la Frontera In the News

Austin American-Statesman

February 8, 2003

Austin on losing side of sales tax tug of war
As retailers flock to burgeoning suburbs, city hurts for revenues the stores generate

by Shonda Novak, American-Statesman Staff

Last year, Simon Property Group rolled out plans for a 750,000-square-foot mall in Round Rock and an even bigger project in Buda, south of the Austin.

Simon, the giant mall developer that owns the three existing Central Texas malls, estimates the Round Rock project would pump $4 million worth of sales taxes into the city's coffers.

Simon wants to build an even larger mall in Buda and a big-box center in Georgetown, projects that would pour sales taxes into those communities as well.

Austin, meanwhile, is confronting its worst budget crisis in 20 years, caused in part by a steep drop in the sales tax revenues that cover more than a quarter of the city's budget. City Manager Toby Futrell sounded an alarm last month, after November sales tax revenues fell short of forecasts for the seventh month in a row, increasing the budget shortfall to $77 million for the fiscal year that starts Oct. 1.

And for more than a decade, Austin's share of the region's sales tax base has been shrinking as retailers expand where there are easier development rules, plenty of customers and more and cheaper land.

Although sales tax revenue in Travis, Williamson and Hays counties nearly doubled over the past seven years, Austin's share dwindled from 78 percent to 58 percent. Round Rock's share nearly tripled during the same time, from 7.5 percent to 21 percent, thanks in part to big projects such as the La Frontera complex on Interstate 35 at FM 1325.

Since 1997, about two-thirds of the new retail development in the region has been in areas outside the Austin city limits, including Round Rock, Cedar Park and Sunset Valley, said real estate consultant Charles Heimsath. During that time, those three areas added about 3.4 million square feet of retail space, compared with 1.8 million square feet in Austin.

Retailers are following the dozens of new subdivisions that have sprung up in Williamson and Hays counties and beyond in recent years. Home Depot, for example, has opened stores in Austin in the past two years, but also has stores in Bastrop, the Village of Bee Cave and Marble Falls. Target is building big stores in Central, North and far Northwest Austin, but also is expanding in the Village of Bee Cave and Georgetown.

"As you see urban sprawl, you see housing and business move away from the city, and that has occurred all over the U.S. It's not unique to Austin," said Sue Edwards, the city's director of redevelopment services.

Meanwhile, the city is attacking the problem of how to generate jobs and sales taxes on other fronts.

Council Members Betty Dunkerley and Will Wynn are spearheading the effort, which includes three subcommittees working to develop a comprehensive economic development policy, including criteria for city incentives. The focus is on small businesses and major employers, but if you create jobs, you create shoppers and generate sales taxes, Edwards said.

Economist Jon Hockenyos, who is advising the city on its development plans, said many cities are struggling with the loss of tax revenues to the suburbs. The concern is real, but he said some of the reasons are beyond the city's control.

"At the end of the day, a retailer will follow where the rooftops are," he said. "They're just trying to meet demand."

But one retail broker said he doesn't buy that argument.

"There are more rooftops in the core city of Austin than in all the outlying areas combined," said Jerry Quick, president of Quick & Co. Commercial Realty Inc., which finds space for retailers.

Quick said the city's development restrictions and sometimes inconsistent rules throw up roadblocks for retailers, who can't make money while land sits undeveloped.

"They need to look at their ordinances and get a more pro-growth, pro-business attitude," he said. "If you let your residents drive to another municipality to shop, you're giving up your sales tax dollars."

He acknowledged that a lack of large vacant tracts in Austin also is a factor.

For example, Costco Wholesale Club, which has a store in the Arboretum area, would like another store in Southwest Austin but is having trouble finding 20 to 25 acres to build on.

Quick said he doesn't think the city needs to offer incentives to attract retailers, but it does need to streamline its development process and end uncertainty bred by inconsistent rules or inflexibility by city staffers.

If the city addressed those issues, he said, "then you wouldn't have to hand them a pot of cash."

Others say the city has made strides.

Ben Heimsath, a former chairman of the city Planning Commission, said the city has made its approval process more efficient and predictable than it was in the 1990s, when he sat on committees addressing those problems. However, he said the process still takes too long.

There are some encouraging signs for Austin.

This week, Endeavor Real Estate Group said it is planning a major outdoor mall with 670,000 square feet of space in North Austin. If Endeavor can nail down financing and tenants, construction could start next year.

This fall, Nordstrom will open in a new wing at Barton Creek Square that will include other shops as well. Target has taken over the former Montgomery Ward's store at Capital Plaza on I-35 and is building another store at I-35 and Parmer Lane.

Ground will be broken this spring at the long-vacant tract at Sixth Street and Lamar Boulevard downtown for an 80,000-square-foot Whole Foods grocery store. The project will include a Whole Foods headquarters and other retail stores.

The city has taken some flak for offering incentives to Schlosser Development Corp. on that project. The $2.2 million package is primarily fee waivers, but Schlosser must reapply for the balance because the project has changed significantly from the original plans.

Some Austinites are protesting any more incentives because they think the Borders Books & Music store in the project will cut into the business of Book People and Waterloo Records, two homegrown businesses across the street.

Critics say developers should not receive incentives for projects that compete with local businesses.

But Edwards said the Sixth + Lamar incentives were "environmental, not economic" enticements awarded under a city program that, among other criteria, encourages growth away from environmentally sensitive areas and along existing transportation routes.

"Smart Growth has nothing to do with who their retailers were going to be," she said. "That has gotten misunderstood."

Rudy Garza, the city's budget officer, said Austin's budget woes go beyond the issue of retail growth in the suburbs.

"The economic downturn is not the result of Austin losing business to surrounding areas," he said. "The biggest driver is people aren't spending. They don't have the ability to spend at the levels they were spending two years ago."

And with the large job losses that have hit the region during the downturn, "we just aren't growing as fast as in the past."

He said the city's economic development initiatives aim "to generate commerce and generate jobs and put people back to work and give them more ability to spend their monies in Austin. There's no doubt that we could use more sales tax revenues."