Prior to the adoption of Section 52-a, Article III, Texas Constitution in 1987, counties were prohibited from using public funds for economic development. Thereafter, the legislature approved Chapter 312, Tax Code for tax abatement agreements and Chapter 381, Local Government Code for general economic development grants and loans in 1987. These statutes have been the subject of several amendments in subsequent legislative sessions.
This evaluation will focus on the effects of the Texas Property Tax Reform and Transparency Act of 2019 (SB 2) and other legislation and AG Opinions on county economic development programs. Although counties continue to have broad authority to promote economic development under the above statutes and Chapter 386 and Chapter 501, Local Government Code, the revenue restrictions in SB 2 compel a re-evaluation of the use of tax abatement agreements and grants and loans for economic development.
Prior to SB 2, it was generally accepted dogma that “all growth is good growth.” Counties and other local governments have promoted economic development through a variety of programs. Texas has led the nation in the attraction of new economic ventures. Local governments have utilized industrial parks, utilities, transportation access, and outright grants to entice new activity. Counties have provided generous tax abatements under Chapter 312 and grants, loans, or sales tax rebates under Chapter 381. The Texas Attorney General has held that the 10-year restriction under Chapter 312 does not apply to programs under Chapter 381.
While all of these economic development options remain available, it is prudent to re-evaluate the use of Chapter 312 abatements and Chapter 381 rebates. While the benefits of growth are widely promoted, the costs of growth are less recognized. All increases in development and population impose costs for additional county services for law enforcement, detention, courts, transportation, health care, and administrative services. These costs are largely absorbed by those paying county property taxes.
Prior to SB 2, these costs for new development were absorbed within the 8 percent revenue cap under Chapter 26, Tax Code. This cap was sufficient to allow the county budget to maintain present service levels, including inflation, and the cost of the additional services for new development. The collection of revenue from new development could be postponed during an abatement period without forcing a reduction of present services. However, with the imposition of a 3.5 percent revenue cap under SB 2, the ability to absorb costs of new development and inflation without a reduction of services has been severely impaired. Legislative consideration of a further reduction of the revenue cap to 1 percent creates a potential further deterioration of the ability to fund necessary services while granting tax abatements or grants. Consequently, it is prudent to evaluate the impact and options concerning economic development programs under these legislatively-imposed conditions. Let’s look at some potential revisions to meet the new reality.
Should the county continue to provide economic development incentives? Yes. Through a carefully-crafted program, the county can continue to encourage development without jeopardizing the funding for current services.
How can the county determine its additional costs from the development? While there are some standardized formulas, an experienced consultant should be utilized for large or specialized projects. This cost should be absorbed by the applicant through the agreement.
Can the county recover its additional costs through sales taxes? No. While some counties have a sales tax, Chapter 26 requires that all sales tax revenue be included in the 3.5 percent revenue cap. An increase in sales tax revenue simply results in a reduction in property tax revenue. An increase in sales tax revenue will not provide additional funds for service costs for additional development.
Can the county recover its costs by only granting a percentage abatement? Partially. The non-abated value will be excluded from the revenue cap for the first year. Thereafter, the additional value does not provide revenue outside the cap.
Can the county recover its additional costs for a full abatement at the end of the abatement period? Unlikely. Although the present value of the improvements will be excluded from the revenue cap for the first year, this value is uncertain unless guaranteed in the abatement agreement and is unlikely to fully recover the costs of additional services during the abatement period. Also, some abatements will not result in any new value at the end of the abatement due to business failure or relocation.
Can the county obtain revenue for its additional service costs outside the revenue cap? Yes, through the negotiation of Payments in Lieu of Taxes (PILOT) as part of the abatement agreement. A PILOT is general revenue and is not considered in the calculation of the ad valorem revenue cap. Also, a PILOT can provide a regular, predictable revenue stream to offset the additional costs.
Should the county consider rebates through grants under Chapter 381, Local Government Code? Only as a last resort. These rebates of sales taxes or property taxes are included in the revenue cap as tax revenue. They will reduce the ability to raise revenue for current services.
Any other issues for consideration?
- The Chapter 312 guidelines and criteria should be a general statement to preserve the ability of the Commissioners Court to negotiate individual agreements on their merits. Unnecessary details will only restrict the options available or require a three-fourths vote for amendment. Although the guidelines and criteria are only effective for two years, there is no need to re-adopt them until an application for abatement is received to preserve the county’s options.
- Do not create a reinvestment zone until an application is received, and restrict it to the abatement property to prevent loss of flexibility on future development within the zone under Section 312.204(b), Tax. Code.
Finally, utilize experienced legal counsel to ensure enforceability of all agreements.