Sebastian Rodrigano
The idea that Texas offers a favorable business climate is deeply rooted in the business community, but a business must monitor its property tax burden or risk paying unnecessarily high tax bills.
It’s understandable that many Texas businesses downplay the impact of property taxes on their bottom line. Late last summer, a survey by Development Counselors International rated Texas as having the best business climate in the nation for the 12th consecutive year. Survey respondents cited the tax climate, pro-business environment and economic development incentives as the top reasons for favoring the state.
As a 20-year Texas resident, I considered Texas’ business climate supremacy to be indisputable. When a client requested a quick check of property tax projections to evaluate locations for a new facility, however, I had trouble reconciling the data with my beliefs about the competitiveness of Texas in attracting new business.
Big Taxes in Texas: Across a 20-year period, property taxes on four hypothetical commercial buildings, all valued at $200 million in the first year, would be nearly four times higher in Texas than in many other states.
The client was trying to decide where to build a $200 million facility, assuming that every available property tax exemption would be granted in each of the states considered. Over a 20-year period, the estimated property taxes in Texas were close to four times those of the nearest competitor.
This result seemed incongruous, to say the least, with Texas’ top national ranking in the “tax climate” category. A number of business representatives have assured me that in spite of a disproportionate property tax load carried by businesses, the overall tax picture is more beneficial in Texas than in most other states. Yet the magnitude of a business’ property tax burden in this state demands significant attention and prudent management.
For existing infrastructure, much can be done to minimize taxes by ensuring that properties are properly and equitably valued. When dealing with new construction, a number of incentives and exemptions are available to help alleviate the property tax burden. What follows are a few options for properties old and new.
Tax Abatement Agreements — Chapter 312 of the Texas Property Tax Code allows taxing entities to enter into agreements with taxpayers to exempt all or some of the value of real and/or tangible personal property from taxation for a period not to exceed 10 years. School districts may not enter into tax abatements. Generally, the agreement must be approved before construction begins.
Value Limitation and Tax Credit Agreements — A school district may agree to limit the taxable value of new property for up to eight years under Chapter 313 of the Texas Property Tax Code. The limitation applies only to school district maintenance and operations taxes applicable to the property. These exemptions are commonly referred to as House Bill 1200 limitations and can be used in conjunction with a tax abatement agreement.
Economic Development Refund — Chapter 111 of the Property Tax Code provides for state tax refunds to qualified property owners that entered into chapter 312 tax abatement agreements after Jan. 1, 1996 without the benefit of a Chapter 313 value limitation.
Freeport Exemption — The Freeport exemption includes a total tax exemption for personal property (excluding petroleum products) that is detained in the state for less than 175 days for assembling, storing, manufacturing, processing or fabrication purposes. Each taxing jurisdiction must elect to participate; in some instances taxing jurisdictions that previously had not granted an exemption for a Freeport zone have opted into the exemption to incentivize business development. This exemption is described in Section 11.251 of the Property Tax Code.
While Texas remains one of the best places in the nation to do business, the property tax burden here is substantial. Careful planning of new investment in the state can considerably mitigate property taxes for a significant period of time, and a watchful eye over assessments will allow for a less costly experience while doing business in Texas.
— Sebastian Rodrigano is a principal at the Texas law firm of Popp, Gray and Hutcheson PLLC. The firm is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.