LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE, 77th Regular Session May 7, 2001 TO: Honorable Rodney Ellis, Chair, Senate Committee on Finance FROM: John Keel, Director, Legislative Budget Board IN RE: HB1200 by Brimer (Relating to the enactment of the Texas Economic Development Act, authorizing certain ad valorem tax incentives for economic development, including authorizing school districts to provide tax relief for certain corporations and limited liability companies that make large investments that create jobs in this state, to authorizing the imposition of certain impact fees, and to continuing the Property Redevelopment and Tax Abatement Act.), As Engrossed ************************************************************************** * Estimated Two-year Net Impact to General Revenue Related Funds for * * HB1200, As Engrossed: impact of $0 through the biennium ending * * August 31, 2003. * * * * The bill would make no appropriation but could provide the legal * * basis for an appropriation of funds to implement the provisions of * * the bill. * * * * The following fiscal impact to the General Revenue Fund 0001 * * reflects estimated dynamic tax feedback effects created by the * * reduction in industry tax burdens. * ************************************************************************** The bill would create the Texas Economic Development Act and authorize certain property tax incentives. The minimum requirement for qualification would be an investment in new buildings and improvements and associated capital equipment between $20 million and $100 million depending on the taxable value of the host school district and the creation of at least 25 jobs. However, the bill would provide for a minimum investment of between $1 million and $30 million depending on the taxable value of industrial property in the host district for certain school districts located in counties: 1) with a population of less than 50,000, 2) that are not included in a metropolitan statistical area, and 3) in which the population remained the same, decreased, or increased less than 15 percent between the 1990 and 2000 census. In such areas, the bill would require the creation of at least 10 jobs. The tax limitation only would apply to property used in connection with manufacturing, research and development, and renewable energy electric generation. The provisions of the bill concerning property value limitations and school tax credits would expire December 31, 2007. General Revenue-Related Funds, Five-Year Impact: **************************************************** * Fiscal Year Probable Net Positive/(Negative) * * Impact to General Revenue Related * * Funds * * 2002 $0 * * 2003 0 * * 2004 384,000 * * 2005 978,000 * * 2006 3,334,000 * **************************************************** All Funds, Five-Year Impact: *************************************************************************** *Fiscal Probable Revenue Gain/(Loss) to Probable Revenue Gain/(Loss) to * * Year General Revenue Fund School Districts * * 0001 * * 2002 $0 $0 * * 2003 0 0 * * 2004 384,000 0 * * 2005 978,000 0 * * 2006 3,334,000 (54,908,000) * *************************************************************************** The state cost under the Foundation School Program (FSP) would increase by an estimated $54.9 million, less $3.3 million in revenue feedback effects, in fiscal 2007. Annual growth in values subject to the property tax reductions and school tax credits provided by the bill would increase state FSP payments by an estimated $301.9 million, less $32.7 million in revenue feedback effects, by fiscal 2011. Fiscal Analysis To qualify for a reduction in school district property tax, firms would apply to a local school board and enter into an agreement concerning the investment and job targets. The firms would have to pay an application fee to the school district, not to exceed the district's estimated processing cost. The bill would require the district, if the district elected to consider an application, to engage a third person to conduct an economic impact evaluation of the application. For the first two years after the finalization of an agreement, a company would pay school property tax on its full appraised value. Beginning in the third year, and for a total of eight years, the appraised value of the property for maintenance and operations property taxes would be capped at the lower of the investment limitation, as determined by the school district, or its market value. The agreement would have to include provisions for the protection of future school district revenues, require the property owner to maintain a viable presence in the school district for at least three years after the date the tax limitation expired, and provide for the recapture of property tax revenue lost including penalties and interest if the property owner failed to comply with the terms of the agreement. A company would receive a credit for property taxes paid on the portion of value exceeding the investment limitation in the first two years. The credit would be granted by the school district in eight annual installments beginning in the year following the approval of the application by the school district. The credit for any year could not exceed 50 percent of the year's property taxes imposed on the qualified property. The bill would authorize a municipality or county to impose an impact fee against a new development to recover the costs of capital improvements or facility expansions attributable to property subject to a tax limitation. Methodology The estimated fiscal impact on school districts is the sum of the revenue losses from the property value limitation provision and the proposed school tax credits. The revenue loss from the property value limitation was computed for each year as the product of the appraised value of qualifying investments (limited to the manufacturing and research and development industries) exceeding the threshold, as defined in the bill, and the estimated average maintenance and operations school tax rate in that year. The amount of appraised value exceeding the threshold was computed by multiplying the estimated total Texas annual investment by the share of qualified investments projected to exceed the investment threshold. The resulting amount was adjusted by the percentage of investment by corporations and for differences in capital investment and appraised values. Total Texas annual capital investment was estimated using data on new capital investments by Texas mining, manufacturing, and utility industries provided by the U. S. Bureau of the Census. For other industries, new investment was estimated using data from the Census Bureau's annual U. S. capital expenditures survey. The data were apportioned to Texas using Texas' share of gross state product for each industry. The future growth rate of capital investment was provided by Wharton Econometric Forecasting Associates. The share of total Texas investment exceeding the investment threshold was estimated from data provided by TDED on business expansions in Texas during the last half of the 1990s. The fiscal impact of the proposed school tax credits was estimated using the same methodology, except the credit amounts were spread over an eight-year period beginning in the third year an investment would be made. Under the current school finance system, the Comptroller's office assumed that the state would reimburse school districts for their losses for the property value limitation and the school tax credits after a one-year lag. Once the static fiscal impact was estimated, the dynamic fiscal impact was calculated using a Texas-specific general equilibrium model to distribute among the state's economic sectors the savings that otherwise would have been paid in taxes by businesses. The revenue feedback calculation was based on the historical relationship between state tax revenues and associated economic factors. Note: This fiscal note assumes that the exception for semiconductor fabrication cleanroom equipment in Section 313.021 (2) (C) (ii) would be for new cleanroom equipment installed in an existing building, and that it would not apply to existing cleanroom equipment. Local Government Impact The impact on local school districts is reflected in the above tables. The fiscal impact to cities and counties from imposing impact fees would depend on the number of projects and the cost to cities and counties of providing improvements, and is therefore not reflected in the above tables. Source Agencies: 304 Comptroller of Public Accounts LBB Staff: JK, SD, BR