Chapter 311 of the Texas Tax Code, known as the Tax Increment Financing Act, lets a Texas city or county target an area for redevelopment, freeze its property tax base at current levels, and channel the property tax revenue generated by any future increase in value into a dedicated fund that pays for public improvements in that area.1Justia. Texas Tax Code Chapter 311 – Tax Increment Financing Act The area is called a reinvestment zone. The captured revenue can pay for infrastructure, demolition, environmental cleanup, affordable housing, and similar costs that private developers usually will not cover on their own.
What Qualifies an Area as a Reinvestment Zone
Section 311.005 gives an area four ways to qualify. Most zones use the first: the local government must show that conditions in the area are holding back the municipality or county, dragging down public health, safety, or welfare, because of problems like deteriorating structures, defective sidewalks, unsafe conditions, faulty lot layouts, or tax delinquency exceeding the land’s fair value.2State of Texas. Texas Tax Code Section 311.005 – Criteria for Reinvestment Zone In municipalities of 100,000 or more, non-residential structures where less than 10 percent of the square footage has been used for commercial, industrial, or residential purposes over the past 12 years also qualify.
The second path covers predominantly open or undeveloped land whose outdated platting or deteriorated site improvements are blocking sound growth. The third path applies to areas inside or immediately adjacent to a federally assisted new community.
The fourth path is a petition process. If property owners holding at least 50 percent of the appraised value in a proposed area petition the governing body, the area can be designated without any blight or underdevelopment finding.2State of Texas. Texas Tax Code Section 311.005 – Criteria for Reinvestment Zone Petition-created zones follow their own rules elsewhere in Chapter 311, including exemption from the residential cap discussed below.
A separate provision allows a municipality to designate a zone for land used for a regional commuter or mass transit rail system, regardless of blight or underdevelopment.
Size and Residential Limits
Section 311.006 puts hard limits on how much of a city can sit inside reinvestment zones. A municipality cannot designate a new zone if more than 30 percent of the property in the proposed area, excluding publicly owned land, is used for residential purposes. Residential means property occupied by a house with fewer than five living units, valued by the most recent appraisal rolls.3State of Texas. Texas Tax Code Section 311.006 – Restrictions on Composition of Reinvestment Zone Petition-designated zones are exempt from this cap.
There is also a citywide ceiling. In municipalities of 100,000 or more, the total appraised value of real property across all reinvestment zones cannot exceed 25 percent of the total appraised value of taxable real property in the municipality and its industrial districts. For cities under 100,000, the ceiling rises to 50 percent. A municipality cannot expand an existing zone in a way that pushes past those limits either.
Steps to Create a Zone
Before adopting the ordinance or order, the governing body has to make a specific finding: the proposed development or redevelopment would not occur solely through private investment in the reasonably foreseeable future.4State of Texas. Texas Tax Code 311.003 – Procedure for Creating Reinvestment Zone This is the “but-for” finding, and it is the statutory gatekeeper. If private money alone would do the job, the zone fails at the threshold. The municipality or county must also prepare a preliminary reinvestment zone financing plan before the vote.
A public hearing follows. Anyone can speak for or against the zone, its boundaries, or tax increment financing generally. Notice must run in a newspaper of general circulation no later than seven days before the hearing, and property owners must be given a reasonable opportunity to protest inclusion. After the hearing, a municipality adopts an ordinance and a county adopts an order, each designating the zone and setting a termination date. A municipality can designate areas inside its corporate limits, in its extraterritorial jurisdiction, or both, and a later annexation of property already in the zone does not disturb the designation.
How the Tax Increment Is Calculated
The math starts with a baseline. In the year a zone is designated, the total taxable value of real property in the zone becomes the tax increment base. In each later year, the county appraisal district determines the current total taxable value of real property in the zone. The difference between the current value and the base is the captured appraised value.5State of Texas. Texas Tax Code Section 311.012 – Determination of Amount of Tax Increment
Each participating taxing unit then multiplies its own tax rate by the captured appraised value. That product is the tax increment, the additional revenue attributable to growth in the zone. If the zone is later expanded, the base adjusts upward using the new property’s value in the year it was added. If property is removed, the base drops accordingly.
The taxing units collect property taxes in the zone the way they collect them anywhere else, then pay their tax increment into the zone’s dedicated fund. Two amounts can be subtracted: any taxes already owed to another political subdivision under a contract predating the zone, and, for taxing units other than the municipality that created the zone, up to 15 percent of the increment retained by the unit if the financing plan allows.6State of Texas. Texas Tax Code Section 311.013 – Collection and Deposit of Tax Increments
Who Actually Pays In
This part surprises people. A taxing unit other than the municipality or county that created the zone, such as a school district or water district, is not required to contribute any of its tax increment unless it voluntarily signs an agreement with the creating government.6State of Texas. Texas Tax Code Section 311.013 – Collection and Deposit of Tax Increments The agreement can be signed before or after the zone is designated. It must specify the portion of the increment to be paid and the years covered, and it can earmark the contribution for specific projects. It can even let the unit use a later base year than the zone’s original base.
The practical effect: a financing plan may project revenue from every taxing unit that levies on property in the zone, but if a unit declines to participate the fund receives significantly less than projected. Negotiating those participation agreements is often where the real political work of a reinvestment zone happens.
The Board of Directors
Every zone has a board of directors. Under Section 311.009, the standard board has between 5 and 15 members, though the number can exceed 15 if needed to give a seat to every participating taxing unit. Each unit that levies property taxes in the zone and has agreed to pay its increment into the fund may appoint one member.7State of Texas. Texas Tax Code Section 311.009 – Composition of Board of Directors Terms run two years and may be staggered. Eligibility rules differ for city-created and county-created zones and turn on residency, voter status, age, and property ownership inside the zone.
The board’s role is largely advisory. The governing body can delegate management of the zone and implementation of the project plan, but four powers stay with the elected body no matter what: the board cannot issue bonds, impose taxes or fees, exercise eminent domain, or give final approval to the project plan.8State of Texas. Texas Tax Code 311.010 – Powers of Board of Directors
Project and Financing Plans
Once the zone exists and the board is seated, the board prepares two documents and submits them to the governing body. A preliminary financing plan comes together earlier, before the zone is created, but the full plans come after.9State of Texas. Texas Tax Code Section 311.011 – Project and Financing Plans
The project plan describes existing uses and conditions of real property in the zone with a map, sets out proposed future uses, lists any proposed changes to zoning ordinances, the master plan, building codes, or subdivision rules, estimates non-project costs, and explains how anyone displaced will be relocated.
The financing plan is more granular. It has to include an economic feasibility study, a detailed list of estimated project costs including administrative expenses, the estimated bonded indebtedness, the expected sources of revenue broken down by each taxing unit’s projected percentage contribution, the total duration of the zone, and a projection of captured appraised value for every year the zone will run.
When a Zone Ends
A reinvestment zone terminates on whichever comes first: the termination date set in the original ordinance or order (or a later date adopted under Section 311.007), or the date all project costs, bonds, interest, and other obligations have been fully paid.10State of Texas. Texas Tax Code Section 311.017 – Termination of Reinvestment Zone
A taxing unit other than the creator is not required to keep paying its increment past the original termination date unless it separately agrees to do so. The creating city or county can also end the zone early by depositing enough money with a trustee or escrow agent to cover all outstanding bonds, interest, and other amounts.
Federal Tax Rules on TIF Bonds
Chapter 311 governs the state-side mechanics, but bonds backed by tax increment revenue also have to satisfy federal tax law if the issuer wants the interest to be tax-exempt. Under IRC Section 103, the interest can be excluded from federal income tax only if the bonds qualify as governmental bonds rather than private activity bonds. The IRS applies a private business use test and a private security and payment test under IRC Section 141(b). If the bond-financed improvements disproportionately benefit private businesses, the bonds may fail those tests and lose tax-exempt status.11Internal Revenue Service. Tax-Exempt Private Activity Bonds
Federal arbitrage rules apply throughout the life of the bonds. If bond proceeds are invested at a yield materially higher than the yield on the bonds, the excess earnings generally must be rebated to the U.S. Treasury. Failure to comply with arbitrage or yield restriction requirements can jeopardize the bonds’ tax-exempt status entirely.12Internal Revenue Service. Complying with Arbitrage Requirements – A Guide for Issuers of Tax-Exempt Bonds These rules apply regardless of anything in Chapter 311, and an issuer that discovers a violation may need to use the IRS’s Voluntary Closing Agreement Program to fix it.