a low of 0.125 percent to the maximum allowable 2 percent (in rare cases in which the SPD tax is levied with no other local sales tax). In Texas, 261 SPDs levy sales taxes.

Tax Totals

The sales tax is a major revenue source for local governments across the nation, second in importance only to property taxes. In 2013 (most recent Census data available), local sales taxes across the nation generated almost $73 billion, 12 percent of all local tax revenue. In Texas, they contributed 13 percent.

Municipalities were the first Texas local governments to receive local sales tax authority, and remain its biggest beneficiaries. In calendar 2015, Texas cities received more than $5.2 billion in local sales taxes, about 65 percent of all local sales tax revenue (Exhibit 3).

These relative shares have stayed remarkably stable since the turn of the 21st century, except in the case of SPDs, which have more than doubled their share due to the increasing number and variety of these taxing authorities in Texas.

Overlapping Jurisdictions

Texas (along with most other states) uses a state-administered system of local sales taxation. Sellers collect both state and local taxes from customers at the time of the transaction and remit them, generally on a monthly basis, to the Comptroller’s office.

After processing, the Comptroller returns local tax revenue to the appropriate jurisdictions. The taxing jurisdictions thus avoid the tasks of collecting, accounting for, auditing, enforcing and administering their own tax systems. State administration, moreover, makes the process easier for businesses collecting the tax, giving them a single point of contact for tax payment, refunds and so forth.

State law directs the Comptroller’s office to retain 2 percent of collections for deposit in Texas’ General Revenue Fund to defray these costs.

Overlapping tax jurisdictions can make the administration of local sales taxes a complex task for retailers and the Comptroller’s office. A business can be located inside two, three or more local taxing jurisdictions.

In San Antonio, for instance, a business located in the central city collects the general city sales tax, additional city taxes for venues and a municipal development corporation and taxes for two separate transit authorities (Exhibit 4). Similarly, Fort Worth central-city businesses collect taxes for the city, an MTA and a crime control SPD.