A Penny Here and a Penny There, and Pretty Soon You’re Talking About Real Money

The sales tax is the tax most familiar to Texans. You pay a little tax on most of the things you buy and on many services. The little things add up. The sales tax is the most important tax for Texas state government, and it’s the most important source of Capital Metro’s funding.

The sales tax, in fact, is vitally important to Capital Metro. About 75% of our revenue comes from the tax, and that ties the authority’s fortunes directly to the economic performance of the Austin region.

Capital Metro receives about $145 million a year in sales tax. Other funding comes from federal grants, from fares and from miscellaneous sources like advertising. They’re all important, but the sales tax occupies center stage.

Our tax rate is 1% of the purchase price of a taxable good or service—so one cent on every dollar you spend on taxable items like a book or clothes. The state’s tax is 6.25%, and most cities also impose a 1% tax. That means most people pay a total tax of 8.25% sales tax. That is a fairly high rate among the states, but it’s nothing compared to cities like Chicago were the rate exceeds 10%—and there’s a state income tax in case you’re thinking of moving to Illinois in time to enjoy winter on the Great Lakes.

Capital Metro’s tax is collected along with the state and city taxes by retailers who send the money to the state Comptroller’s office either every month or every three months depending on their size—the big retailers like Wal-Mart pay monthly. The Comptroller divides the local taxes up and sends out the money, usually within two weeks of the end of month when the tax is due. That is, taxpayers pay the state on the 20th of the month, and by the middle of the following month, Capital Metro receives its share.

Because the sales tax plays so large in our finances, it can cause big problems when it slumps, as it does in recessions. Much of the explanation of Capital Metro’s (and the state’s) recent budget struggles is a byproduct of the recession that began here in Texas in December 2008.

The recession is over, and we’re projecting a slow but steady recovery of the sales tax over the next five years. That’s good news for our budget and for our services, but it’s also good news for the region. The sales tax typically grows at about 2½-3% times the rate of job growth. If jobs are growing at 2% a year, a moderate growth rate, then the sales tax normally would grow at 5-6% a year.

Of course, that rule of thumb is sometimes upset by other factors. Businesses pay about half of the sales tax on their purchases. If they aren’t investing, tax growth can be affected. Growth is also affected by the Internet. Purchases made through Amazon.com and for which the retailer doesn’t collect any tax from you (although technically, and not to be a spoil sport, you actually do owe it), reduce the amount of tax the state, the city and Capital Metro receives. This is becoming a major issue for sales taxes nationally—and for the governments that rely on them.

Right now, though, the sales tax outlook is improving because the outlook for jobs and investment in the region is improving. It’s going to be a slow recovery, but on the whole, a slow recovery is better than no recovery. It makes our budget-writing job easier, but more importantly it means that the Austin area is on the move economically.

Capital Metro is in the midst of developing its budget for FY2012, and over the next month we’ll be sharing more details about our revenue (including sales taxes) and expenditures. Learn more about the process and get involved.

3 thoughts on “A Penny Here and a Penny There, and Pretty Soon You’re Talking About Real Money

  1. anon

    Actually Council member Riley voted and not recused himself along with Mike Martinez to give 1/4 of that 1 cent to the City Of Austin to maintain highways since 2010 a potential conflict of interest. So Capital Metro gets 3/4 cents of the cities Sales Tax. 6.50 cents goes to the State of Texas, then county and city. Texas Sales Tax is currently capped at 8.25. There was talks between Rep. Joquin Castro D-San Antonio and others during the school funding crisis of 2011 to increase the caps on sales tax to as much as 11.5 percent.

  2. Pingback: Let’s Make it Better! « Capital MetroBlog

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