Sales tax helps avoid annexation

wonder whether the agreements lead to wasteful spending that lacks transparency. The revenue is not subject to the voterapproved revenue cap that has forced the city to lower its property tax rate and slash budgets. Critics also note that Houston provides no services to most of these suburban areas, whose residents can’t vote in city elections.

“It’s unconstitutional,” Fort Bend County Judge Bob Hebert said. “I thought we fought a war back in the 1700s on ‘taxation without representation.’ ” ‘Backdoor’ solution

Utility district leaders defend the agreements, noting that they take half the money collected and receive a contractual promise they will not be fully annexed for 30 years.

City officials agree that the agreements are fair. Census figures show that nearly two-thirds of those who work in Houston live outside of the city limits. City officials note that suburban residents attend plays in the Theater District, watch free concerts at Memorial Hermann Park and put wear and tear on city property.

“It is the primary tool we have to deal with the growth that goes on outside the city and the burden put on infrastructure by suburban citizens without our property tax,” Houston Finance Director Kelly Dowe said.

Houston’s contentious annexation of Kingwood in 1996 led to the changes in state law curbing the powers of cities, effectively halting 50 years of aggressive expansion by Houston. Those changes also gave cities and util- ity districts broad power to create “special purpose agreements” for “limited purpose annexations.”

Many Texas cities have used the agreements to cooperate on a timeline for full annexation and outline an orderly transition of services.

Houston, however, has signed more than 200 special purpose agreements just to collect sales taxes. Only a handful include the city providing police or fire protection.

“It’s a backdoor way of solving the political problems of annexation without having to address public support,” said Bob Stein, a Rice University political scientist. “The real question is whether this is good public finance. The short answer: We don’t know.”

“From the city’s perspective, this is like the best deal they could possibly get,” said Christopher Goodman, a University of Nebraska professor and expert on government fragmentation. “They get revenue and essentially have no service responsibilities associated with that.” Utility leaders laud idea

Utility district leaders, though, say the deals benefit their communities.

Len Forsyth, board president of the Mason Creek Utility District, said the city’s pledge not to annex a community improves the accuracy of long-term planning. Because districts cannot collect a sales tax, Forsyth said the deals also provide leaders with an infusion of money they use to keep tax rates low, pay off debts and fund special projects.

“Our community is 42 years old, and we have to compete with the Cinco Ranches and newer subdivisions,” said Forsyth, whose district covers about 2 square miles west of George Bush Park. “With our revenues under the city agreement, we’ve been able to add value to our neighborhood.”

The district’s share of sales tax collections from a one-mile stretch of retail businesses along the Interstate 10 access road adds up to about $250,000 annually. With those funds, the utility district has added sidewalks that connected schools to neighborhoods and built a creekside trail.

But most utility districts signing deals with the city are primarily made up of commercial properties rather than homes.

On the other side of I-10, the Fry Road MUD covers half as much land area as Mason Creek. Thanks to big-box stores like Wal Mart, Home Depot and Best Buy, the district splits nearly $3 million a year in sales tax collections with the city. Only two oth- ers collect more. In fiscal 2014, the city collected $3.5 million in Harris County MUD 358, which supports the Cypress shopping district, including Houston Premium Outlets.

About one-fifth of districts with special city agreements reported no collections last year, but that still could be good for Houston. Many of those areas have not been “built out” yet, meaning the city can expect to see sales tax revenues grow.

Cities long have looked for ways to capture revenue from suburbanites. New York City taxed the income of suburban residents who commuted to the city, although that was later struck down by the courts. Cities and counties in more than a dozen states still collect an incomebased commuter tax, according to the nonprofit Tax Foundation. Omaha, Nebraska uses special districts to collect sales taxes outside its limits but, unlike Houston, provides services in those areas. Accountability

In the Houston area, sales tax collections are climbing faster in the suburbs than in the city, which Dowe credits to the construction boom and higher disposable incomes.

The city’s share of collections under the agreements now accounts for 7 percent of all sales tax revenue that flows into Houston’s general fund, according to data collected by the Chronicle. In the city’s multibillion dollar budget, nearly $50 million a year is relatively small. Yet, without those funds, next year’s $63 million budget deficit would nearly double.

“It’s not a solution,” the city’s Dowe said. “But every dollar is vitally important.”

Government experts agree that an argument can be made that the deals amount to illegal taxation, particularly since the city does not provide services, but they cautioned that it would be tough to prove. The “limited purpose annexations” draw those taxed areas into city limits even if it’s not the type of boundary familiar to most people. Also, residents have a say in who sits on the utility district boards, which can enter into the agreements.

Still, experts say that ultra-small governments like utility districts are often less transparent to taxpayers and voters, who might not know they even exist.

“It is up to the local homeowners to be paying attention,” said Megan Mullins, a Duke University researcher who studied the spikes in property tax bills when some Texas districts mismanaged their funds. “The problem with the (Houston) agreements is that it’s already happened by the time you see it. These deals are a 30-year commitment.”

Forsyth maintained it is easier for residents to hold utility districts accountable for their spending, noting a perception that some neighborhoods on the outskirts of Houston have been ignored by City Hall.

“My constituents know where I live,” he said. “The decisions I make affect me and my neighbor next door.”

Some local officials and researchers say the agreements could have unforeseen effects on growth. They suggested the deals reinforce negative perceptions of annexation, which could leave many residents outside of city limits for decades longer than in other metropolitan areas.

Goodman also said that fragmented government, like the patchwork of utility districts, creates a greater risk that tax collections will be higher without better services.

“If these unincorporated areas go bad, the county gets the bill,” Goodman said.

It’s a worry shared by Harris County Judge Ed Emmett, a frequent advocate for merging some elements of city and county government.

“The city can’t use money (from these agreements) to repair suburban streets,” he said. Long-term effects?

Trey Lary, an attorney and lobbyist for utility districts statewide, disagreed that the deals inherently drain county coffers, noting that many districts use funds to contract for deputy sheriffs.

If Houston’s agreements with utility districts involve coordination beyond collecting money from residents, the deals might actually give the region more flexibility as it responds to demographic and economic changes, said James Thurmond, a University of Houston professor and former city manager of Missouri City.

Because state law limits the powers of counties and utility districts, he said the agreements provide an opportunity to extend the kinds of services and neighborhood protections that only a city can provide — building codes, programs to seize abandoned houses and various health and safety permits.

“In the short term, these agreements might make sense for both cities and districts economically,” he said. “In the long term, you just wonder how good this is for for those areas.” jayme.fraser@chron.com twitter.com/jaymekfraser