Where the Money Comes From

Texas is home to more than 1,200 cities, with Houston, Dallas, and San Antonio ranking among the 10 most populous cities in the United States.

Typically, cities collect revenue through taxation, fees and fines, user fees, and intergovernmental transfers.

Various funds account for the monies collected as revenue and allocated to fund functions of city governments. Funds are generally categorized according to governmental fund types, such as General Funds, Special Revenue Funds, and Enterprise Funds..  The majority of city revenue is put into a General Fund, the most commonly used fund type. Major revenue sources in a General Fund consist of property taxes, sales taxes, charges for services, grants and contributions, and intergovernmental transfers.

Enterprise Funds—funds that are self-supporting through charges for services—are another common type of fund in municipal finance. These types of funds typically represent activities that are associated with a city’s utility system, airport system, and convention and entertainment facilities.

Major sources of city revenue: Taxes

Revenue sources that make up the largest portion of city revenue are the property tax and the sales tax. Property taxes are collected locally, while sales taxes levied by city governments are collected and distributed by the Texas Comptroller of Public Accounts, then put into a city’s General Fund, the most significant source of funding city expenditures.

1) Property Tax Property taxes are the largest source of city revenue in most municipalities. Generally, property taxes account for roughly 30 percent of a city’s revenue. In largely populated cities this is usually the most significant source of revenue. Property tax revenue in small cities generally accounts for a similar proportion of city revenue, but sales tax receipts may be the largest source of income.

According to the Texas Comptroller of Public Accounts’ Annual Property Tax Report, in 2008, $6.5 billion in property taxes were levied from 1,054 Texas cities. The impact of property tax revenue to a city budget depends on the value of taxable property and tax rate in a particular city. Residential properties make up the majority of taxable value, 53.7 percent of market value, compared to 43.2 percent of commercial properties in 2008. Cities grant exemptions and deductions that reduce their overall revenue.

2) Sales Tax Sales taxes are the second most prominent source of city revenue in Texas. Around 20 percent of city revenue is collected from sales or use taxes. Local sales and use taxes on goods and services can be imposed by cities, but local sales and use taxes are capped at a combined rate of 2 percent as required by state law.  The basis of the sales tax is the location of the seller, whereas the location of the customer receiving the good or service serves as the basis of the use tax.  As state law requires, cities must be the first of all local governments to levy a sales or use tax; if the cap is not reached, other local government entities can participate in tax collection up to the capped rate.

In 2009, total city sales and use tax remittances amounted to almost $4 billion, a 67.4 percent share of all local governments authorized to collect sales taxes in Texas.

Other sources of city revenue: Fees, fines, etc.

1) Besides the property and sales taxes, remaining city revenue sources include franchise fees, fines and permits, interest earned, grants and contributions, fees charged for services, other taxes, and transfers from utilities. The levels of revenue provided to city budgets from these sources vary depending on the size and economic demographic of a city.