Can a Texas city cut a sales tax that is paying off its development corporation's bonds?

Plain-English summary

The Executive Director of the Texas Department of Commerce asked about two 1991 amendments to section 4A of the Development Corporation Act. Section 4A lets certain cities hold an election to levy a small sales and use tax (one-eighth up to one-half percent) for the benefit of an industrial development corporation the city creates, and the proceeds can be used to pay the principal and interest on the corporation's bonds. The new amendments, subsections (n) and (o), let a city call a later election to reduce the tax rate, or to limit how long the tax is collected. The question was whether such a reduction could be applied to bonds the corporation had already issued.

The Attorney General split the question by when the bonds were issued. For bonds sold before the amendments took effect on May 24, 1991, the answer was a clear no. When a statute authorizing a bond issue creates a particular fund to pay the bonds, those provisions become part of the contract between the issuer and the bondholders, and later legislation cannot repeal or limit that funding mechanism without substituting one of equal effectiveness. Buyers of these bonds had relied in good faith on the statutory promise that a set tax rate secured them, and the original statute made no provision for cutting the tax. So a later law purporting to allow a reduction could not reach those bonds, because doing so would impair the obligation of the contract under article I, section 10 of the U.S. Constitution and article I, section 16 of the Texas Constitution.

For bonds issued after the effective date, the analysis was closer but reached the same result. Buyers of those bonds are generally charged with knowing the law in effect when the bonds issue, including subsections (n) and (o), so in theory they bought knowing the rate could later be reduced. But the opinion drew on Attorney General Opinion DM-31 (1991) to explain that the controlling event is not the statute that authorizes a reduction, it is the later action that actually carries it out. The crucial date is the date of the rollback election. Before that election, only the potential for a reduction exists, and bond purchasers should not be required to speculate about future tax rates. If subsections (n) and (o) applied to every bond issued after May 24, 1991, purchasers would have to make exactly those speculations, the bonds likely could not be sold, and the whole section 4A financing scheme would be defeated. Because the Legislature could have repealed section 4A outright if that was its goal, the AG would not read the amendments to scuttle the scheme indirectly. The opinion held that a rate reduction, or a limit on how long the tax is collected, may not be applied to any bonds issued before the date of the rollback election.

Currency note

This opinion was issued in 1992. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The Development Corporation Act has since been recodified into the Texas Local Government Code (the article 5190.6 section 4A sales tax is now generally found in the Type A economic development corporation provisions), so the section numbers used here no longer match current law. Confirm the present statute before relying on anything described here.

Background and statutory framework

Section 4A of article 5190.6, V.T.C.S., the Development Corporation Act of 1979, authorized a covered city to call an election to levy a sales and use tax at a rate of one-eighth, one-fourth, three-eighths, or one-half percent for the benefit of an industrial development corporation created by the city. Proceeds "may be used to pay the principal of, interest on, and other costs relating to the corporation's bonds." V.T.C.S. art. 5190.6, § 4A(f). The 1991 amendments at issue were subsections (n) and (o), enacted as part of House Bill 916, Acts 1991, 72d Leg., ch. 184, effective May 24, 1991. Under those subsections a city could call a subsequent election to reduce or increase the rate in one-eighth-percent increments, between a one-eighth-percent minimum and a one-half-percent maximum, on a majority vote (with a petition mechanism for forcing the election), or to limit the length of time the tax may be imposed. The request asked whether the reduction provisions could be applied to bonds previously issued by the corporation.

For bonds issued before the May 24, 1991 effective date, the opinion applied the Contract Clauses of article I, section 10 of the U.S. Constitution and article I, section 16 of the Texas Constitution, which prohibit any law impairing the obligation of contracts. In City of Aransas Pass v. Keeling, 247 S.W. 818 (Tex. 1923), the Texas Supreme Court held that where a legislative act authorizing a bond issue creates, or authorizes the creation of, a particular fund for paying the bonds, those statutory provisions become part of the contract between the debtor and the bondholders, so they cannot be repealed or limited by later legislation without substituting a funding mechanism of equal efficacy; any such limiting legislation "would impair the obligation of the contract, and therefore, come under constitutional condemnation." Purchasers before May 24, 1991 had relied in good faith on the statutory representation that their bonds were secured by a particular sales tax rate, and the statute made no provision for reducing that tax, so the later amendments were ineffective to reduce or limit it as to those bonds.

For bonds issued after the effective date, the opinion started from the established rule that the laws in effect when bonds are issued become part of the contract between the bondholders and the issuing authority. Bankers Life Co. v. Breckenridge Independent School District, 97 S.W.2d 933, 937 (Tex. 1936); see also Dallas County Levee Improvement Dist. No. 6 v. Rugel, 36 S.W.2d 188, 189-90 (Tex. Comm'n App. 1931, holding approved). Potential purchasers of bonds issued after May 24, 1991 were therefore deemed aware that the tax rate then in effect was subject to reduction or restriction by a later election. But the opinion did not stop there. In Attorney General Opinion DM-31 (1991), the office had recognized that despite the general principle that the law existing when a contract is made becomes part of it, subsequent action might still constitute an impairment. DM-31 involved a city that, after a referendum, granted a $50,000 homestead exemption to disabled or elderly resident taxpayers, after having pledged its ad valorem tax revenues to repay bonds; a statute required the assessor-collector to disregard the increased exemption if granting it would impair bonds the city had already pledged its taxes to support. DM-31 concluded the exemption could not validly be granted if doing so would impair the city's pre-existing contractual obligations to bondholders, even though the exemption had not been granted when the bonds issued and only the authorizing legislation existed at that time.

Applying that reasoning, the opinion identified the crucial date as the date of the rollback election, not the statute authorizing the reduction. Before the rollback election, only the potential for a tax reduction or limitation existed, and purchasers of a political subdivision's bonds should not be required to speculate about future tax rates. If subsections (n) and (o) were read to apply to all bonds issued after May 24, 1991, bond purchasers would be forced into exactly that speculation, and the bonds in all likelihood could not be sold, rendering the entire section 4A scheme ineffectual. Since the Legislature could have abrogated the section 4A mechanism directly by repealing it, the opinion declined to attribute to the Legislature an intent to scuttle that mechanism by circuitous means. It held that a reduction in the sales tax rate, or a limitation on the time the tax may be collected, may not be applied to any bonds issued before the date of a rollback election.

Common questions

Can a Texas city undo a development sales tax once bonds are out?
Under this opinion, not for bonds already issued. The Attorney General concluded that a rollback election reducing the section 4A sales tax, or limiting how long it is collected, cannot be applied to any bonds the development corporation issued before the date of that election.

Does it matter whether the bonds were sold before or after the 1991 amendments?
Both were protected, for related reasons. Bonds issued before the May 24, 1991 amendments were protected by the Contract Clause because the tax securing them was part of the bond contract. Bonds issued afterward were protected because the controlling date is the rollback election, and a reduction cannot reach bonds sold before that election.

Why couldn't the later tax cut reach bonds sold after the amendment passed?
The opinion reasoned that if every post-amendment bond were exposed to a future rate cut, buyers would have to guess at future tax rates and the bonds likely could not be sold at all, which would defeat the whole section 4A financing scheme. The AG would not read the amendments to gut the scheme indirectly when the Legislature could have repealed it outright.

What was the key date the opinion pointed to?
The date of the rollback election. Before that election, only the possibility of a reduction existed; the opinion said bond purchasers should not have to speculate about tax rates that had not yet been changed.

Citations

• V.T.C.S. art. 5190.6, § 4A(d), (f), (m), (n), (o) (Development Corporation Act of 1979)
• H.B. 916, Acts 1991, 72d Leg., ch. 184, effective May 24, 1991
• U.S. Const. art. I, § 10
• Tex. Const. art. I, § 16
• City of Aransas Pass v. Keeling, 247 S.W. 818 (Tex. 1923)
• Bankers Life Co. v. Breckenridge Independent School District, 97 S.W.2d 933, 937 (Tex. 1936)
• Dallas County Levee Improvement Dist. No. 6 v. Rugel, 36 S.W.2d 188, 189-90 (Tex. Comm'n App. 1931, holding approved)
• Attorney General Opinion DM-31 (1991)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0137
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1992/dm0137.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, and several case names and citations were degraded in the scan; they are corrected here against the reporter citations. The linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

July 8, 1992

Ms. Cathy Bonner
Executive Director
Texas Department of Commerce
P. O. Box 12728
Austin, Texas 78711-2728

Opinion No. DM-137

Re: Whether a municipality which has levied a sales tax under subsection 4A(d), article 5190.6, V.T.C.S., may reduce or eliminate the tax after issuance of the bonds for which the tax was levied (RQ-383)

Dear Ms. Bonner:

You have requested our opinion regarding the constitutionality of two recent amendments to section 4A of article 5190.6, V.T.C.S., the Development Corporation Act of 1979. Section 4A authorizes a city covered by its provisions to call an election to levy a sales and use tax, at a rate of one-eighth, one-fourth, three-eighths, or one-half percent, for the benefit of an industrial development corporation created by the city. Proceeds from such tax "may be used to pay the principal of, interest on, and other costs relating to the corporation's bonds." V.T.C.S. art. 5190.6, § 4A(f). Pursuant to the recent amendments, a city may call a subsequent election to reduce or increase the rate of the sales and use tax "in one or more increments" up to a maximum of one-half percent and down to a minimum of one-eighth percent, or to "limit the length of time that a sales and use tax may be imposed."

[Footnote: The amendments in question, denominated as subsections (n) and (o) of section 4A, were enacted as part of House Bill 916, Acts 1991, 72d Leg., ch. 184, at 802-8, effective May 24, 1991.]

[Footnote: Subsection (o) provides: In a city in which a sales and use tax for the benefit of a corporation has been imposed under this section, in the same manner and by the same procedure the city by majority vote of the qualified voters of the city voting at an election called and held for the purpose may reduce or increase the tax. The rate may be reduced in one or more increments of one-eighth of one percent to a minimum of one-eighth of one percent or increased in one or more increments of one-eighth of one percent to a maximum of one-half of one percent. On petition of 10 percent or more of the registered voters of the city requesting an election on the increase or decrease of the tax under this section, the governing body of the city shall order an election on the issue. The ballot shall be printed in the same manner as the ballot under Subsection (m) of this section.]

You ask whether the reduction provisions of subsections (n) and (o) may be applied to bonds which were previously issued by the corporation.

We will first address this question with respect to bonds issued prior to the effective date of the statute, May 24, 1991. As to such bonds, it is clear that article I, section 10 of the United States Constitution, and article I, section 16 of the Texas Constitution, which prohibit the enactment of any law impairing the obligation of contracts, act to preclude any reduction in the tax rate or any limitation of the time during which the tax may be imposed. In City of Aransas Pass v. Keeling, 247 S.W. 818 (Tex. 1923), the Texas Supreme Court said that, where a legislative act authorizing a bond issue creates, or authorizes the creation of, a particular fund for payment of bonds, those statutory provisions become a part of the contract between the debtor and the bondholders, so that they cannot be repealed or limited by subsequent legislation without the substitution of a funding mechanism of equal efficacy. Any subsequent limiting legislation "would impair the obligation of the contract, and therefore, come under constitutional condemnation." City of Aransas Pass, 247 S.W. at 821.

In the situation you present, purchasers of bonds prior to May 24, 1991, acted in good faith reliance on the statutory representations that their bonds were secured by a particular sales tax rate. The statute made no provision for reducing or otherwise limiting that tax. As a result, subsequent legislation which purports to permit the reduction or other limitation of that tax is ineffective to do so, because such alteration would impair the obligation of the contract between the city and such bondholders.

Your question must also be addressed with regard to those bonds issued subsequent to the effective date of the statute. It is well established that the laws in effect at the time of a bond issue become a part of the contract between the bondholders and the issuing authority. Bankers Life Co. v. Breckenridge Indep. School Dist., 97 S.W.2d 933, 937 (Tex. 1936); see also Dallas County Levee Improvement Dist. No. 6 v. Rugel, 36 S.W.2d 188, 189-90 (Tex. Comm'n App. 1931, holding approved). Thus, as to any bonds issued after May 24, 1991, potential purchasers must be deemed to have been aware of the provisions of subsections (n) and (o), i.e., that the tax rate then in effect was subject to reduction or other restrictions by a subsequent election.

This does not end our inquiry, however. In Attorney General Opinion DM-31 (1991), we recognized that, despite the general principle that the law existing when a contract is made becomes a part of the contract, subsequent action might constitute an impairment. In that opinion, we considered a situation in which a municipality, after a referendum vote, granted a $50,000 homestead exemption to resident taxpayers who were either disabled or at least 65 years of age. Prior to the referendum, the city had pledged its ad valorem tax revenues for the repayment of bonds. A statute required the assessor-collector to disregard the increased exemption if (1) prior to the granting of exemption, the city had pledged its taxes in support of bonds, and (2) granting the exemption would impair those bonds. The opinion concluded that the homestead exemption could not "validly be granted if doing so would impair the city's ability to fulfill its pre-existing contractual obligations to bondholders." Although the actual exemption had not been granted at the time the bonds were issued, legislation existed which authorized the city to confer the exemption.

Thus, the crucial date in Attorney General Opinion DM-31 was not the statute authorizing the ordinance granting the exemption, but the adoption of the ordinance granting the increased exemption, and any bonds issued prior to that date had the protection of the contract clause. Analogously, the crucial date in the situation you pose is the date of the rollback election. Prior to that time, only the potential for a tax reduction or limitation existed. Purchasers of the bonds of a political subdivision should not be required to speculate as to future tax rates.

In the event that subsections (n) and (o) were made applicable to all bonds issued after May 24, 1991, bond purchasers would necessarily be obliged to engage in such speculations. As a consequence, the bonds could not in all likelihood be sold. To read subsections (n) and (o) as applicable to all bonds issued after the effective date of the statute would render ineffectual the entire scheme of section 4A. Since the legislature, had it wished to abrogate the statutory mechanism of section 4A, could have done so directly by repealing it, we are not willing to attribute to the legislature an intent to scuttle that mechanism by circuitous means. We hold, therefore, that a reduction in the sales tax rate, or a limitation on the amount of time the tax may be collected, may not be applied to any bonds issued prior to the date of a rollback election.

                               SUMMARY

      Where, pursuant to subsections (n) and (o) of section 4A, article 5190.6, V.T.C.S., an election is held to reduce the sales and use tax rate collected by a municipality on behalf of an industrial development corporation, or to limit the length of time during which the tax may be collected, such reduction or limitation may not be applied to any bonds issued prior to the date of the election.

                                            DAN MORALES
                                            Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Assistant Attorney General

RENEA HICKS
Special Assistant Attorney General

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Rick Gilpin
Assistant Attorney General