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How Texas Uses Commercial Property Tax Code to Fast Track Growth

Everything’s 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 is using more than 200 Tax Income Reinvestment Zones (TIRZ, pronounced like turs) to keep up with the growing appetite for new development and better public spaces. 

A TIRZ is a political subdivision of a city most commonly initiated by property owners that allow the TIRZ itself to collect a portion of incremental tax increases funded through the appreciation of the appraised property within the zone. In layman’s terms, a TIRZ functions like an HOA, diverting a portion of tax revenue from its municipality to fund improvements with the zone’s boundaries. The funding comes from taxes attributed to new improvements, so the process fuels itself. The more tax revenue generated, the more money for the area, the more it can invest locally to generate more tax revenue. Because taxes are levied on the value of the properties, the system works by garnering a portion of appreciation of the commercial value of the buildings. In effect, a TIRZ gives owners a greater say on how to spend tax revenue being generated by their properties to benefit their properties. Similar to a Public Improvement DIstirct but with more funding and power akin to a redevelopment authority. 

Tax Income Reinvestment Zones of Texas have been a hot-button issue within the state since they were first established in the early 1990s. Developer Robert Silvers wanted to transform the rundown Lamar Terrace neighborhood in Houston but the city’s notorious lack of zoning left him with few options to create a planned community. After acquiring more than 100 plots, he began working with the city of Houston to establish the states’ first Tax Income Reinvestment Zones: TIRZ Number One. The city agreed to levy the same tax receipts on the zone for the next 40 years. Receipts above that level would go towards funding water, electricity, transportation, drainage, and sewer upgrades within the area. Silvers’ plan worked and shortly the TIRZ was raking in millions, expanding to include all of Lamar Terrace Neighborhood, rapidly changing it to the upscale St. George Place neighborhood that exists today. In its first 10 years, the TIRZ generated $40 million in incremental taxes, most of which went directly towards improving the TIRZ. 

Combined with a lack of zoning laws, reinvestment zones give commercial owners outsized power in how local dollars are spent. Originally pitched as a way to transform downtrodden areas in desperate need of redevelopment, many of today’s TIRZ have established themselves as stewards of some of the state’s most valuable real estate. This led to allegations that a TIRZ is just a cash grab from commercial owners tired of forking over taxes that improve areas their assets aren’t in. But in a state defined by property tax collection, a collective organization designed to reinvest in an area is actually a way to expand municipal funding. That’s exactly what Houston is doing. 

Houston has made more use of TIRZ than any other city, now 27 different of them exist in the city covering 90 squares miles. Those TIRZ generate an additional $200 million in tax revenue annually, outside the city’s budget. That’s the key here. Houston’s finances have been hobbled by a state-imposed property tax revenue cap. No matter what the cities finances are like or how fast property values are appreciating in Houston, the city can only raise property taxes by a maximum amount every year. That’s left the city scrambling for funding as the area’s population explodes but its budget stays stagnate. The last few Houston mayors have struggled with high-profile disputes between the firefighter union, police, and other municipal employees over who gets a larger share of a pie piece that isn’t getting bigger. TIRZ funds are exempt from the revenue cap, allowing rapidly appreciating property values to generate additional tax revenue. In Houston, the TIRZ isn’t subverting funds, without it more than $200 million in annual tax revenue would not even exist. 

“The City Council has been trying to minimize the impact of the revenue cap by the utilization of the TIRZs, that just points to the structural inequity that exists. But you can only do that for so long without hurting the city as a whole,” Houston Mayor Sylvester Turner told the Houston Chronicle. “So I do think once the revenue cap is removed, then the necessity for the TIRZs is not nearly as great.”

It isn’t just Houston, across the state cities are working with property owners to establish TIRZ to manage the state’s robust growth. Texas’ population has grown by more than 4 million people over the last 10 years. Twenty-three U.S. states don’t even have a total population of 4 million. Frisco, Texas, is the poster child of explosive growth in the state. The most recent U.S. Census found Frisco is the nation’s fastest-growing city with a 71.1 percent population growth rate over the past decade. Frisco formed its first TIRZ in 1997, 713 acres of an undeveloped area bounded by some of the area’s most trafficked highways. That Tax Income Reinvestment Zones is now home to the third-largest mall in Texas, Dr. Pepper Ballpark, Dr. Pepper Arena, and many other commercial properties. The zone has generated tens of millions in additional tax revenue that the city has used to keep property taxes for families low and invest back into the community. The TIRZ also has an added benefit for the school district. Money generated by the TIRZ is not counted in the state’s Robin Hood formula that redistributes funds from richer school districts to poorer ones. That allows Frisco to keep an outsized portion of tax revenue to fuel further growth. Earlier this year Frisco moved to expanded TIRZ by 583 acres to include 3 golf courses nearby.  

In Texas, a TIRZ is akin to a public-private partnership. Private property owners can establish greater local control over an area, freeing some of the financial burdens of the city at large. More and more property owners and commercial developers are establishing TIRZ to help seal in some of an area’s prosperity. As Tax Income Reinvestment Zones proliferate, their purpose and mission have been clouded. Like any tool, a TIRZ can be used for good or evil. By and large, most throughout the state have improved and maintained their areas but they are not without drama. Tax Income Reinvestment Zones have faced accusations of improper development, favoring their own developments and projects at the expense of surrounding areas that have greater need. In heavily developed areas, a TIRZ is a way for the rich to get richer but that’s not always a bad thing if the TIRZ is reinvesting to facilitate growth. 

In a state defined by property taxes that are growing faster than any other, TIRZ has proven to be a useful tool for Texas to manage its growth. By working with commercial property owners and cutting them in on the success of the neighborhood through incremental tax revenue, municipalities are giving property owners additional equity in the prosperity and growth of urban areas. 

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