Since 1987, Section 51-a, Article III, of the Texas Constitution and Chapter 312, Tax Code have authorized counties to engage in economic development through tax abatement agreements. The purpose of these agreements is to encourage additional investment and employment within the county. Tax abatement agreements waive the property taxes on new investment for all or a percentage of the investment for a period of time. In return, the applicant commits to invest a stated sum in new improvements and/or provide a stated number of new jobs. The effort to attract new businesses is highly competitive with other counties and states. While the statute allows counties to grant maximum abatements of 100 percent for 10 years, Commissioners Courts should carefully evaluate each proposal to ensure fairness to existing taxpayers.
Before approving a tax abatement agreement, the Commissioners Court must adopt guidelines and criteria describing the eligibility and scope of the tax abatement program. A public hearing and majority vote are required. The guidelines are effective for two years, and the votes of four members of the Commissioners Court are required to amend them during the two years. The effectiveness of the program should be periodically reviewed and evaluated. The Commissioners Court is not required to approve any application, but approved agreements must comply with the guidelines.
The new improvements must be located in a reinvestment zone approved by Commissioners Court. To maintain maximum flexibility, the Commissioners Court should limit the boundaries of the reinvestment zone to the property involved in each project.
While new investment and additional jobs generally have a positive impact on the county, there are costs involved. Growth requires additional county services, including transportation and other infrastructure, law enforcement and jail capacity, emergency services and firefighting, and courts. If tax abatement agreements do not produce additional revenue, these additional costs will be borne by the existing taxpayers. While the revenue cap was 8 percent and inflation was low, these costs could be fairly distributed among the new investment and existing taxpayers. However, the ability to balance this burden has been altered in recent years.
Since the 3.5 percent revenue cap limits the total amount of property and sales taxes that the county can collect without an election, simply adding value to the appraisal roll or collecting additional sales taxes will not increase the total funds available to meet increased costs in the budget. With the imposition of the new revenue cap at 3.5 percent and annual inflation above this rate, the costs of additional services created by tax abatements have been shifted onto existing taxpayers unless the abatement agreement is structured to produce sufficient revenue to offset them. To counter the effects of the lower revenue cap and higher inflation, Commissioners Courts have implemented two adjustments in their economic development programs:
- inclusion of provisions for payments in lieu of taxes (PILOT); and
- restructuring the term and percentage of abatements.
The PILOT has been utilized in county tax abatement agreements since at least 1991. The initial purpose was to assure a steady revenue stream to offset county costs during the abatement period. The PILOT can also be directed to support specific programs, such as job training, law enforcement, or infrastructure. The PILOT is paid to the general fund of the county and is not included in calculating the property tax revenue cap. These payments have become standard provisions in tax abatement agreements, especially for projects that produce few new jobs.
As noted earlier, adding additional value to the appraisal roll does not increase the amount available under the revenue cap, which is calculated as 3.5 percent of the total property and sales taxes collected in the prior year. However, the value of new improvements, including previously abated property, is excluded from the revenue cap during the first year on the appraisal roll. In other words, if a 90 percent abatement is granted for $10 million in new investments, $1 million will be added to the appraisal roll as new investment and excluded from the revenue cap for that year. Therefore, if abatements are structured to place more of the investment on the appraisal roll in the early years after construction, that revenue will be available to offset the cost of additional services without depleting the amount available under the revenue cap.
With inflation absorbing all of the additional funding available under the 3.5 percent revenue cap, Commissioners Courts are considering provisions for a PILOT and/or restructuring the required amount of investment and the percentage of investment in the early years to offset additional costs and avoid unfairly burdening existing taxpayers. Finding the proper balance to maintain a competitive economic development program without unfairly shifting the burden of additional cost onto the existing taxpayers is challenging and may require outside assistance.