How Texas is using the commercial property tax code to accelerate growth
Everything is bigger in Texas, including the tax code. Unique provisions in a state funded primarily by property taxes give commercial owners more control over how and where local government dollars are spent. The Lone Star State uses more than 200 Tax Revenue Reinvestment Zones (TIRZ, pronounced as turs) to meet the growing appetite for new development and better public spaces.
A TIRZ is a political subdivision of a city most often initiated by landowners who allow the TIRZ itself to collect a portion of additional tax increases funded by the appreciation of assessed property in the area. Simply put, a TIRZ operates like an HOA, diverting a portion of its municipality’s tax revenue to fund improvements with the boundaries of the area. Funding comes from taxes allocated to new improvements, so the process is self-sustaining. The more tax revenue generated, the more money there is for the region, the more it can invest locally to generate more tax revenue. Since taxes are levied on the value of properties, the system works by collecting a portion of the appreciation in the commercial value of buildings. In effect, a TIRZ gives owners a greater say in how to spend the tax revenue generated from their properties for the benefit of their properties. Similar to a public improvement district but with more funding and power similar to a redevelopment authority.
Texas’ tax revenue reinvestment zones have been a hot issue within the state since their inception in the early 1990s. Developer Robert Silvers wanted to transform Houston’s run-down Lamar Terrace neighborhood, but the notorious lack of zoning in the city left him with few options to create a planned community. After acquiring more than 100 parcels, he began working with the City of Houston to establish the states’ first tax revenue reinvestment zones: TIRZ Number One. The city has agreed to collect the same tax revenue from the area for the next 40 years. Revenue above this level would go to fund water, power, transportation, drainage and sewer upgrades in the region. Silvers’ plan worked and before long the TIRZ was raking in millions, expanding to include the entire Lamar Terrace neighborhood, quickly transforming it into the upscale St. George Place neighborhood that exists today. In its first 10 years, the TIRZ generated $40 million in additional taxes, most of which went directly to improving the TIRZ.
Combined with the absence of zoning laws, reinvestment zones give commercial owners inordinate power over how local dollars are spent. Originally touted as a way to transform downtrodden areas in desperate need of redevelopment, many of today’s TIRZs have established themselves as guardians of some of the state’s most valuable real estate. This has led to claims that a TIRZ is just a cash grab from business owners tired of shelling out taxes that improve areas where their assets are not. But in a state defined by property tax collection, a collective organization designed to reinvest in an area is actually a way to increase municipal funding. That’s exactly what Houston is doing.
Houston has used more TIRZs than any other city, now 27 different ones exist in the city covering 90 square miles. These TIRZs generate an additional $200 million in tax revenue each year, outside of the city budget. That’s the key here. Houston’s finances were hampered by a state-imposed tax revenue cap. No matter what the city’s finances look like or how quickly real estate values appreciate in Houston, the city can only raise property taxes by a maximum amount each year. This has left the city scrambling for funding as the area’s population explodes, but its budget remains stagnant. Houston’s last mayors have been embroiled in high-profile disputes between the fire union, police and other city workers over who gets a bigger slice of a piece of pie that doesn’t get bigger. TIRZ funds are exempt from the income cap, allowing property values to appreciate quickly to generate additional tax revenue. In Houston, the TIRZ does not subvert funds, without it more than $200 million in annual tax revenue would not even exist.
“The city council has tried to minimize the impact of the revenue cap by using TIRZs, which only highlights the structural inequality that exists. But you can only do it for so long without harming the city as a whole,” Houston Mayor Sylvester Turner said. Houston Chronicle. “So I think once the revenue cap is removed, the need for TIRZs isn’t as great.”
It’s not just Houston, across cities across the state that are working with landowners to establish TIRZ to manage the state’s robust growth. Texas’ population has grown by more than 4 million people in the past 10 years. Twenty-three US states don’t even have a total population of 4 million. Frisco, Texas is the star child of the state’s explosive growth. The most recent US Census found Frisco to be the fastest growing city in the nation with a population growth rate of 71.1% over the past decade. Frisco formed its first TIRZ in 1997, 713 acres of undeveloped area bounded by some of the area’s busiest freeways. These tax revenue reinvestment areas are now home to the third largest shopping mall in Texas, Dr. Pepper Ballpark, Dr. Pepper Arena and many other commercial properties. The area has generated tens of millions in additional tax revenue which the city has used to keep property taxes for families low and reinvest in the community. The TIRZ also has an added benefit for the school district. Money generated by TIRZ is not counted in the state’s Robin Hood formula which redistributes funds from wealthier school districts to poorer ones. This allows Frisco to retain an inordinate share of tax revenue to fuel its growth. Earlier this year Frisco moved to the expanded 583 acre TIRZ to include 3 nearby golf courses.
In Texas, a TIRZ is similar to a public-private partnership. Private owners can establish greater local control over an area, freeing up some of the financial burdens from the city as a whole. More and more landowners and business developers are establishing TIRZ to help seal some of a region’s prosperity. As tax revenue reinvestment zones proliferate, their purpose and mission have been clouded. Like any tool, a TIRZ can be used for good or for evil. Overall, most parts of the state have improved and maintained their areas, but they are not without drama. Tax revenue reinvestment areas have been accused of inappropriate development, favoring their own developments and projects at the expense of surrounding areas that need them most. In highly developed areas, a TIRZ is a way for the rich to get richer, but it’s not always a bad thing if the TIRZ reinvests to facilitate growth.
In a state defined by property taxes that are rising faster than any other, TIRZ has proven to be a useful tool for Texas to manage its growth. By working with commercial landlords and involving them in the success of the neighborhood through additional tax revenue, municipalities give landlords an additional stake in the prosperity and growth of urban areas.