The city of Sherman may soon utilize a clause in recent tax reforms aimed at assisting cities who are experiencing a disaster.
The City Council voted Monday night to allow the city manager to begin calculating the voter-approval tax rate as though the city of Sherman was a special taxing unit.
In 2019, state legislators approved a new law that would put a cap on the property tax revenue that a city can earn on existing properties over the previous year’s totals. However, by acting as a special taxing unit, the city can temporarily return to the levels set prior to the reforms. Sherman, like many other communities across the state, have declared a disaster following the ongoing COVID-19 pandemic.
“We are seeing this as a tool in the toolbox. This is something that the legislature provided to cities in senate bill 2 that would that would take a look at extenuating circumstances such as the disaster declaration that is currently in place and allow cities more financial flexibility under those circumstances than they would otherwise have,” Sherman Community and Support Services Manager Nate Strauch said.
Unlike some neighboring communities, Sherman relies heavily on sales tax revenues to offset the reliance on property taxes. However, with the arrival of COVID-19, and the effective shutdown of much of the local economy, city leaders are predicting significant losses to the city’s sales tax revenues not only for the current fiscal year, but also for the next.
As a part of the early budgeting process, city leaders have cautioned departments that they could see as much as a 10 percent budget decrease this upcoming cycle. City staff is expected to receive the sales tax numbers for March 2020 later this week.
“The tax numbers are going to be interesting,” Strauch said. “It could be Armageddon or it could be not as bad as we are thinking.”
Under Senate Bill 2, which went into effect in January, new restrictions were placed on how much property tax revenues a city or municipality can raise over the previous year.
Prior to SB 2, cities and municipalities were limited to receiving up to 8 percent more in property tax revenues over the previous year for existing properties without the need for a rollback election. This could be done without any changes to the tax rate, if property values shifted significantly.
However, SB2 changed this cap for cities and school districts. Moving forward, these entities can only see a 3.5 percent increase in revenue over the previous year.
The senate bill did include provisions that allowed Special Taxing Units to remain at the previous 8 percent cap. However, these units are very few and far between in the state of Texas.
However, SB2 does include a clause that allows for cities who have a declared disaster affecting a portion of the city to act, temporarily, as a STU.
“This is something that we are not sure we will even use, but we do want to have it at our disposal if push comes to shove during budget discussions,” Strauch said.
With Monday’s action, city officials said that the council has not approved a specific rate or a rate that includes the eight percent increase in revenue. Instead, officials said the city will consider the option when it starts the budget cycle later this year.
Strauch noted that the drafters of the legislation likely did not intend for it to be used in such a manner, or for it to used statewide so quickly after it was drafted.
“When you look at the way the bill was written, it does talk about parts of the city being within a disaster declaration,” Strauch said. “That makes me think that the legislative intent there was for more localized emergencies.”
Denison City Manager Jud Rex said he agrees with Strauch that this likely wasn’t the original intent of that clause. Rex said he anticipates that the governor’s office and the legislation may step in regarding this issue.
“The legislators who drafted SB2 made their intent clear that a pandemic was not necessarily anticipated when they put in that disaster clause,” he said.
Unlike Sherman, Denison relies less on its sales tax revenues and more on property taxes for its coffers. While it is anticipating a revenue decrease for the current year, it is less of an impact to the city’s budget than Sherman is predicting.
Rex added that the city of Denison has not considered similar steps to this point yet. While it may be within the city’s purview to increases taxes, he questioned on if now was the proper time.
Sherman City Council Member Shawn Teamann stressed that the city has not set a specific course with regard to its tax rate for the next cycle, and instead is simply exploring its options so that all possibilities have been discussed.
“It may come back that we don’t need any tax increase at all, because we’ve had lots of development,” he said. “It may come back that he submits a request for a tax increase to us.”
Teamann noted that in many previous situations he has been opposed to tax increases in situations where he did not feel it was warranted. However, he said he prefers to look at each situation on a yearly basis.
“My opinions have not really changed on the city’s need to raise taxes and most of it surrounds what the necessary projects are at the time we are working through the budget of the future year.”
With the ongoing situation, Teamann said he would like to see some form of offset for Sherman residents if it is deemed necessary to increase taxes.
“I would go as far to say that I do everything in my power not to raise taxes, and ... in years where we have less needs and can lower taxes, I am all for it.”
Michael Hutchins is the local government reporter for the Herald Democrat. He can be reached at firstname.lastname@example.org.