Print 🖨

House Committee on Ways & Means

November 2, 2011

 The committee met to hear invited testimony on property tax exemptions and Tax Code Chapter 313 – Texas Economic Development Act from:

  • Debbie Cartwright, Property Tax Assistance Division Director, Texas Comptroller’s Office
  • Robert Wood, Economic Development and Analysis Director, Texas Comptroller’s Office
  • Dale Craymer, Texas Taxpayers and Research Association
  • Paul Sadler, Executive Director, Wind Coalition
  • Luke Bellsnyder, Executive Director, Texas Association of Manufacturers
  • Dick Lavine, Senior Fiscal Analyst, Center for Public Policy Priorities

Property Tax Exemptions – Invited Testimony

Debbie Cartwright, Property Tax Assistance Division Director, Texas Comptroller’s Office

  • All statutory changes that provide property tax exemptions must have constitutional authority
  • Most property tax exemptions are provided through the constitutional provision that gives the legislature the authority to create an exemption; however, some are constitutionally mandated, such as:
    • $15,000 school district homestead exemption
    • Freeport exemptions on goods which are brought in and out of Texas within a 175-day period
    • Household goods exemptions: implements of husbandry and farm products, livestock, etc.
  • Comptroller’s Office prepares a Tax Exemptions and Incidence report every other year for the legislature (please see attachment)
    • Pg. 33 begins discussion re. cost of school property tax exemptions
    • Largest exemption is the Residence Homestead: mandated $15,000 exemption, which costs the state over $1 billion and is constitutionally required – not optional 
    • Pg. 35-39 provides summaries of each exemption what section of Tax Code they can be found
  • Comptroller’s Office collects exemption information from appraisal districts, such as how much value is being removed from the appraisal rolls on an annual basis; it does not administer the exemptions

Member Q&A

  • Rep. Naomi Gonzalez inquired about the “miscellaneous” and “raw cocoa and green coffee held in Harris County” exemption categories
    • Cartwright explained: miscellaneous exemptions are those that could not be neatly categorized into other categories such as school, religious organizations, etc. when the Code was enacted in 1979
    • The Raw coco and green coffee held in Harris Co. exemption was adopted in 2001 and has constitutional authority; all properties for which it applies is in Harris Co.
  • Rep. Jim Murphy inquired about how the optional homestead exemption works and why some school districts choose to offer a larger exemption
    • Cartwright indicated the governing body may grant an additional exemption of up to 20% of the market value of a residence homestead, with minimal exemption amount of $5,000
    • Some offer 5%, others 10%, etc., it is at the discretion of the governing body and does not have to be approved by voters of a district; however, the voters may petition to require approval
    • The Texas Education Agency (TEA) is statutorily authorized to fund up to 50% of the value lost due to a local option exemption if the agency has money in its budget to do so, but it is not required
      • TEA has only had enough money to do this once in the past 10 years
      • 215 school districts in the state offer a local option exemption
  • Chairman Harvey Hilderbran inquired about the Historic of Archeological Site exemption
    • Cartwright explained it is a very small local option exemption that is granted by a governing body

Chapter 313 Texas Economic Development – Invited Testimony

Robert Wood, Economic Development and Analysis Director, Texas Comptroller’s Office

  • Ch. 313 was enacted in 2001 with the purpose of enhancing state’s ability to attract capital businesses and increase employment
    • Requires projects be in reinvestment zones and prohibits school tax abatements
    • Sets a minimum value limitation; amounts invested in a project surpassing the value limitation is not taxed at the local level
      • In a $10 million district where a project invests $20 million, $10 million of the investment is eligible for the tax benefit
      • Schools are held harmless through the funding process
      • Contains a minimum job creation requirement for rural and non-rural districts; 25 new jobs in non-rural districts and 10 new jobs in rural districts
        • May be waived in certain circumstances such as the industry type does not create the minimum number of jobs
      • 80% of the news jobs must be qualifying/good jobs: have health benefits, pay a certain wage, etc.
      • Must invest a certain amount based off of taxable industrial property
        • Largest non-rural category requires $100 million dollar investment, which would be in Austin, Houston, etc.
        • Majority of rural district investments are generally in the $10-30 million range

Member Q&A

  • Rep. Gonzalez inquired about the application fee
    • Wood explained it is set at the discretion of the school district
    • Projects apply through the school district, which sends the application to the Comptroller’s Office; Comptroller’s Office must find the project eligible and conduct an economic report on the project based off things required in statute. If the report shows there is economic value to the state then the recommendation to the district is made that it should move forward with the project
  • Wood further explained the program is a 10-year program; in years 3-10 projects receive the value limitation discussed and do not pay M&O tax above their limitation
    • The amount the project would have received had the property been in place in years 1 and 2 can be received back through a tax credit
    • When the limitation expires in 10 years it goes on the tax roll at full value and the school collects on the full value and the state reduces its payment accordingly
  • Rep. Murphy inquired about the Comptroller’s reporting requirements
    • Wood explained the data is crunched every 2 years; since the time of the last report there have been 7 additional active agreements and 21 applications pending
    • Murphy pointed out the exemption is only on M&O, but projects still pay on the I&S side
  • Rep. Gonzalez confirmed the sunset date of Chapter 313 is Dec. 31, 2014
  • Chair Hilderbran inquired about the Comptroller’s role and responsibilities
    • Wood explained in recent years things have been added to the reporting requirements, added to the Comptroller’s responsibilities to review the application and the role in which the Comptroller plays to ensure concerns were addressed about the Comptroller’s authority to protect the state’s interests

Dale Craymer, Texas Taxpayers and Research Association

  • Total school tax collections in 2010 were $21.5 billion; it property were taxed without any exemptions whatsoever, the amount would have been about $27 billion
    • There are very few business exemptions; $2.5 billion is available to residential property/homestead exemptions
    • Approximately 85-90% of the next $21 billion will be M&O
  • Business exemptions are a small part of the overall picture:
    • Freeport property exemption – available to local school districts that they may offer for tangible personal property temporarily located in the state for a period of 175 days or less
      • School districts could act to not offer the exemption
      • Exemption that relates to pollution control equipment; note this exemption applies to property mandated by a regulatory requirement of state or federal law to be put in place to control pollution
        • Theory behind the exemption is that they are required to put these properties into place and thus are not going to be taxed on them
        • Rep. Gonzalez inquired about TCEQ’s participation in the exemption process
        • Craymer explained: TCEQ does make the determination as to whether or not the equipment serves the purpose of controlling pollution and presents it to the local appraisal district. The local appraisal district could however still not give the exemption
        • Craymer further explained: TCEQ has adopted a set of rules that says pollution control function has to be at the site; that would not apply to equipment used to produce a lower emitting product. The original legislative intent was the pollution controlled must be one’s own. The actual language of the state and interpretation could be an issue for the courts to decide
        • Chair Hilderbran mentioned an issue raised in previous meetings concerning schools having to give money back; Craymer explained that is not the way it works: someone installs pollution control equipment, applies for the exemption at TCEQ, and TCEQ makes a determination. On those particular applications they are not seeking refunds. It is solely prospective
  • Texas is a low tax state because it does not have a personal income tax
    • The average state leverages personal income taxes over $800/person; if Texas did, it would add $20 billion/year to state revenues
    • Texas relies much more heavily on sales and property taxes; Texas is a high sales tax state compared to other states and property taxes in Texas are among the highest in the nation
    • Discussed a Lincoln Institute of Land Policy study that looks at specific types of projects against the 50 states to see what property taxes they would pay across them
      • Effective tax rate on Texas is 2.5% of the market value of the property; average in other states is 1.4% or 1.5% depending on the size of project; meaning Texas is 175% of the level seen in others states – creates a barrier to capital intensive projects looking to locate here
  • Rep. John Otto argued Texas has fared better in the economic downturn because of Texas’ tax mix being more reliant on property taxes, which is more stable
  • Chair Hilderbran indicated the committee would be more interested in seeing how Texas fares against states in the West and South and industrial states in the North, rather than the national average
  • Craymer indicated when looking at state tax systems the property tax is by far the most stable tax
    • Where local jurisdiction can calculate adjustments it is the single most stable source of revenue for a taxing entity
    • A personal income tax is more volatile because of the way people invest in their retirement; stocks are subject to capital gains and losses
    • Sales tax provided a more stable base for Texas than income has in other states given the impact of the recession; Texas has benefitted in the recession because of its mix of taxes, but it has still suffered greatly largely because part of the sales tax is tied to business purchases and capital investment dried up
  • Craymer further explained Texas’ tax system is more focused on businesses than individuals; the state relies on sales and property taxes, which are higher than the rest of the nation, and therefore the state is not a low tax state for businesses
    • Texas has a much heavier tax load on capital investments than other states
    • More than half of its property taxes comes from school districts, which is why Chapter 313 came to be. The high barrier that property taxes created dried up large capital intensive projects
    • Would be difficult for Texas to compete for large industrial projects if it did not have a way to offset the high local school taxes
  • Craymer argued when tweaking Chapter 313 it is essential to preserve economic incentives as long as the state relies heavily on property taxes
    • Chapter 313 is important and necessary for Texas to compete with other states; in evaluating changes carefully look at what other states are doing and acknowledge there is competition and benefits elsewhere for projects
    • Cautioned against using a single variable to assess the program; suggested a number of variables to look at for long term jobs created, including construction jobs created, total amount of capital investment, the permanent value that is added to the tax rolls, what projects pay in other state and local taxes, etc.
  • Rep. Murphy inquired about payment limit taxes
    • Craymer explained the original chapter provided a mechanism for an applicant to share a portion of savings with a school district; in 2009 a limit was placed on the amount of the contract payments to where they could be no more than $100 dollars/student/year of the agreement. Once the project went on at full value those payments went away

Paul Sadler, Executive Director, Wind Coalition

  • Sadler argued that the committee needs to bring in leading economists in the state to discuss where the state is today and provide projections for 10, 20, etc. years into the future
    • Demographic changes and population changes in Texas are critical; needs to be nexus between growth in the populations and growth in taxes to mirror the increase in needs
  • Rep. Otto expressed concern with the federal government: it makes up half of Texas’ budget and there is no way Texas can make up what it can cut
  • Chair Hilderbran expressed the need to update the rainy day fund to level out gaps between peaks and valleys of performance
  • Sadler argued the Texas tax system is regressive because of its reliance on business and sales taxes
    • Rep. Otto agreed but argued it is not highly regressive because numbers do not take into account government services persons receive
  • Sadler: Chapters 312 and 313 are the most important economic tools the state has; Chapter 313 helped Texas create a manufacturing industry across the entire state, but the state is not alone in its ability to build industries such as wind
    • A market has been created for wind, solar and any other renewable energy in other states, which did not exist 10 years ago; there are other markets where companies will spend their billions of dollars 
    • 34 states have property tax exemptions; 19 have sales tax exemptions that Texas does not have. The most common exemption across the country is property tax, although taxes across the country are variable
    • Chairman Hilderbran asked which is better: property or sales tax exemptions?
      • Sadler answered: property tax exemptions; most states have some form of property tax
      • Sadler went on to discuss wind energy; wind is the only form of energy that does not use water and with Texas’ drought the state could benefit from expansion
        • Expansion of wind could fill up the CREZ lines

Luke Bellsnyder, Executive Director, Texas Association of Manufacturers

  • In 6 years the Assn. has grown to over 500 member companies, which represent every manufacturing sector that exists
    • Texas is the only state that can lay claim to building this much diversity
  • Economic study a year and a half ago from Comerica stated Texas has weathered the global economic recession better than other states because of its strong, large and diverse manufacturing sector
  • Manufacturers contribute over $100 billion to the state economy every year and are responsible for 2/3 of all private sector research and development
  • Disadvantage is that Texas does not have an R&D franchise tax exemption and is one of few states that does not have a sales tax exemption for research equipment
  • Texas has been the leading export state in the country for 9 years
  • Currently, manufacturing employs 838,000 Texans at average compensation of $75,000/yr; which is 22% higher paying than the private sector
    • For every 1 manufacturing job created, between 2.5 and 8 additional jobs are created in the private sector in the service industries
  • Must assure that Texas attracts the capital investments that lead to direct and indirect jobs and ultimately lead to higher tax revenues, without increasing tax rates
  • Chapter 313 is the most important economic development tool Texas has to remain competitive in attracting capital intensive investments
  • Major large scale industrial employers do not first decide to move to Texas, they look state by state, region by region, nation by nation to know where their best return on investment is
  • Dow Chemical has created a matrix that objectively measures states and communities to decide where to plant
    • For a $100 million manufacturing facility, Texas would be a 1.0 with the highest number being the least attractive. Louisiana is a .8; when we include abatements and Chapter 313 Texas goes down to a .85 range; Louisiana is still more attractive but Texas is at least in the same ballpark
  • Benefits and successes of Chapter 313 can be attributed with Samsung, Toyota, Caterpillar
    • Major European automobile manufacturers are looking to build in the US and are looking at other states besides Texas
    • If Chapter 313 was not available or there was a thought that it would be taken away, Texas would not be in the running
    • Just discussions of not renewing or retroactively taking away benefits/credits will discourage companies and chill Texas’ economic growth
  • Also need to consider what Chapter 313 means to existing plant operations
    • Always take care of the 838,000 jobs that are on the ground now
    • Need to make sure manufacturers stay in Texas and reform and are ready for new market opportunities
  • Chair Hilderbran requested Bellsnyder present a list of exemptions other states are doing that the association’s members view are ones today and from the past that are appealing to them and result in more investment and jobs
    • Also asked about sales tax exemption on equipment – would like to know if the entire industry has to be exempt or a specific category would be enough such as wind

Dick Lavine, Senior Fiscal Analyst, Center for Public Policy Priorities

  • Expressed concern about the effect of policy on low and moderate income families
    • Best thing that can be done for them is to make sure jobs are available
  • Would like to make Chapter 313 the best program it can be for the creation of high-paying jobs, which was the initial intent
    • High paying manufacturing jobs like Samsung, Toyota and Caterpillar are the goal; pointed out that Toyota and Samsung are responsible for more than half the total jobs created through Chapter 313
  • Argued the program has gotten away from its original intent
    • Requested rethinking Chapter 313 from the beginning and suggested perhaps making three separate incentive programs: one for the very few large scale jobs that come with high paying jobs, another for renewable energy and another for other energy and other projects
  • Need to have a better grasp of what the program has accomplished before it is restructured
    • Put the state auditor on it because there is nothing that requires the state to know how many jobs have been created, what are the capital investments, are they staying in the state and recapturing the monies if promises are not fulfilled
    • Currently there is no enforcement mechanism
    • May be a good reason to have wind or Eagle Ford shale investments, but they are not creating jobs
  • Argued the state is over paying for Chapter 313, there is a history of distorting the decision making process, and the state does not know how many projects would have come to Texas anyway without the incentives
    • Texas is incentivizing companies to do what they would have done anyway
  • Recommended:
    • Increasing authority of the Comptroller so there is better reporting of what is going on and addressing the wind project separately (2011 GEER report)
    • Economic impact evaluations that were proposed in SB 1590 (82R) by Ogden
      • Comptroller is not actually evaluating, but only reporting the information that is being given to them by companies
  • Current law says if a company does not meet its promises of investment/jobs, there is a recapture of the benefits but there is no enforcement mechanism
  • Rep. Otto discussed a Chapter 313 agreement in Liberty ISD with an old natural pipe and tube facility; a company was looking at a site in LA and TX and they were out of Missouri. They chose Texas and now there are 500 people employed and Liberty has doubled its electric billing
    • May not have happened without Chapter 313
    • Lavine argued that is the type of project the Chapter is designed for and is desired

Closing Remarks

Chairman Hilderbran

  • Will be opportunity for public testimony in subsequent meetings
  • Next hearing will be in January

 

 

 

Attachments