Two Rulings Address Property Tax Questions
Attorney General John Cornyn issued two rulings that dealt with pollution control property and tax increment financing agreements.
Attorney General Opinion No. JC-0372 released April 30 held that add-on pollution-control devices and methods of production that limit pollution at new facilities are entitled to exemption under Tax Code Section 11.31. It stated that the Texas Natural Resource Conservation Commission (TNRCC) must administer the tax exemption to grant exemptions to only that portion of property that actually controls pollution.
TNRCC Chair Robert J. Huston asked if certain types of property qualify for tax exemption under Section 11.31. He inquired if the exemption applied to equipment, of a type new to a location, that is used to make a product and by its design limits pollution, or to add-on control equipment installed on new equipment.
Section 11.31 provides that a person is entitled to a property tax exemption for all or part of real or personal property "used wholly or partly as a facility, device, or method for the control of air, water, or land pollution." Texas voters approved the constitutional amendment for this exemption in 1993, and the legislature added Tax Code Section 11.31, effective January 1, 1994. Section 11.31 establishes a procedure whereby taxpayers seeking the exemption submit information to the TNRCC for determining whether property is a pollution-control facility, device, or method.
The attorney general interpreted the questions to be whether a distinction should be made between measures taken to address pollution that is already being generated by an existing facility as opposed to pollution that will be generated in the future by a new facility. The second question was whether pollution-reducing production equipment and add-on control equipment should be treated differently. Since no Texas court decision has addressed Section 11.31, the attorney general looked to the plain meaning of terms in that section to answer these questions.
First, the ruling found that Section 11.31 made no distinction between property controlling pollution generated by an existing facility or by a new facility. The statute contained only one limitation: to be exempt, property must be acquired after January 1, 1994, the statute's effective date. The ruling held that Section 11.31 applies to pollution-control property added to any facility after January 1, 1994, with no basis in the statute for limiting the tax exemption only to pollution-control property added to an existing facility.
Second, based on the meaning of the terms "wholly," "partly," and "method," the ruling concluded that Section 11.31 clearly extended to equipment that is used to make a product and by its design limits pollution. The opinion added, "We stress, however, that under section 11.31 the owner of pollution-reducing production equipment, property that serves both a production and a pollution-reduction purpose, is not entitled to a tax exemption on the total value of the property. Rather, pollution-reducing production equipment may receive only a partial tax exemption. The TNRCC has been charged by the legislature with determining what portion of such property is a 'facility, device, or method for the control' of pollution."
The ruling also stated that "the TNRCC must administer the tax exemption to grant exemptions to only that portion of property that actually controls pollution. The legislature may want to provide the TNRCC with additional guidance regarding the proper criteria for assessing what portion of property actually controls pollution. In addition, the constitution permits the legislature to narrow or eliminate this tax exemption for pollution-control property if it determines that the exemption is burdensome to taxing units or unfair to other taxpayers."
Tax increment financing
In Opinion No. JC-0373 issued May 1, the attorney general reviewed the Comptroller's annual property value study and the deduction of market value for property subject to a tax increment financing agreement under Local Government Code Chapter 374, Subchapter D. Cornyn held that the deduction was not optional, but was required by statute.
Texas Comptroller Carole Keeton Rylander requested the opinion dealing with this special type of tax increment financing agreement in the Local Government Code. Most current tax increment districts are established under Tax Code Chapter 311.
Government Code Section 403.302 requires the Comptroller to conduct annual studies to determine the total value of taxable property within Texas school districts. The "total taxable value" of such property is certified to the Commissioner of Education and is used to calculate the state's support for school districts and determine the district's wealth per student under the funding equalization provisions of the Education Code.
Section 403.302(d) sets forth that "taxable value" means the market value of all taxable property less certain deductions. One deduction, listed in Subsection (d)(4), addresses the dollar amount of any captured appraised value of property within a Tax Code Chapter 311 reinvestment zone. This subsection, however, does not address a Local Government Chapter 374 reinvestment zone.
In reviewing the tax increment financing provisions of Local Government Code Chapter 374, Cornyn found no judicial decisions and only one opinion that addressed issuing bonds without holding an election (Attorney General Opinion No. H-1191 in 1978). He did find that the Tax Increment Financing Act in Tax Code Chapter 311 had been the subject of judicial decisions and attorney general opinions.
Chapter 374, the Texas Urban Renewal Law, grants municipalities various powers directed at eliminating slum and blighted areas, and subchapter D authorizes funding urban renewal projects through tax increment financing. These provisions were adopted in 1977. Chapter 374 provides that a city may designate an urban renewal area and may issue bonds for public improvements. The bonds are backed solely by future tax increments. Tax increments are any taxes that result from the increased value of the property in the project area. City, county, state, school district, and special district tax increments go into a fund to be used to repay the bonds. The taxes collected by each taxing unit on the original market value stay with the taxing unit. Only taxes on newly added value go to repay bonds. Once the bonds are repaid, the full value of the area goes on each unit's tax roll, to be taxed normally.
The ruling stated that Chapter 374 requires a majority of the qualified voters of the city voting on the question to approve that method of financing in an election," but "[t]his referendum is not required if the constitutional amendment on tax increment financing is approved by the voters."
In reviewing whether Chapter 374 was constitutional, the attorney general found that the provisions of former Article 1269l-3 of the Revised Civil Statutes authorizing tax increment financing were ruled unconstitutional when adopted, based on Attorney General Opinion MW-337. Although the legislature that added Article 1269l-3 also proposed a constitutional amendment authorizing tax increment financing, the voters did not adopt the proposed amendment. The opinion said that a tax increment financing plan adopted under unconstitutional provisions of Article 1269l-3 would not be valid, with or without voter approval.
After Attorney General Opinion MW-337 ruled that the tax increment law was unconstitutional, the legislature proposed adding Article VIII, Section 1-g to the constitution to authorize tax increment financing. This time, Texas voters did adopt the provision. The attorney general found that a statute unconstitutional when adopted may be revived by adopting a constitutional amendment that cures the constitutional defect. The opinion said that Article VIII, section 1-g of the Texas Constitution did not specifically refer to any statute and, in consequence, its adoption did not expressly validate any legislation. The legislature that proposed amending the constitution repealed the Tax Increment Financing Act of 1979 and adopted the Tax Increment Financing Act of 1981 ("the 1981 Act"). Despite the issuance of Attorney General Opinion MW-337, two cities had established tax increment districts under the 1979 Act. The 1981 Act included a validation provision for such cities. "The legislature's treatment of the 1979 Act and actions taken thereunder displayed an intent for the constitutional amendment to operate prospectively only, and not to validate tax increment provisions adopted without constitutional authority. Given this strong legislative preference for prospective operation of Texas Constitution article VIII, section 1-g with respect to the Tax Increment Financing Act of 1981, and the absence of any evidence that it wished to validate the tax increment provisions of the Urban Renewal Law, we conclude that the latter provisions were not validated by the adoption of the constitutional amendment," the attorney general wrote.
The attorney general, however, found that "the tax increment financing provisions of the Urban Renewal Law were validated when they were repealed and reenacted as chapter 374 of the Local Government Code in the 1987 nonsubstantive revision of statutes relating to local government." The opinion stated, "When a code is enacted, it becomes the binding law of the state. If a statute is unconstitutional when adopted, it will become effective by its inclusion in a code adopted after the constitution has been amended to authorize legislation of its type."
The opinion also reviewed the Government Code Section 403.302(d)(8) deduction from market value to determine "taxable value." Subsection (d)(8) requires deducting any portion of the market value of property not otherwise fully taxable by the district because of action required by statute or the constitution that produces an amount equal to the difference between taxes that the district would have imposed on the property if the property were fully taxable at market value and taxes that the district is actually authorized to impose.
The opinion concluded that "taxable by the district" means property that generates tax revenues for the district, and not property that the district taxes as an agent for another entity.
The opinion held that the "captured appraised value" must be subtracted from the market value of property taxable by a school district subject to tax increment financing under Chapter 374.
The attorney general also reviewed whether the referendum requirement of Local Government Code Section 374.031(a) makes this tax increment financing method optional for the school district, so that the school's participation is not "required by statute" within Government Code Section 403.302(d)(8). The opinion held that the deposit of property tax revenues in the tax increment fund is an "action required by statute." While a city or town may not adopt tax increment financing absent voter approval, the statute adopted by the legislature under constitutional authorization, and not any voluntary act of the school district, requires the school district to place tax revenues in the tax increment fund, the opinion said. "Although the Education Code vests authority to manage the school district in the board, the school board has no opportunity to consent or withhold consent for the school district's participation in the tax increment financing scheme under Chapter 374, subchapter D," wrote the attorney general. The opinion held that the Comptroller must deduct from the market value of property taxable by the school district the value subject to a tax increment financing agreement authorized by the Urban Renewal Law.