Proposed Constitutional Amendments4 of 19 Amendments Address Property Taxes
On Tuesday, November 6, Texas voters will decide on 19 constitutional amendments proposed by the 77th Texas Legislature. Of these 19, four amendments address some area of property taxation. The Texas House of Representatives’ Research Organization released its focus report August 13 that reviewed all 19 constitutional amendments. The four property tax propositions address the following areas.
To access the complete House Research Organization’s report on constitutional amendments, go to the Web site at www.capitol.state.tx.us/hrofr/framer1.htm.
Proposition 3 would add Texas Constitution Article VIII, Section 1-n, to allow the Legislature to exempt from property taxes raw cocoa and green coffee held in Harris County. The ballot proposal reads: “The constitutional amendment to authorize the legislature to exempt from ad valorem taxation raw cocoa and green coffee that is held in Harris County.”
Under Article VIII, Section 1(b), all tangible personal property, including inventories, held for the production of income is subject to property taxes unless specifically exempt.
Supporters. The House Research Organization found that supporters say exempting coffee and cocoa inventories from property taxes in Harris County would make the Port of Houston eligible to be designated an exchange port for coffee by the New York Board of Trade. The New York board has said that it will not consider the county’s application unless coffee and cocoa are exempted from taxation. Supporters say this designation would bring global recognition and marketing power to Houston, as one of only four designated coffee ports in the nation, along with New York, New Orleans, and Miami.
Although exempting coffee from property taxes would decrease local tax revenue in the short run, supporters believe Houston’s certification as a coffee port would spur long-term investment in local warehouse facilities, create jobs, and bring additional business to trucking and distribution companies across the state. Increased property tax revenues from new construction, along with job growth and other statewide economic benefits, would more than make up for the short-term loss in tax revenue.
Opponents. In the House Research Organization’s report, opponents point out the loss of tax revenue for local governments in Harris County. The current $300,000 in annual tax revenue from coffee in Harris County is spread among three school districts. Opponents also said that creating an exemption for a specific industry in a specific county would require other businesses and residential property owners in the county to bear more of the burden of funding public services. It also would set a bad precedent by encouraging other types of businesses to try to carve out similar exemptions for their benefit.
Opponents argue that creating a special tax-exempt status for coffee and cocoa would send the message that Texas is willing to overlook the notoriously poor human-rights records of these industries in the hope of producing economic benefits for a single Texas county. Human-rights violations are especially prevalent in coffee and cocoa production in West Africa.
Other opponents say a tax exemption for coffee should not be granted only to Harris County. Other ports in Texas share Houston’s proximity to coffee-growing regions and consumer markets. Ports in Corpus Christi or Brownsville also should benefit from any tax exemption on certain commodities. They point out that once the import market is established, the special tax break should be phased out.
Enabling legislation. If Proposition 3 passes, Senate Bill 1574 adds Tax Code Section 11.33 to implement the exemption. The exemption claimed under this statute would not have to be claimed in subsequent years and would apply to all raw cocoa and green coffee held by an owner until the commodity’s qualification for the exemption changed. The chief appraiser, however, could require an owner who received the exemption in a prior year to file a new application to confirm the commodity’s qualification for the exemption.
Proposition 10 would add Texas Constitution Article VIII, Section 1-n, to authorize the Legislature to exempt from property taxes personal property that is stored temporarily en route to another location in Texas or outside the state. Exempt property would include the same types of goods and products eligible for the current “freeport” exemption. The property would have to be acquired in or brought into Texas and stored at a location not owned or controlled by the property owner for not more than 270 days after acquisition or importation. (Unlike “freeport goods,” which may be exempt if exported within 175 days under Article VIII, Section 1-j, these “goods in transit” would not have to be shipped out of state to qualify for the new exemption.)
Taxing units could choose to tax these goods-in-transit if another law did not exempt the property. A unit’s governing body would hold a public hearing before acting to do so. Owners of property eligible for the freeport exemption could apply for the goods-in-transit exemption if the Legislature enacted it, subject to the decisions of their local taxing units. An owner receiving the goods-in-transit exemption, however, could not claim the freeport exemption for the same property. The amendment would take effect January 1, 2002.
The ballot proposal reads: “The constitutional amendment to promote equal tax treatment for products produced, acquired, and distributed in the State of Texas by authorizing the legislature to exempt from ad valorem taxation tangible personal property held at certain locations only temporarily for assembling, manufacturing, processing, or other commercial purposes.”
Currently, Texas Constitution Article VIII, Section 1-j, and Tax Code Section 11.251 exempt from property taxes “freeport” property that is in the state temporarily. Eligible “freeport” property includes goods, wares, merchandise, ores, and other tangible personal property. It does not include oil, natural gas, and other petroleum products. To be eligible for the freeport exemption, property must be acquired in or imported into Texas for export; detained for assembly, storage, manufacturing, processing, or fabrication; and shipped out of state no later than 175 days after acquired or imported. Before April 1, 1990, local taxing units (school districts, cities, counties, and junior college districts) were allowed to overrule the exemption and tax such property. The units that retain the option to tax may decide to permanently rescind the decision to tax and grant the exemption.
Supporters. The House Research Organization found that supporters say Proposition 10 would be an important first step in helping Texas regain its share of lucrative warehousing and distribution markets. Voter approval also would allow the Legislature to stem the loss of customers and jobs to other states. They say that the “freeport amendment” has offered only limited tax relief. Because it applies only to interstate freight, it discriminates against Texas goods bound for in-state destinations. And, all taxing units do not offer the exemption.
Supporters say that while some taxing entities have used the freeport exemption to attract out-of-state business, the provision actually penalized the Texas warehouse industry. Some developers persuaded rural areas with lower operating costs and no warehouses to attract warehouse development by offering the exemption. This forced existing warehouses in developed areas without the exemption to lower their prices in order to compete. Surrounding states offer much more favorable inventory tax treatment. Oklahoma fully exempts all freeport goods with no local option, and New Mexico exempts inventories with few exceptions. Recognizing their competitive advantage, nearby states have enacted laws and promoted policies to help their warehouse operators attract new business. Many manufacturers began storing their products outside Texas, costing the state an estimated 27,000 jobs.
Supporters argue that estimated state reimbursement increases to school districts for reduced local revenue from this exemption are exaggerated and should not exceed $11 million. They believe that many school districts and other taxing entities might choose to continue to tax such property. Supporters point out that a potential annual income gain of $540 million and almost 14,000 new permanent jobs.
Opponents. According to the House Research Report, opponents argue that any measure that erodes local tax bases further would be imprudent, especially in a time of revenue shortfall and fiscal uncertainty. They believe that the state should impose a moratorium on new tax exemptions until the efficiency and appropriateness of existing exemptions are determined.
These opponents say that the school finance issue also makes Proposition 10 all the more ill-advised. The Legislative Budget Board (LBB) estimated that if all taxing entities granted the goods-in-transit exemption the required state reimbursements to school districts for revenue losses in fiscal 2003 would total $36 million in fiscal 2004. Those reimbursements would compensate districts for declines in taxable property values, depending on wording of enabling legislation. Losses to cities and counties in fiscal 2003 would total $7.8 million and $11.2 million, respectively, according to LBB.
Opponents point out that allowing local governments to “opt out” of the goods-in-transit exemption would perpetuate existing problems with tax administration. Business and industry likely would relocate to exempt areas, creating the same tax-policy patchwork that plagues the freeport exemption.
The proposed amendment unfairly would shift the property tax burden from certain taxpayers who happen to own goods-in-transit property to others, according to opponents. It would show favoritism by subsidizing a single, relatively small industry, yet produce little positive “ripple effect” benefiting the state economy. They believe that the impact of economic losses from across-the-border migration of storage facilities is overstated. Realistically, such out-of-state facilities can serve efficiently only markets in Dallas-Fort Worth, El Paso, and perhaps Houston. On the arguments about other states, opponents say that Texas should not be lured into a tax-break war with other states for dubious returns to address what amount to regional problems.
In appraising the property, opponents say that the criteria for assessing the new exemption would complicate rather than simplify the appraisal process. Determining property owners’ intent could be difficult, because ambiguity in the language might allow them to claim exemptions for goods that arguably are not meant for shipment. More tax law complexity simply raises costs for taxpayers.
Finally, other opponents say that, without enabling legislation, voters will be in the same quandary as in 1999, when they approved the amendment providing a tax exemption for automobiles leased for personal use, which had no immediate effect. It would be better to wait and adopt both the amendment and the enabling legislation simultaneously.
Enabling legislation. Because the 77th Legislature did not pass an enabling bill, the tax exemption for these goods in transit could not take effect for at least two years if voters approve it. The Legislature could consider enabling legislation to implement the proposed exemption beginning in 2003 or thereafter.
Proposition 12 would eliminate duplicative and obsolete provisions from the Texas Constitution. Since the constitution’s adoption in 1876, the Legislature has proposed 567 amendments, of which Texas voters have approved 390. Various provisions are now obsolete by federal judicial decisions or enactments, repeat the same or similar language, or refer to programs and entities no longer in effect.
Proposition 12 would remove, reword, or relocate many provisions of the Constitution, including these on property taxation:
• making various references gender-neutral;
• deleting provisions regarding the disposition of receipts from state ad valorem taxes;
• deleting a provision that only “property taxpayers” are qualified to vote and relocating provisions that prohibit persons convicted of bribery, perjury, forgery, or other high crimes from voting or serving on juries;
• deleting duplicate oath-of-office provisions;
• relocating the authority of county commissioners to call an election to elect a tax assessor-collector or to designate the sheriff as assessor-collector in counties with populations of fewer than 10,000 people; and
• eliminating a duplicate provision for when an elected or appointed officer of a home-rule city resigns that position when running for another office.
The ballot proposal reads: “The constitutional amendment to eliminate obsolete, archaic, redundant, and unnecessary provisions and to clarify, update, and harmonize certain provisions of the Texas Constitution.”
Supporters. The House Research Organization found that supporters believe Proposition 12 would streamline the existing Constitution by deleting obsolete, inconsistent, and moot provisions; by relocating provisions to more logical places; and, by renumbering provisions with duplicate numbering. A complete overhaul of the Constitution could result in an improved document but would involve making many substantive changes that need to be examined thoroughly. Rather than wait for the Legislature to adopt a complete rewrite, Proposition 12 would allow voters to update the current constitution and remove many of the unnecessary provisions that make it difficult to use. They say that all the proposed changes are relatively minor and noncontroversial.
Opponents. Opponents say rather than amend and repeal sections of an out-of-date constitution, the Legislature should overhaul the document for a leaner, more responsive blueprint for the new century. They point out the sheer volume of unnecessary provisions being removed by Proposition 12, following two similar revisions in 1997 and 1999. Because of the large number of changes in Proposition 12, some of the proposed revisions may not have been examined fully.
Proposition 14 would amend Article VIII, Section 1, to allow the Legislature to authorize taxing units (other than school districts) to grant property tax exemptions to owners of registered, non-income-producing travel trailers, regardless of whether the trailers were real or personal property. To be eligible for the exemption, a trailer would have to be registered in compliance with state law on January 1 of the applicable tax year. The proposed amendment would take effect January 1, 2002.
The ballot proposal reads: “The constitutional amendment to authorize the legislature to authorize taxing units other than school districts to exempt from ad valorem taxation travel trailers that are not held or used for the production of income.”
Under Texas Constitution, Article VIII, Section 1(d), the Legislature may exempt from ad valorem taxation tangible personal property, except structures that are personal property used or occupied as residential dwellings and property held or used for the production of income. Tax Code Chapter 11 exempts various types of property from ad valorem taxation. Tax Code Section 11.14(a) allows local taxing units to grant exemptions for non-income-producing tangible personal property, other than manufactured homes.
Two recent attorney general opinions have addressed travel trailers. Opinion No. JC-0150 (December 8, 1999) upheld taxation of travel trailers as personal property. Opinion No. JC-0282 (September 7, 2000) held that the Tax Code does not preclude taxation of travel trailers as real property improvements if they have been affixed to someone else’s land.
Supporters. In the House Research Organization’s report, supporters say Proposition 14 would provide uniformity in taxing travel trailers and would help promote the tourism industry by encouraging more people to visit the state for extended periods. Travel trailers have grown increasingly popular in Texas as recreational vehicles and winter homes, especially in Hidalgo and Cameron Counties. The Texas Department of Transportation reported that more than 161,000 travel trailers were registered in Texas as of January 2001. According to the Texas Association of Campground Owners, about 70,000 “winter Texans” inhabit the Lower Rio Grande Valley each year, contributing more than $165 million to local economies. Some of these residents live in their trailers six months out of the year, yet retain their mobility.
Supporters say that Proposition 14 would clarify property tax statutes and remove appraisal subjectivity by allowing local taxing entities to exempt travel trailers, regardless of whether they were real or personal property. Some appraisers do not appraise travel trailers as taxable property at all; some appraise them as real property, especially if they have carports or attached rooms; some appraise them as rental property; others appraise them as personal property. Compounding the problem are park-model trailers, somewhat similar to mobile homes. Such inconsistency of tax administration across counties is inequitable and led to class-action lawsuits in Hidalgo and Cameron Counties.
Supporters point out that travel trailer owners already pay sales taxes when they buy their trailers. They also must pay annual vehicle registration fees to move or sell them. Taxing them again as property is excessive, if not double, taxation. Property taxes on travel trailers hinder tourism and economic development in a region that sorely needs both. They also penalize a productive class of residents, most of whom are retired on fixed incomes and contribute positively to their adopted homes. Cameron County realizes about $1 million in annual tax revenue from travel trailers, and Hidalgo County receives about $1.4 million annually. But continued taxation, especially if not applied fairly and uniformly, would reduce the trailer population, as has occurred in other southwestern states.
Finally, supporters say that recreational vehicle tourism is down 8 percent in the Valley, and half of those surveyed cited property taxes as reason for leaving. The economic benefits of keeping these visitors in Texas outweigh the benefits of the property tax revenue. Any exemption would be optional on the part of local taxing entities. School districts, however, would not exempt travel trailers, preventing any repercussions for school finance.
Opponents. The House Research Organization found that opponents say allowing property tax exemptions for travel trailers would create a special class of homeowner. Travel trailers may be occupied indefinitely and can have frame structures attached to them. If owners live in them, the trailers should be taxed as real property, like manufactured homes. Second homes are not inherently tax-exempt simply because they are mobile.
Opponents say that creating another exemption would complicate. rather than simplify, the system. The attorney general has held that travel trailers are personal property and, if affixed to real estate, may be considered real property improvements. The problem is not the statutes themselves but the lack of guidance for appraisers in applying the statutes. The Legislature should define more specifically what constitutes a taxable residence, as it has done for manufactured homes. For example, park-model trailers — essentially mini-mobile homes — are not travel trailers because they are too wide to be towed by pickup trucks. Some trailer owners apply for homestead exemptions.
Proposition 14 would erode local tax bases, according to opponents. The Valley needs local tax revenue to expand and enhance basic services stretched by a growing population. Semi-permanent residents who use services should pay their fair share. Many winter Texans run small businesses or participate in cottage industries involving border communities. It is unfair to tax impoverished families living in substandard homes in nearby colonias while exempting affluent retirees living in trailers that cost as much as $40,000 each. They say winter Texans keep returning because of the overall low cost of living, aesthetics of the landscape, and proximity to the Gulf of Mexico.
Finally, opponents say Proposition 14 would not give owners of travel trailers significant tax relief, because it would not allow the trailers to be exempt from school property taxes — the bulk of the owners’ tax bills.
Enabling legislation. House Bill 2076, the enabling legislation, would add Tax Code Section 11.142 to define travel travelers as camper trailers or house trailer-type vehicles, whether affixed to real estate or not. The trailers must be less than 400 square feet in area and designed primarily as temporary living quarters for travel, camping, recreational, or seasonal use, not as permanent dwellings.