LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE, 77th Regular Session March 9, 2001 TO: Honorable Rene Oliveira, Chair, House Committee on Ways & Means 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 or maintain jobs in this state, and to continuing the Property Redevelopment and Tax Abatement Act.), As Introduced ************************************************************************** * Estimated Two-year Net Impact to General Revenue Related Funds for * * HB1200, As Introduced: 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 in the future. * * * * The following fiscal impact to the General Revenue Fund 0001 * * reflects estimated dynamic tax feedback effects created by the * * reduction in industry tax burdens. * ************************************************************************** General Revenue-Related Funds, Five-Year Impact: **************************************************** * Fiscal Year Probable Net Positive/(Negative) * * Impact to General Revenue Related * * Funds * * 2002 $0 * * 2003 0 * * 2004 954,000 * * 2005 2,246,000 * * 2006 7,212,000 * **************************************************** All Funds, Five-Year Impact: *************************************************************************** *Fiscal Probable Revenue Gain/(Loss) to Probable Revenue Gain/(Loss) to * * Year the General Revenue Fund School Districts * * 0001 * * 2002 $0 $0 * * 2003 0 0 * * 2004 954,000 0 * * 2005 2,246,000 0 * * 2006 7,212,000 (96,000,000) * *************************************************************************** The state cost under the Foundation School Program (FSP) would increase by an estimated $96 million, less $14.3 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 could increase state FSP payments by as much as $480 million by fiscal 2011, after revenue feedback effects are considered. Fiscal Analysis The bill would create the Texas Economic Development Act and authorize certain property tax incentives. To qualify for a reduction in school district property tax, companies would apply to a local school board and enter into an agreement concerning the investment and job targets. The companies would have to pay an application fee to the school district, not to exceed the greater of the district's processing cost or $50,000. The Comptroller's Office would publish application forms and rules for the school tax limitation. In addition, the Comptroller's Office, Legislative Budget Board, Texas Department of Economic Development, Council on Workforce and Economic Development, and Texas Workforce Commission would provide assistance to local school districts in their evaluation of the merits of an 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 would be capped at the lower of the investment threshold or its market value. A company would receive a credit for property taxes paid on the portion of value exceeding the appraised value, as defined by this bill, in the first two years. The credit would be granted by the school district in seven 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. Methodology The estimated fiscal impact on school districts is based on the Comptroller's office analysis and 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 exceeding the threshold, as defined in the bill, and the estimated average 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 investments projected to exceed the investment threshold. This analysis assumes that only the largest 15 school districts would participate in the tax incentives authorized by the bill, as these districts would have the least potential for negative fiscal impact, relative to the size of their tax base. This analysis also assumes there would be no minimum job requirement because the bill would allow companies to maintain jobs. 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 capital investments by Texas mining, manufacturing, and utility industries provided by the U. S. Bureau of the Census. For other industries, 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 Texas Department of Economic Development 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 a seven-year period beginning in the third year an investment would be made. Under the current school finance system, it is 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. Local Government Impact The impact on local school districts is reflected in the above table. Source Agencies: 103 Texas Legislative Council, 480 Department of Economic Development, 302 Office of the Attorney General, 320 Texas Workforce Commission, 701 Texas Education Agency, 301 Office of the Governor, 304 Comptroller of Public Accounts LBB Staff: JK, SD, WP, BR