Austin Doesn’t Have to Hike Taxes So Much to Pay for Rail — There’s Another Way

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Construction at CapMetro’s downtown station, which adjoins the Austin Convention Center (Photo By Randy Clarke/CapMetro)

Not everyone believes that the mass transit plan known as Project Connect is necessary. Some critics insist that railways will be rendered obsolete by self-driving vehicles or even flying cars; others believe a permanent shift to more teleworking will resolve the traffic problem; and still others simply don’t want to think about the traffic issue — all that concerns them is their tax bill.

For sake of argument, let’s accept for the moment that building more light rail and commuter rail in Austin is a worthy goal. That still leaves the question: How to pay for it?

The way that city leaders aim to finance the project is a property tax increase on every property in the city, residential or commercial, in the amount of 8.75 cents per $100 valuation, which is an increase of about 20% from the current level.

For the “average homestead,” that means a tax bill that is $424 higher under the new rate, not including tax hikes made by other jurisdictions, such as Travis County, according to a city tax rate notice issued August 2.

That’s a tax burden that even enthusiastic supporters of light rail might grimace at.

Not only that, but this kind of tax hike is inequitable, disproportionately burdening middle-income and low-income households that are pressured by rising property values and tax rates — a long-running and widely recognized driver in the city’s ‘gentrification’ process.

The City Council, recognizing this problem, has thrown a $300 million bone to these unfortunates in the form of “anti-displacement measures,” which the Project Connect website describes as “transit-oriented developments and affordable housing along Project Connect routes.”

But past city schemes to boost the supply of subsidized affordable housing have generally lagged market demand. And in any case, “affordable housing” generally means rental units that are only modestly cheaper than the already over-inflated market rents — and that isn’t the same thing as preserving the wealth of generations that’s locked up in home equity.

Shift Funds from the Convention Center

There’s at least one other way to finance part of Project Connect, which is more equitable and could unburden homeowners of a big part of the bill: the city’s hotel occupancy tax.

This tax, known by its shorthand HOT, is a levy on tourists and business travelers. Travelers see this tax item at the bottom of their hotel bill when they check out. The tax is 17% per night, consisting of 6% collected for the state, 9% for the city, and a 2% venue tax.

Revenues from the city’s share of hotel occupancy tax surpassed $111 million in fiscal year 2019, according to the City’s Comprehensive Annual Financial Report. That number will be far lower this year, due to the coronavirus-driven drop in travel, and likely for several years to come. But in the long term, it still represents a major source of revenue.

At the moment, much of that revenue is dedicated to operating the Convention Center, and paying off some outstanding bond debt on a previous expansion of the center. The last of these bonds matures in 2029, but the city is fast retiring this debt and is looking for how to spend the rest of the HOT revenue in the meantime.

The solution that city leaders came up with was to expand the Convention Center even further — despite a long-running decline in convention attendance and the ongoing pandemic that is likely to dramatically harm the convention industry.

Instead of spending $1.2 billion on a loss-making investment, the city could use that money to fund part of Project Connect.

State law limits how HOT revenue can be spent, forcing cities to spend it in ways that generally benefit the hotel industry. This is a talking point for proponents of the plan to expand the Convention Center, including the current council. They point to the Tax Code ( chapter 351) to insist that there’s no other way to spend the HOT revenue — that the city’s hands are tied.

But in fact the Tax Code, while it limits how HOT revenues can be spent, does contain a carveout authorizing the “allocation of (HOT) revenue for certain transportation systems.”

It says, “a municipality may use the revenue derived from the tax imposed under this chapter for a transportation system to transport tourists from hotels in or near the municipality to… the commercial center of the municipality (or) a convention center of the municipality.”

That description perfectly suits the proposed Project Connect blue line, which runs from airport hotels and the airport to the downtown station adjoining the Convention Center.

The blue line’s second-to-last stop is at Metrocenter Drive, adjoining the airport, which is home to a Holiday Inn, Microtel, La Quinta, Hampton Inn, and Courtyard Marriott.

That should help the city legally justify the dedication of HOT revenue to the transit line, including funding the pricey downtown station, and many miles of track.

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Project Connect’s blue line connects airport hotels with the Convention Center

On the legal front, there would be a few potential challenges to overcome, though not insurmountable ones. Notably, the Tax Code prohibits the use of the hotel tax “for a transportation system that serves the general public other than for a system that transports tourists (as described above).”

For that reason the blue line would need to be funded separately from the rest of the general Project Connect system. HOT revenues couldn’t be used to fund elements of the transit system unconnected to the key tourist route between the airport and the downtown.

Another complication stems from a provision in the Tax Code that says a transportation system funded with HOT revenue must be “owned and operated by the municipality” or “privately owned and operated but partially financed by the municipality.” That could require the City of Austin to operate the airport-to-downtown portion of the blue line under an arrangement with Capital Metro. Or, perhaps the city could ask the legislature to tweak that section of the law.

It’s difficult to say how much revenue this proposal could generate for Project Connect. But a good starting number might be the $1.2 billion price tag that the Council put on the Convention Center expansion — which is more than 30% of the $3.85 billion share of Project Connect that will be funded by local taxpayers (federal transit funding is expected to cover the rest).

This is just one creative way to save taxpayers money. Could there be other ways to fund Project Connect? Supporters may say ‘no,’ it’s too late or not possible to find alternative funding sources. Critics might not want to discuss this idea at all, for fear of legitimizing the project.

In November, voters won’t get to say ‘yes’ to Project Connect without also saying ‘yes’ to the tax increase. There’s no middle option.

Nonetheless, a debate over alternative funding sources could serve the city well. The reality is, governments can’t do it all. They have to prioritize, make choices, and recognize their own limitations. Perhaps by moderating its ambitions for the Convention Center, Austin could actually accomplish more for Project Connect.

Originally published at on September 28, 2020.

Original reporting on local Austin news, Texas politics, and the economy.

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