economy Economic Development

Six Steps to Approve a Tax Abatement Chapter 312

To approve a tax abatement, the following steps are required:

Step 1: Adopt Guidelines and Criteria

A local taxing unit must create guidelines and criteria regarding how local tax abatement agreements will be decided for both new and existing facilities/structures.

The governing body of a taxing unit must call a public hearing on the proposed guidelines. The guidelines and criteria are in effect for two years after adoption and can be modified with a three-fourths vote of the governing body.

The taxing unit must post the adopted guidelines and criteria on their website.

Step 2: Designate a Reinvestment Zone

The city or county governing body may designate an area as a reinvestment zone after the guidelines and criteria have been approved and a public hearing has been held.

1. Provide Notice of Public Hearing: Before a public hearing may be conducted, a city or county governing body must provide a seven-day notice in a newspaper that is in general circulation in the city or county in which the hearing will take place, as well as a seven-day written notice to other taxing units in the proposed area. Notice to other taxing units is considered delivered when addressed properly to the correct presiding officer for each taxing unit and mailed or sent via registered or certified mail with a return receipt received.
2. Hold a Public Hearing: A city or county governing body shall hold a public hearing to ascertain if the designated area qualifies as a reinvestment zone under Section 312.201 or Section 312.401, Tax Code. At the hearing, members of the public are permitted to speak and present support for or against the designation of the reinvestment zone.
3. Treatment of Enterprise Zones: An enterprise zone created under Chapter 2303, Government Code, is identified as a reinvestment zone pursuant to Sections 312.2011 and 312.4011, Tax Code.
4. Adoption of an Ordinance or Order: Once findings in favor of creating a zone have been made, a city ordinance or county order may be adopted by the governing body to designate the area as a reinvestment zone. The ordinance or order must describe the zone's boundaries and designate whether the zone is eligible for residential tax abatement, commercial-industrial tax abatement or tax increment financing. A reinvestment zone designation created under the Tax Abatement Act (i.e., Chapter 312, Tax Code) expires after five years and may be renewed for periods not to exceed five years.

Step 3: Statement of Abatement Eligibility

A taxing unit cannot enter into an abatement agreement until it adopts a resolution stating that the taxing unit elects to become eligible to participate in a tax abatement (Section 312.002(a), Tax Code). This action should be taken with plenty of lead time before the consideration and vote on an actual abatement agreement, so the public and other local taxing units with jurisdiction over the same property can consider approving an abatement to the same business that is working with the lead taxing unit.

Step 4: Public Notice

Once a taxing unit creates a reinvestment zone, there are three steps to implementing a tax abatement agreement.

1. Provide 30 Days Public Notice of Meeting: Section 312.207(d), Tax Code, requires at least 30 days public notice of the meeting on the approval of a tax abatement agreement. Notice should be provided in accordance with the Open Meetings Act. Among other requirements, the notice must contain:
   1. The property owner's name and the applicant's name in the agreement.
   2. The name and location of the reinvestment zone subject to the agreement.
   3. A general description of the nature of the improvements or repairs in the agreement.
   4. The estimated cost of the improvements or repairs.
2. Approval of Agreement at Public Hearing: By a majority vote, the governing body may approve a tax abatement agreement when it determines the agreement terms and property meet the pertinent guidelines and criteria governing tax abatement agreements.
3. Notice to Other Taxing Units and Agreement Execution: Before the agreement is executed, written notice to other taxing units and a copy of the proposed agreement are required to be sent at a minimum of seven days in advance. Notice is considered delivered when addressed properly to the correct presiding officer for each taxing unit and placed in the mail. Failure to deliver the notice does not affect the validity of the agreement. Other taxing units eligible under Section 312.002, Tax Code, may enter into a tax abatement agreement as described in Sections 312.206 and 312.402, Tax Code.

The tax abatement must be contingent on the property owner making specific improvements or repairs to the property, and only the increase in the value of the property may be exempted. The property owner may not exempt the real property's current value. The current value of real property is the taxable value of the real property and any fixed improvements as of Jan. 1 of the year in which the tax abatement agreement is executed.

Step 5: Entering into a Tax Abatement Agreement

When a reinvestment zone is created, the city or county governing body may enter into a tax abatement agreement with the property owners for a period not to exceed 10 years as set forth in Sections 312.204 and 312.402, Tax Code. Once the governing body authorizes the agreement at a regularly scheduled meeting, it may be enacted after giving notice to other taxing units.

Section 312.205(a), Tax Code, sets out seven prerequisites for a tax abatement agreement. The agreement must:

1. List the kind, number and location of all proposed improvements to the property.
2. Provide access to and authorize the taxing unit to inspect the property to ensure compliance with the agreement.
3. Limit the property's use consistent with the taxing unit's development goals.
4. Provide for recapturing property tax revenues that are lost if the owner fails to make the improvements or repairs as provided in the agreement.
5. Include each term that was agreed upon with the property owner.
6. Require the owner to annually certify compliance with the terms of the agreement to each taxing unit.
7. Allow the taxing unit to cancel or modify the agreement at any time if the property owner fails to comply with the terms of the agreement.

For example:

A business owns property valued at $500,000 as of Jan. 1 of the year the tax abatement agreement is executed. The business agrees to significantly enlarge the facility, increasing its valuation to $800,000. The taxing unit may abate from taxation up to $300,000 of the property value (the portion of the value that exceeds the base value of $500,000).

The agreement may also abate all or part of the value of tangible personal property the business brings onto the site after the execution of the agreement. A taxing unit may not abate the value of personal property that was already located on the real property before the agreement took effect. The abatement for personal property may not exceed 10 years. The percentage of the tax abatement for either real or personal property may not exceed the total increase in property value.

NOTE: Abated property could include tangible real property or personal property. However, whether a property is tangible real or personal property, there is some limited usage of tax abatements for purposes other than industrial or commercial projects, such as for residential area improvements and/or development.

Step 6: Mandatory Reports to the Comptroller's Office

The Comptroller's office maintains the central registry of all designated reinvestment zones and executed ad valorem tax abatement agreements under the Tax Abatement Act.

Refer to Post-abatement Valuation Reports and Reporting Requirements.

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