Perspectives on Property Tax Exemptions in Texas, Including Those for Economic Development

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1 Perspectives on Property Tax Exemptions in Texas, Including Those for Economic Development Dale Craymer Texas Taxpayers and Research Association Presentation to the Ways and Means Committee November 2, 2011

2 Page 1 of 6 Key Facts about Property Taxes in Texas The property tax in Texas applies to: o All real property, including land and improvements o Business personal property [personal property of individuals is exempt under Texas Constitution, Article 8, Section 1(d)] Property in Texas is appraised and taxed at market value as provided in Texas Constitution, Article 8, Section 1(b): All real property and tangible personal property in this state, unless exempt as required or permitted by this Constitution, shall be tax in proportion to its value. A state property tax is prohibited under Article 8, Section 1-e of the Texas Constitution. A local entity may levy a property tax only with the approval of their voters. Property may be exempted only by amendment to the Texas Constitution which requires a vote of the people. Property tax relief for the purpose of encouraging economic development or redevelopment and improvement of property is authorized by Article 8, Section 1-g. The key business exemptions in Texas are: o The Freeport exemption is available for tangible personal property to be shipped outside the state but is temporarily (175 days or less) located here. The exemption is automatic unless a school district takes specific action to tax the property. This exemption is key for many manufacturers who produce goods for sale outside the state (authorized by Article 8, Section 1-j). o Pollution control equipment is exempted from the property tax provided the equipment is necessary to meet or exceed a regulatory requirement controlling pollution at the site at which the equipment is installed (authorized by Article 8, Section 1-l). This provision was passed to prevent the taxation of nonproductive equipment businesses were required to purchase to comply with governmental regulations. o The Texas Economic Development Act allows school districts to offer a temporary limitation on the taxable value of certain new industrial projects (authorized by Article 8, Section 1-g).

3 School Taxes in Texas Gross and Net School Taxes in 2010 ($ millions) Page 2 of 6 Category/Exemption Taxes on Market Value Tax Value of Exemptions/ Prod. Val. Net School Tax Due Gross Tax on Residential Property $13,029.8 $15,000 Mandatory Homestead ($990.3) $10,000 Mandatory Over 65 ($187.3) Mandatory Veterans/Surviving Spouse ($65.7) Local Option Percentage Homestead ($435.7) Local Option Over 65/Disabled ($98.2) Over 65 Tax Freeze ($627.9) 10% Limit on Homestead Appraisal ($105.5) Other ($8.1) Total Exemptions ($2,518.7) Net Taxable Value $10,511.1 Gross Tax on Business Property $11,149.8 School Tax Abatements ($1.0) Freeport Property ($273.4) Pollution Control Equipment ($113.6) Texas Economic Development Act ($117.3) Other ($2.5) Total Exemptions ($507.8) Net Taxable Value $10,642.0 Gross Tax on Agricultural Property $2,936.8 Value Loss to Productivity Appraisal ($2,543.2) Net Taxable Value $393.6 Total, All Property $27,116.4 ($5,569.7) $21,546.7 If all property were taxed at its market value, school taxes (for maintenance and operations and debt service combined) would have totaled $27.1 billion in However school taxes were reduced by $5.6 billion because of exemptions and productivity adjustments, resulting in total tax collections of $21.5 billion a reduction of 18.6 percent. Of the $5.6 billion cost 45.2 percent was attributed to reductions in residential property, 45.7 percent was due to agricultural valuation provisions, and 9.1 percent was attributed to business exemptions. Residential exemptions reduced overall property tax collections by 9.3 percent, agricultural provisions by 9.4 percent, and business exemptions by 1.9 percent.

4 Comparing Texas Taxes Page 3 of 6 Texas has no state personal income tax. The national average for state income taxes in 2009 added $805 per capita to each state treasury, according to the Tax Foundation. If Texas had such a tax, it would add $20 billion annually to the Texas tax burden. Texas 6.25% state sales tax rate is 12 th highest (tied with Illinois and Massachusetts). Adding in local sales taxes (up to a general maximum of 2%), the average combined sales tax rate in Texas is 11 th highest, according to the Tax Foundation. Texas property taxes are among the nation s highest. The Minnesota Taxpayers Association and the Lincoln Land Institute do a comparative study of property taxes on different types of property across the 50 states. For an industrial property, Texas base local tax rates place the state at a competitive disadvantage relative to other states: Realty Value Effective Tax Rate U.S. Average Effective Tax Rate Texas Rank Among the States Texas Rate vs U.S. $100, % 1.431% 3 rd highest 176% $1,000, % 1.460% 3 rd highest 173% $25,000, % 1.471% 4 th highest 172% There are two types of taxpayers in state and local tax systems: o individuals, and o businesses. In Texas, 61.2 percent of all state and local taxes are paid by business, compared to the national average of 46.0 percent. Only Alaska, Wyoming and North Dakota are more reliant on business taxes than Texas [figures from the Council on State Taxation]. Thanks to the lack of a personal income tax, tax burdens on individuals in Texas are among the very lowest among the states. In 2010 Texas ranked 48 th among the states with state and local taxes tallying 3.6 percent of the state s personal income, far below the U.S. average of 5.9 percent [figures from the Council on State Taxation]. Because of heavy reliance on sales and property taxes taxes that fall heavily on businesses tax burdens on businesses in Texas are above the national average. In 2010 Texas ranked 19 th highest among the states with state and local taxes tallying 5.1 percent of the state s gross economic output from private sector industries above the national average of 5.0 percent, just below California (5.2 percent), well below New York (6.2 percent), but ahead of Illinois (5.0 percent), New Jersey (4.9 percent), Michigan (4.6 percent), and Massachusetts (4.3 percent) [figures from the Council on State Taxation].

5 Page 4 of 6 Property Taxes in Texas $45 $40 $35 $30 $ billions School City County Special District $25 $20 $15 $10 $5 $ Since 1990, property taxes have more than tripled (increasing 3.4 times), growing slightly faster than the overall economy (which grew 3.2 times). Absent the 2006 school tax relief initiative, property taxes would have increased by 4 times). Almost 55 percent of all property taxes in Texas are levied by school districts.

6 Page 5 of 6 Key Facts about Chapter 313: School Tax Limitations Texas is not a low tax state for businesses particularly capital intensive businesses. The chief burden to new business investment in the state is our high property taxes the bulk of which are local school taxes. Absent some type of property tax incentive Texas may not be able to compete with other states for high dollar investment projects. The Texas Economic Development Act, Chapter 313 of the Texas Tax Code, passed in 2001 as House Bill 1200 in response to Texas losing a high dollar investment project, in part because of high property taxes. Chapter 313 of the Tax Code allows school districts to provide a temporary limitation on the value of new investment subject to property tax. It does not remove property from the tax rolls no existing facility s value may be abated. The only way to get a limitation is to spend new investment dollars. School tax rolls are significantly increased over time as the limitations expire and the investment becomes taxable at its full value. The temporary tax abatements do not reduce state or local district revenues because many of these projects would not have been built here absent the limitations. And, in addition to adding property to the tax rolls, these projects pay millions of dollars in sales, franchise and other state and local taxes.

7 Page 6 of 6 How Should Chapter 313 Be Evaluated? The preamble in Chapter 313 lists the basic goals of the law: o encourage large-scale capital investments in this state, especially in school districts that have an ad valorem tax base that is less than the statewide average ad valorem tax base of school districts in this state; o create new, high-paying jobs in this state; o attract to this state new, large-scale businesses that are exploring opportunities to locate in other states or other countries; o enable local government officials and economic development professionals to compete with other states by authorizing economic development incentives that meet or exceed incentives being offered to prospective employers by other states and to provide local officials with an effective means to attract largescale investment; o strengthen and improve the overall performance of the economy of this state; o expand and enlarge the ad valorem property tax base of this state; and o enhance this state's economic development efforts by providing school districts with an effective local economic development option. It is tempting to want to evaluate the program based on a single variable, such as number of jobs created relative to taxes abated, however, this is problematic because it implies that the more capital intensive a project is, the less desirable it is. Further, the tax limitations are temporary, and greatly add to the tax rolls of the state when the limitation expires a factor the measure does not capture. In fact, a number of variables are necessary to evaluate the effectiveness of the program, including, but not limited to: o Long-term jobs created o Construction jobs created o Total amount of capital investment o Permanent value added to the tax rolls o New property taxes as a result of value added to the tax rolls o Other state and local taxes paid by the project o Ancillary economic and tax benefits from the project