Houston’s Negative Credit Outlook Raises Specter Of Property Tax Rate Hike

Houston’s outlook from two of the three major credit rating agencies has gone from “stable” to “negative,” prompting its city comptroller to question Houston City Council on its plans for the property tax rate. 

Comptroller Chris Hollins told the council at a meeting last week that the city needs a plan to return to fiscal sustainability, ABC 13 reported. So far, no council members have come forward with a proposal.

“Continued inaction poses real risks to our future prosperity, and this is a real challenge that's knocking on our door,” Hollins said, according to ABC 13. “All eyes are on Houston to see how we answer the call.”

S&P Global downgraded Houston’s credit outlook rating in July, saying the outlook rating reflects a 1 in 3 chance that it could lower the city’s rating during its two-year outlook period. Lowering the rating would make it more expensive for the city to borrow money.

Fitch Ratings was the second to downgrade its outlook in September, ahead of a $145M tax and revenue anticipation notes series that is set for a competitive sale on Wednesday.

Both agencies mentioned Houston’s $612M settlement with the Houston Professional Fire Fighters Association for raises and back pay as a factor in the downgraded outlooks.

Due to a 2019 state law, the city usually can’t increase its property tax collections by more than 3.5% without voter approval. But that cap doesn't apply during times of declared disasters, meaning Houston could increase its property tax revenue up to 8% without voter approval, Houston Landing reported.

Houston would need to raise its property tax rate by at least 3.2 cents per $100 of assessed property value to cover costs incurred from the May derecho and Hurricane Beryl, Finance Director Melissa Bubowski told the city council last month. 

But Mayor John Whitmire has no interest in increasing taxes, instead preferring to cut budget costs, ABC 13 reported. The city hired a third-party auditor to create a report examining its options.

Although the city needs more money, raising taxes could be a growth inhibitor, University of Houston economics professor Steven Craig told Houston Landing. Craig was unsurprised by the downgraded outlook since many residents moved from Houston to its suburbs in recent years, decreasing its tax base.

Houston gets at least 10% of its revenue from commercial property tax, and falling asset values could be part of the reason the city is facing a budget shortfall.

Depending on how valuations fare, the average American city can expect tax revenues to fall between 0.9% and 3.2% by 2031, according to a Tax Policy Center analysis of 47 U.S. cities.

Some council members have previously argued that Houston needs to increase its tax rate to keep up with the city's needs, since the rate has decreased in nine of the past 10 years even as the city has grown. Council members and Hollins noted that tax revenue helps fund city services residents don't want to lose, like trash pickup. 

But if the city raises taxes to make up for the shortfall, even more people might move away or choose not to live in the city, Craig said, adding that cutting expenses is a more sustainable solution. 

“[These] hypothetical new people are comparing you to the other places, and they see that you’re a bad deal. They move to these other places,” Craig said, according to Houston Landing.