PART 4:
The Additional Sales Tax
Cities, counties and hospital districts may levy a sales tax specifically to reduce property taxes. Some hospital districts, created after September 1, 2001, in counties with a population of 75,000 or less, may levy the sales tax without reducing their property taxes.
In each case, the taxing unit reduces its effective and rollback tax rates to offset the expected sales tax revenue. The Tax Code provisions refer to the tax as the additional sales tax for the reduction of property taxes and this manual refers to the tax as the additional sales tax. For more information about imposing and administering the additional sales tax, call the Comptroller's Local Government Assistance Section at (800) 531-5441, ext. 3-4679.
Timing a Sales Tax Election
Local voters by election must approve imposing or abolishing the additional sales tax. Elections may be held on any of the four general election dates–in January, May, August or November. If the additional sales tax to reduce property taxes passes, the taxing unit follows the instructions in this booklet for calculating reduced effective and rollback tax rates.
Collecting the sales tax begins on Oct. 1 following the first full quarter after the taxing unit notifies the Comptroller's office of the election results. A taxing unit that held a successful election in August or November 2007 or held a successful election in January or May 2008 will adjust its 2008 rates. A taxing unit that holds a successful election in August or November 2008 will adjust its 2009 rates for the first time.
Impact on Effective and Rollback Tax Rates
A taxing unit that adopted the additional sales tax in August or November 2007 or in January or May 2008 must adjust both its effective and rollback tax rates. A taxing unit that adopted the tax in prior years, however, will adjust only its rollback rate.
Steps for First Year
A taxing unit that adopted the additional sales tax in August or November 2007 or in January or May 2008 makes a first-year adjustment to both the effective and the rollback tax rates. The taxing unit computes an additional rate based on an estimate of sales tax revenue and subtracts that rate from the effective and rollback rates. The adjustment rate is called the "sales tax gain rate." Use the Additional Sales Tax Rate Worksheet in Appendix 4 to calculate this rate.
The sales tax gain rate. To calculate a sales tax gain rate, the unit must first contact the Comptroller's office to obtain an estimate of the last four quarters' total dollar-volume of business activity subject to sales tax. Multiply that estimate by the adopted additional sales tax rate (normally .005), and multiply that by 95 percent. By using 95 percent, the Texas Legislature allowed a conservative amount to offset low first-year estimates of the total taxable sales. Divide the sales tax estimate by total 2008 taxable values, as illustrated in Exhibit 5.
Section 26.041(i) provides that a county excludes the amount of sales tax revenue that is or will be distributed by the county for economic development grants. The county subtracts this amount from the total estimated sales tax revenue in the first-year rate calculations. The development grants are created and authorized by Local Government Code Chapter 381.
Subtracting the sales tax gain rate from the effective tax rate and the rollback rate adjusts those rates for the anticipated additional sales tax, as shown in Exhibit 6.
Steps for Following Years
Once a taxing unit has collected the additional sales tax for a year, its property tax revenues will reflect any rate reduction arising from the additional sales tax. As a result, calculating the effective tax rate will not require an adjustment for the additional sales tax. Follow the steps described in Part 2 for calculating the effective tax rate.
Calculating the rollback rate after the first year, however, uses the prior year's sales tax revenue in calculating the M&O component of the rollback rate. The unit also subtracts a "sales tax adjustment rate." The resulting calculation includes three components, as shown in Exhibit 7.
The debt service component of the rollback rate is identical to that described earlier. See Part 3 for a full explanation of the rollback tax rate. Use the Additional Sales Tax Rate Worksheet for these calculations.
Sales tax in the M&O rate. To calculate the effective M&O rate, add the prior year's sales tax revenue spent on M&O purposes to the adjusted M&O levy.
The prior year's sales tax revenue is the amount from the first full year of sales tax revenue spent for M&O. This adjustment is necessary to properly account for sales tax revenue received in the preceding year. If this component were not added, the sales tax adjustment would not properly reflect the change in sales tax revenue from one year to the next.
Section 26.041(i) provides that a county excludes the amount of sales tax revenue that was distributed by the county for economic development grants. The county subtracts this amount from the sales tax revenue spent in the calculation of the county's effective M&O rate.
Sales tax adjustment rate. After the first year, the sales tax adjustment rate is based on actual sales tax collections in the previous four quarters. As in the first year, the Comptroller's office supplies this amount on request. Unlike the first year, there is no 95-percent adjustment. To calculate the sales tax adjustment rate, divide the additional sales tax revenue from the last four quarters by the total 2008 taxable values, as shown in Exhibit 8.
A taxing unit's historical summary of monthly local sales and use tax allocation payments is available on the Comptroller's Web site at www.window.state.tx.us/taxinfo/local/ under the link "Allocation Payment Detail." Or, call the Comptroller's Tax Allocation Section at (800) 531-5441, ext. 3-4530.
Changing the Additional Sales Tax Rate
If the taxing unit either increases or decreases the sales tax rate from last year, the unit must perform an additional step to determine the projected sales tax.
If the sales tax rate increased (for example, from $.0025 to $.005), the taxing unit must have two sales tax projections. The first projection uses the increased rate; the second projection does not. The difference between the two projections is the extra revenue generated by the rate increase. In the first year that the rate changed, the effective tax rate is the rate before the increase, less a rate for the extra revenue. To determine the rate to subtract, divide the extra revenue difference by the current total property values (less new property value).
If the sales tax rate decreased (for example, from $.005 to $.0025), then the taxing unit has two sales tax projections–the first on the new decreased rate and the second on the old rate. The difference between the two projections is the revenue loss for the rate change. In the first year that the rate changed, the effective tax rate is the rate before the decrease, plus a rate for the revenue loss. To determine the revenue loss rate to add, divide the revenue loss by the current total property values (less new property value).
Taxing units should contact the Comptroller's Property Tax Assistance Division at (800) 252-9121 for special instructions on calculating the sales tax projection for the first year after a sales tax rate change.
Abolishing the Additional Sales Tax
If voters abolish the additional sales tax to reduce property taxes, the unit adjusts its effective tax rate upward by adding a "sales tax loss rate." To calculate this rate, the unit divides sales tax revenues for the last four quarters by the current year's property value. It then adds the result in calculating the effective tax rate, as shown in Exhibit 9.
To calculate the rollback rate, the unit includes the sales tax in the M&O rate but does not include the sales tax loss rate, as shown in Exhibit 10.
Tax Bills and the Additional Sales Tax
Taxing units that levy the additional sales tax must show on their tax bills the amount of additional property taxes that the taxpayer would have paid had the additional sales tax not been adopted. The Comptroller's office recommends calculating this amount by applying the sales tax adjustment rate (Line 44 from the Additional Sales Tax Rate Worksheet) to each property's total taxable value.
City Mass Transit Sales Tax
Vernon's Texas Civil Statutes, Article 1118(z), authorizes a city with a population of at least 56,000 to impose a sales tax to operate a public transportation system. A city that imposes a mass transit sales tax under this article cannot impose an additional sales tax and vice versa.
A city must make a one-time adjustment to its effective and rollback tax rates in the year it elects to impose a transit tax. In general, instead of subtracting a sales tax adjustment rate, these cities subtract a mass transit expense rate. The city divides the amount budgeted in property taxes for mass transit expenses in the current year by the total taxable value. Exhibit 11 illustrates these steps.
Tax Code Section 26.043 states that mass transit services do not include the construction, reconstruction or general maintenance of municipal streets.
