Property tax abatement agreements

A property tax abatement is a local agreement between a taxpayer and a taxing unit that exempts all or part of the increase in the value of the real property and/or tangible personal property from taxation for a period not to exceed 10 years. Tax abatements are an economic development tool available to cities, counties and special districts to attract new industries and to encourage the retention and development of existing businesses through property tax exemptions or reductions. School districts may not enter into abatement agreements. The statutes governing tax abatements are located in Texas Tax Code Chapter 312. Each taxing unit that wants to consider tax abatement proposals must designate a reinvestment zone or an enterprise zone.

Chapter 380/381 financing

Chapters 380 and 381 of the Local Government Code provide legislative authority for Texas municipalities and counties to provide a grant or a loan of city or county funds or services in order to promote economic development. Local governments have utilized the provisions under this law to provide a wide array of incentives that have drawn businesses and industries to locales throughout Texas. Whether a local government provides any such incentive is completely discretionary. A city or county may provide a Chapter 380 or 381 grant in the form of a sales or property tax rebate.

Chapter 403 abatement agreements

The Texas Jobs, Energy, Technology and Innovation Act, signed into law on June 7, 2023, amends Chapter 403 of the Texas Government Code. The law takes effect on January 1, 2024. The Texas Comptroller of Public Accounts will make documents available for prospective applicants in September.

This new program allows Texas school districts to cap the taxable value of property for 10 years. The cap applies only to the maintenance and operations (M&O) portion of school taxes (the cap does not apply to the portion of the school tax rate that goes toward debt).[1] Under Chapter 403, 50% of a property’s value can be capped. The cap can increase to 75% for projects in federally designated opportunity zones.

The required number of jobs and capital investment is determined by county population:

Eligible projects include those related to energy, technology, and innovation. The average annual wage to all employees in connection with the project will exceed 110% of the average annual wage in the applicable industry sector. The employer is required to offer and contribute to a group health benefit plan for each employee in a full-time job. Companies that receive the incentives must create an apprenticeship program with the partnering school district.

To begin the application process, the company submits an application to the Texas Comptroller of Public Accounts. The Comptroller will review the application to ensure it meets the required criteria and make a recommendation for approval. The Comptroller must take action within 60 days of determining an application to be complete. No later than 30 days from receiving the comptroller’s recommendation, the governor approves an application by written notice to the comptroller, school district and oversight committee. The school district receives the comptroller’s recommendation at the same time as the governor. The school district must hold a public hearing and provide notice of the hearing. The governor, school district, and applicant may sign the agreement if the application is not denied within 30 days.

Reinvestment zones

The designation of specified areas as "reinvestment zones" is a local economic development tool used by municipalities and counties throughout the state of Texas. Reinvestment zones have been used to stimulate local economies by attracting new companies and encouraging the growth of existing businesses. These zones can be created for the purpose of granting local businesses ad valorem property tax abatements on a portion of the value of real and/or tangible personal property located in the zone, for a period of up to 10 years.

Special taxation entities having jurisdiction over a reinvestment zone may participate in executed abatement agreements; however, the special taxing districts may not designate reinvestment zones or initiate tax abatement agreements. Reinvestment zones are designated by local ordinance or resolution. Incorporated cities, counties and special districts are allowed to enter into tax abatement agreements. However, school districts no longer possess this ability.

The Comptroller of Public Accounts has responsibility for the state's central registry of reinvestment zones for tax abatements and tax increment financing. Comptroller reports indicate active reinvestment zones in 14 communities in four area counties (Austin, Buda, Cedar Park, Dripping Springs, Elgin, Georgetown, Hutto, Kyle, Leander, Liberty Hill, Manor, Pflugerville, Round Rock, and Taylor).

Freeport exemption

A community may choose to offer the freeport exemption for various types of goods that are detained in Texas for a short period of time. Freeport property includes goods, wares, merchandise, ores, and certain aircraft and aircraft parts. Freeport property qualifies for an exemption from ad valorem taxation only if it has been detained in the state for 175 days or less for the purpose of assembly, storage, manufacturing, processing, or fabricating. For certain aircraft parts, a community, by official action, may extend the deadline to 730 days.

The law requires an annual application to the county appraisal district to claim a property tax exemption for freeport goods.

A freeport exemptions map details the jurisdictions providing the exemption. Community college districts cannot adopt the freeport exemption.

Pollution control equipment

A Texas constitutional amendment providing an exemption from property taxation for pollution control equipment was approved in 1993. The intent was to ensure that compliance with environmental mandates through capital investments did not result in an increase in a facility's property taxes. A facility must first receive a determination from the Texas Commission on Environmental Quality (TCEQ) that property is for pollution control purposes. That positive use determination is then provided to the local appraisal district, which must accept the TCEQ's decision and grant the property an exemption from property taxes.

To be eligible for a positive use determination, the property must have been purchased, acquired, constructed, installed, replaced, or reconstructed after January 1,1994 to meet or exceed federal, state, or local environmental laws, rules, or regulations.

Solar or wind-powered energy devices

The Texas property tax code allows an exemption of the amount of the appraised property value that arises from the installation or construction of a solar or wind-powered energy device that is primarily for the production and distribution of thermal, mechanical, or electrical energy for on-site use, or devices used to store that energy. The Texas Comptroller publishes guidelines for the solar and wind-powered energy device exemption.

FOOTNOTES:

1. The M&O portion represents the majority of a school district’s rate. Among 15 districts in Travis County, M&O accounted for between 64% and 90%, with the average being 77% of the total tax rate.↩