Can a Texas county use tax increment financing to fund energy-area road projects?

Plain-English summary

Webb County Attorney Marco Montemayor, on behalf of the county auditor, asked the Attorney General about the constitutionality of how a county energy transportation reinvestment zone (CETRZ) is funded. CETRZs were created by 2013's Senate Bill 1747, which added section 222.1071 to the Transportation Code. A county sets up a CETRZ by designating an area affected by oil and gas activity, creating a tax increment account, and fixing a base year for property values in the zone. As property values in the zone rise, the extra tax revenue above the base, the "tax increment," is captured and put into the account to pay for transportation projects, rather than going to the county's general fund. The central question was whether that mechanism runs afoul of article VIII, section 1(a) of the Texas Constitution, which requires ad valorem taxation to be equal and uniform.

The AG concluded it could be challenged. The office traced the issue back to a 1981 opinion that found a municipal tax-increment scheme invalid under the equal and uniform requirement, because dedicating the increment to a zone meant property inside the zone did not contribute the same share toward general government support as equal-value property outside it. Voters later amended the Constitution (article VIII, section 1-g(b)) to authorize cities and towns to use tax increment financing, curing the problem for them, but a proposed amendment to extend that authority to counties was defeated in 2011. A 2012 opinion had already concluded that a county's pledge of its tax increment to a transportation reinvestment zone would be subject to constitutional challenge because the enabling amendment did not cover counties. The AG reached the same conclusion here: absent a constitutional amendment, section 222.1071's authorization for counties to pledge tax increments to a CETRZ could be challenged under the equal and uniform provision.

The AG rejected two suggested workarounds. Pledging the increment to a road utility district instead of directly to the zone does not change the fact that the money is dedicated to a use other than the county's general support, so it does not fix the disparity. And the constitutional problem is not really about bonds: the earlier opinion's concern was the tax disparity caused by pledging the increment, with bonds merely being the financing method, so neither barring bonds nor adding a road utility district resolves the difference in tax treatment between property inside and outside the zone.

On the separate question of whether a county could put extra money from its general revenues into the tax increment account, the AG said no. A county has only the powers expressly granted or necessarily implied, and section 222.1071 specifies funding the account from taxes collected in the zone, not from general revenue. The AG also noted that committing general revenue beyond a single year would create unconstitutional county debt. So a county creating a CETRZ may not place general revenue funds into the tax increment account.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later Attorney General 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.

What the opinion meant for those who asked

County Attorney Montemayor and the Webb County Auditor (as the opinion described it): The opinion concluded that a county's use of tax increment financing to fund CETRZ transportation projects could be challenged under the equal and uniform taxation requirement of article VIII, section 1(a), and that a county may not put general revenue funds into the tax increment account. It described the suggested fixes (a road utility district or avoiding bonds) as not curing the constitutional concern.

Counties considering a CETRZ (as the opinion described it): The opinion described the equal and uniform problem as flowing from dedicating the tax increment to the zone rather than to general county support, described the cities-and-towns constitutional amendment as not extending to counties, and described the 2011 defeat of a county amendment, so it treated counties as exposed to challenge absent a constitutional amendment.

Public finance and bond professionals (as the opinion described it): The opinion described the constitutional issue as the tax disparity from pledging the increment, not the use of bonds, so it described prohibiting bonds or interposing a road utility district as insufficient to remedy the potential infirmity.

Common questions

Is county tax increment financing for road projects constitutional in Texas?
The AG concluded it could be subject to challenge. Dedicating the tax increment to a zone may violate the equal and uniform taxation requirement of article VIII, section 1(a), because property in the zone contributes less to general county support than equal-value property outside it.

Why can cities use tax increment financing but counties face a problem?
The AG explained that voters amended the Constitution (article VIII, section 1-g(b)) to authorize cities and towns to use tax increment financing, but a proposed amendment to extend that authority to counties was defeated in 2011, so counties lack the same constitutional cover.

Does running the money through a road utility district fix it?
No. The AG explained that pledging the increment to another entity for use in the zone does not change the fact that the increment is dedicated to a use other than the county's general support, so it does not resolve the disparity.

Is the problem that the county issues bonds?
No. The AG explained that the constitutional concern is the tax disparity caused by pledging the increment, and bonds are merely the financing method, so barring bonds does not cure the issue.

Can a county add its own general revenue to the tax increment account?
No. The AG concluded that section 222.1071 specifies funding the account from taxes collected in the zone, not from general revenue, and that committing general revenue beyond a year would be unconstitutional county debt.

Background and statutory framework

Senate Bill 1747 added section 222.1071 to the Transportation Code, letting a county create a CETRZ by designating an affected area to promote transportation infrastructure projects (Tex. Transp. Code Ann. § 222.1071(b)(1) (West Supp. 2013)), creating a tax increment account and base year (id. § 222.1071(f)(2)-(3); Tex. Att'y Gen. Op. No. GA-0549 (2007) at 2-3), paying the increment into the account (id. § 222.1071(h)), and using the funds for projects and grants from the transportation infrastructure fund (id. § 222.1071(i); id. §§ 256.101-.106). The equal and uniform requirement comes from article VIII, section 1(a) (Parker Cnty. v. Spindletop Oil & Gas Co., 628 S.W.2d 765, 767 (Tex. 1982)).

Earlier opinions found that tax increment financing diverts revenue from general support and creates a disparity between property inside and outside the zone (Tex. Att'y Gen. Op. No. MW-337 (1981) at 4-5), a concern the Constitution cured for cities and towns through article VIII, section 1-g(b) (Tex. Const. art. VIII, § 1-g(b); Tex. Att'y Gen. Op. Nos. JC-0152 (1999) at 5, JC-0141 (1999) at 3) but not for counties, whose proposed amendment voters rejected in 2011 (Tex. Att'y Gen. Op. No. GA-0981 (2012) at 3). Because GA-0981 had concluded that a county's pledge of its tax increment to a transportation reinvestment zone under section 222.107 would be subject to challenge (Tex. Transp. Code Ann. § 222.107(c) (West Supp. 2013)), the AG reached the same result for the CETRZ. The AG explained that pledging the increment to a road utility district does not change the dedication away from general support (id. §§ 222.1071(i)(5), 222.1071(n)), and that the problem is the tax disparity rather than the bonds (Tex. Att'y Gen. Op. No. GA-0514 (2007) at 7), noting that section 222.1071 also differs from section 222.107 on tax abatement and road-utility-district taxing (id. § 222.107(h)(2)-(3), (h-1), (i), (j)). On general revenue, a county has only its expressly granted or necessarily implied powers (City of San Antonio v. City of Boerne, 111 S.W.3d 22, 28 (Tex. 2003)), section 222.1071(h) specifies funding only from taxes collected in the zone, and committing general revenue beyond a year is unconstitutional debt (Tex. Const. art. XI, § 7; Stevenson v. Blake, 113 S.W.2d 525, 527 (Tex. 1938)).

Citations

Constitutional and statutory provisions:

• Tex. Const. art. VIII, § 1(a) (equal and uniform ad valorem taxation)
• Tex. Const. art. VIII, § 1-g(b) (tax increment financing for cities and towns)
• Tex. Const. art. XI, § 7 (county debt limitation)
• Tex. Transp. Code Ann. § 222.1071(b)(1) (West Supp. 2013) (creation of a CETRZ)
• Tex. Transp. Code Ann. § 222.1071(f)(2)-(3) (tax increment account and base year)
• Tex. Transp. Code Ann. § 222.1071(h) (West Supp. 2013) (funding the account from zone taxes)
• Tex. Transp. Code Ann. § 222.1071(i) (use of tax increment funds)
• Tex. Transp. Code Ann. § 222.1071(i)(5) (West Supp. 2013) (pledge to a road utility district)
• Tex. Transp. Code Ann. § 222.1071(n) (road utility district with CETRZ boundaries)
• Tex. Transp. Code Ann. §§ 256.101-.106 (Transportation Infrastructure Fund)
• Tex. Transp. Code Ann. § 222.107(c) (West Supp. 2013) (transportation reinvestment zone bonds)
• Tex. Transp. Code Ann. § 222.107(h)(2)-(3), (h-1), (i), (j) (West Supp. 2013) (TRZ tax abatement and road utility district taxing)

Cases:

• Parker Cnty. v. Spindletop Oil & Gas Co., 628 S.W.2d 765, 767 (Tex. 1982)
• City of San Antonio v. City of Boerne, 111 S.W.3d 22, 28 (Tex. 2003)
• Stevenson v. Blake, 113 S.W.2d 525, 527 (Tex. 1938)

Prior Attorney General opinions:

• Tex. Att'y Gen. Op. No. MW-337 (1981)
• Tex. Att'y Gen. Op. No. JC-0152 (1999)
• Tex. Att'y Gen. Op. No. JC-0141 (1999)
• Tex. Att'y Gen. Op. No. GA-0981 (2012)
• Tex. Att'y Gen. Op. No. GA-0549 (2007)
• Tex. Att'y Gen. Op. No. GA-0514 (2007)
• Tex. Att'y Gen. Op. No. GA-0953 (2012)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-1076
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2014/ga1076.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS
GREG ABBOTT

August 14, 2014

The Honorable Marco A. Montemayor Opinion No. GA-1076
Webb County Attorney
1110 Washington Street, Suite 301 Re: Constitutional questions related to funding
Laredo, Texas 78040 of County Energy Transportation Reinvestment
Zones (CETRZ) (RQ-1187-GA)

Dear Mr. Montemayor:

On behalf of the Webb County Auditor, your office inquires about recently enacted Senate Bill 1747, relating to county energy transportation reinvestment zones,[1] and asks whether the tax increment funding mechanism may be subject to challenge under article VIII, section 1(a) of the Texas Constitution, which requires ad valorem taxation to be equal and uniform. Request Letter at 1; Parker Cnty. v. Spindletop Oil & Gas Co., 628 S.W.2d 765, 767 (Tex. 1982).

Senate Bill 1747 adds section 222.1071 to the Transportation Code and authorizes the creation of a county energy transportation reinvestment zone ("CETRZ") to fund transportation improvements in areas affected by oil and gas exploration activities.[2] A county creates a CETRZ by designating an affected area, or zone, to promote one or more transportation infrastructure projects in the area. See TEX. TRANSP. CODE ANN. § 222.1071(b)(1) (West Supp. 2013). The order designating the zone must create a tax increment account and establish the ad valorem tax increment base year. See id. § 222.1071(f)(2)-(3); see Tex. Att'y Gen. Op. No. GA-0549 (2007) at 2-3 (explaining how tax base of total appraised property value in a zone is designated and that any increase in the tax revenue over taxes due on the base value-the tax increment-is captured and put into a separate fund). A county pays the tax increment, less specified amounts, into the tax increment account. See TEX. TRANSP. CODE ANN. § 222.1071(h) (West Supp. 2013). Tax increment funds may be used for infrastructure projects and to apply for grants from the state transportation infrastructure fund for zone infrastructure projects. See id. § 222.1071(i); see also id. §§ 256.101-.106 (providing for the Transportation Infrastructure Fund).

Your several questions about section 222.1071 are intricate and include multiple aspects. See Request Letter at 1-2. Yet, the fundamental issue common to the questions is the potential impact of the constitutional "equal and uniform" limitation on the CETRZ tax increment funding mechanism. See id. Despite the differing emphases of the questions, the analysis under the equal and uniform provision is the same so we consider them together.

Tax increment financing has been considered in previous attorney general opinions. We begin with Opinion MW-337. See Tex. Att'y Gen. Op. No. MW-337 (1981). Opinion MW-337 concluded that a statute authorizing a municipal tax increment scheme was invalid under the equal and uniform requirement absent an enabling constitutional amendment. See id. at 5. The opinion observed that because the tax increment revenue was dedicated to the reinvestment zone, it was not available for the general support of the municipality. Id. at 4-5. Opinion MW-337 distinguished the impact on property inside the reinvestment zone from the impact on property outside the reinvestment zone: "[A] parcel of property located in the tax incremental [zone] (if its value has been enhanced) will not pay the same amount or ratio of taxes for the general support of the city that will be paid by a parcel of equal value located outside the [zone]." Id. at 5.

Subsequent to Opinion MW-337, the voters adopted article VIII, section 1-g(b) of the Texas Constitution, which authorizes cities and towns to engage in tax increment financing. TEX. CONST. art. VIII, § 1-g(b); see Tex. Att'y Gen. Op. Nos. JC-0152 (1999) at 5 (characterizing section 1-g(b) as an exception to the equal and uniform requirement), JC-0141 (1999) at 3 (same). A proposed constitutional amendment to grant similar authority to counties was defeated by the voters in 2011. See Tex. Att'y Gen. Op. No. GA-0981 (2012) at 3 (noting rejection).

Opinion GA-0981 examined a similar provision, section 222.107 of the Transportation Code, which authorizes a county to create a transportation reinvestment zone ("TRZ") and to issue bonds to pay the costs of TRZ transportation projects. See Tex. Att'y Gen. Op. No. GA-0981 (2012) at 1; TEX. TRANSP. CODE ANN. § 222.107(c) (West Supp. 2013). As considered in the opinion, section 222.107 authorized a county to use the tax increment derived from the TRZ to secure the bonds. Tex. Att'y Gen. Op. No. GA-0981 (2012) at 1. This office concluded that a "county's issuance of tax increment financing bonds secured by a pledge of the county's ad valorem tax increment would be subject to constitutional challenge as violating the equal and uniform taxation requirements ... of the Texas Constitution." Id. at 3. Key to the determination of the disparate tax treatment under the equal and uniform provision in both opinions was the fact that the tax revenue from a portion of the value of property within the zone was diverted from the general support of the city or county due to the pledge of the tax increment.

As article VIII, section 1-g(b) remedied the equal and uniform concern for only cities and towns, a dispositive issue in Opinion GA-0981 was the fact that article VIII, section 1-g(b) did not include counties. See id. at 2 ("The ... amendment ... did not extend the Legislature's enabling authority to counties."). We conclude, as we did in Opinion GA-0981, that absent a constitutional amendment, section 222.1071's authorization for counties to pledge tax increments to the CETRZ could be subject to challenge under the equal and uniform provision.

Our conclusion is not altered by the fact that section 222.1071 authorizes a county to pledge the tax increment to a road utility district. See TEX. TRANSP. CODE ANN. §§ 222.1071(i)(5) (West Supp. 2013) (authorizing a county to pledge money in the tax increment account to a road utility district), 222.1071(n) (authorizing creation of road utility district with the same boundaries as the CETRZ); Request Letter at 2. Pledging the tax increment to another entity for use in the CETRZ does not change the fact that the tax increment is dedicated to a use other than the general support of the county. Your request letter suggests that the constitutional infirmity in section 222.107, at issue in Opinion GA-0981, was the fact that the tax increment secured county-issued bonds. See Request Letter at 2; see also Brief from James P. Allison, Cnty. Judges & Comm'rs Ass'n at 3-4 (Mar. 14, 2014) (on file with Op. Comm.) (asserting that subsection 222.1071(j) was enacted to address constitutional concern about county tax increments being used to service bond debt discussed in Opinion GA-0953).[3] Concern about a county's issuance of bonds misconstrues Opinion GA-0981. The issue in Opinion GA-0981 was the tax disparity caused by the pledge of the tax increment to the TRZ: the bonds were merely the authorized financing method. Cf. Tex. Att'y Gen. Op. No. GA-0514 (2007) at 7 (recognizing in municipal context that tax increment reinvestment zone improvements can be "financed with bond or note proceeds or by some other method"). Neither the prohibition of the use of bonds nor the involvement of a road utility district remedies the potential constitutional infirmity here because neither resolves the disparity between the tax treatment of property located in the CETRZ and property located outside of the CETRZ.[4]

In your remaining query, you ask in essence whether a county may fund the tax increment account with additional money from the county's general revenues. Request Letter at 2. A county has only that power expressly granted or necessarily implied therefrom. City of San Antonio v. City of Boerne, 111 S.W.3d 22, 28 (Tex. 2003). Subsection 222.1071(h) expressly provides that a county "may[,] from taxes collected on property in a zone, pay into the tax increment account for the zone an amount equal to the tax increment produced by the county less any amounts" specified. TEX. TRANSP. CODE ANN. § 222.1071(h) (West Supp. 2013). In this section, the Legislature's specified method of funding a CETRZ does not include funds from a county's general revenue. Moreover, while county revenue may be spent for a county public purpose, committing general revenue beyond a year is unconstitutional debt. See TEX. CONST. art. XI, § 7; Stevenson v. Blake, 113 S.W.2d 525, 527 (Tex. 1938) (defining "debt" by reference to satisfaction of pecuniary obligations "out of the current revenues for the year"). Accordingly, a county creating a CETRZ under section 222.1071 may not place county general revenue funds into the tax increment account.

SUMMARY

A county's use of tax increment financing to fund transportation projects in a county energy transportation reinvestment zone could be subject to challenge under the equal and uniform taxation requirement in article VIII, section 1(a) of the Texas Constitution.

A county creating a county energy transportation reinvestment zone under section 222.1071 of the Transportation Code may not place general revenue funds into the tax increment account.

Very truly yours,

GREG ABBOTT
Attorney General of Texas

DANIEL T. HODGE
First Assistant Attorney General

JAMES D. BLACKLOCK
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

Charlotte M. Harper
Assistant Attorney General, Opinion Committee

[1] See Letter from the office of Honorable Marco A. Montemayor, Webb Cnty. Att'y, to Honorable Greg Abbott, Tex. Att'y Gen. at 1 (Feb. 18, 2014), http://www.texasattorneygeneral.gov/opin ("Request Letter").

[2] See Act of May 26, 2013, 83rd Leg., R.S., ch. 1372, §§ 2, 7, 2013 Tex. Gen. Laws 3640, 3642-44, 3645 (providing that it prevails); see also Act of May 17, 2013, 83rd Leg., R.S., ch. 1134, § 1, 2013 Tex. Gen. Laws 2703-05.

[3] See Tex. Att'y Gen. Op. No. GA-0953 (2012) at 3; Tex. Att'y Gen. Op. No. GA-0981 (2012) at 2 n.2.

[4] Unlike section 222.107, section 222.1071 does not authorize a county to abate ad valorem taxes on property in the zone or authorize a conterminous road utility district to impose its own taxes in an amount equal to the abated tax. Cf. TEX. TRANSP. CODE ANN. § 222.107(h)(2)-(3), (h-1), (i), (j) (West Supp. 2013).