Signs of a soft landing are emerging in Texas — on the spending side of the ledger.
In November, monthly sales tax allocations for all taxing entities rose 7.1% compared with a year earlier, the Texas comptroller reported. That’s less than half the average monthly gain of 17.5% over the previous 12 months.
In Plano, where strong gains were the norm for 17 straight months, sales tax revenue actually declined slightly compared with a year ago — down 2%.
“When things were going gangbusters, the question in the back of everyone’s mind was, ‘How much longer is this sustainable?’” said Casey Srader, Plano’s senior budget manager. “Everyone knows it can’t be forever. Now we’re at a time when things are starting to turn.”
Sales tax allocated to cities in November primarily reflects receipts from September. After taxes are collected and sent to Austin, the appropriate shares are later returned to cities, counties, transit systems and special tax districts.
That means the slowdown in sales tax growth was appearing in September in much of the state.
“People are retrenching a little bit,” Srader said. “There’s a lot of talk about recession, and all of that plays into people just being more cautious.”
Sales didn’t actually decline in September for the vast majority of Texas cities. But the pace of growth slowed, and those numbers are being compared against the sometimes spectacular gains of the pandemic recovery.
In the first 11 months of 2022, sales tax gains for all Texas cities rose an average of 14.1%, the comptroller reported. But in November alone, sales tax payments rose an average of 5.9% — not even keeping up with inflation.
“While the North Texas economy is outperforming the national economy, we’re not immune from national trends,” said William Adams, chief economist at Comerica Bank.
Comerica’s Texas Economic Activity Index rose at an annualized rate of 1.5% for the three months ended in August. For the same period a year earlier, the index was up 7.6%.
The decline in the housing market, driven by much higher interest rates, is taking a toll, Adams said. Higher prices for electricity and gasoline are prompting many low- and middle-income families to pull back. Even high-earners are less flush after the sharp drop in the stock and bond markets.
“With those headwinds, it’s no surprise to see slower spending reflected in the sales tax revenue,” Adams said.
Arlington, which has one of the region’s top entertainment districts, had been racking up giant gains in sales tax revenue. There’s been strong demand for live events, including concerts, Dallas Cowboys games and other sports, said Arlington city manager Trey Yelverton.
From January through November, sales tax allocations to Arlington rose over 24%. But in November alone, Arlington’s allocation was only 1.5% higher than a year ago, which isn’t close to matching inflation.
“One month doesn’t make a trend, right?” Yelverton said.
In the past two fiscal years, which ended in September, total sales tax revenue has grown over 28% in Arlington, he said. Part of that comes from higher sales in the wake of the pandemic, and part of it stems from a Supreme Court decision that allowed local governments to collect sales tax on online sales.
Those gains are now baked into the city’s base model, and he believes future growth is likely to resemble past patterns.
“It’s a return to more normal sales tax trends,” Yelverton said. “We might see sales tax rise a couple of percent or fall a couple of percent. But we won’t see these big, big swings.”
He’s more concerned about the effects of inflation. For some recent construction projects, bids were coming in 30% higher than budgeted, often because of supply shortages. That’s prompted Arlington to curtail the scope of some projects and use value engineering to close the gaps.
The city also is looking at other revenue sources, such as federal dollars, to augment its spending plans, he said. If necessary, Arlington could tap debt to pull off some important projects.
“We’ve not done that yet,” Yelverton said. “If prices stay high for a period of time, we may end up needing to do that.”
There are still strong indicators in the economy, especially with the labor market and consumer spending. For October, advance estimates of U.S. retail sales were higher than many expected, indicating that consumers continue to spend.
Retail and food services sales totaled nearly $695 billion in October, up 1.3% from September.
That’s a year-over-year gain of 8.3%. Inflation contributes much of that, and the annual growth rate is slightly lower than it was in September. Adams said the October annual gain was the smallest since April.
“In year-over-year terms, we are seeing a slowdown — or I guess you could call it a moderation in growth of retail sales,” Adams said.
The Texas comptroller recently reported that state sales tax revenue totaled $3.8 billion in October, 11.9% more than in October 2021. He said the growth was driven by business spending.
That’s not surprising, said Adams: Business spending tends to track overall economic activity and corporate profits, and those measures have been strong.
With supply constraints continuing, Adams said, “Many businesses have had a lot of pricing power, which helps them stay profitable.”
The Federal Reserve’s push to raise interest rates will affect companies’ spending plans because they often borrow for big investments.
“Going forward, we’re likely to see businesses turn more cautious, too,” Adams said.
