Published Online: March 12, 1997

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Texas Lawmakers Ask If School Taxes Should Be Negotiable

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Austin, Texas

Thanks to a state economy that has gone from humming to hurting to humming again, the language of economic development is a familiar part of Texans' parlance.

Whether the subject is tax incentives, their role in economic growth, or their effect on schools, the question is more likely to draw a debate than a blank stare here.

Are tax breaks necessary or unnecessary? Costly or cost-effective? Good or bad?

Those kinds of questions have been batted around more than usual since last August when the state legislature released a report saying that the property-tax abatements that cities, counties, and school districts grant to businesses are costing schoolchildren plenty.

According to the report, 186 of the state's 1,043 districts approved property-tax exemptions to companies since 1985. In the 10 years that followed, the districts that awarded the tax breaks lost $480 million.

The report went on to argue that the majority of schools never really profit from the new jobs or general prosperity created by companies that negotiate property-tax breaks.

"School districts are giving up millions of needed dollars to attract business," said David Sibley, the chairman of the state Senate's economic-development committee, which published the report. "Schools struggling to meet their budget should not be forced to forgo tax revenue that could be spent on supplies, teacher salaries, and other needs."

School tax abatements were intended as a tool to help generate business during the state's economic drought of the 1980s, when oil prices plunged.

But that purpose, according to the Republican senator, has run its course. While the abatements are understandably popular with corporate bosses, he said, they may not be necessary to lure jobs.

Today, Sen. Sibley explained, the Texas economy is strong and diverse, and the coveted high-tech companies that dot the landscape prefer good schools that turn out skilled employees to a few million dollars in tax breaks.

It is time, he and others argue, for the state to close its school-tax depleting loopholes and let its good schools--not its tax breaks--be its selling point.

Replacement Funds Dry Up

Texas schools' troubles with tax abatements have ballooned since 1993. Before then, the state would repay districts for property taxes they lost to corporate tax deals.

Just before lawmakers stopped replacing lost funds, San Antonio officials granted the HEB Butt Grocery Co., one of the area's largest employers, a nine-year property-tax abatement estimated to cost schools and local agencies $888,050, according to records from the state comptroller's office.

For that deal, Texas will reimburse the San Antonio Independent School District for all the losses over the nine-year pact.

The state is paying schools about $119 million a year to pay for old property tax agreements, according to the legislative budget board.

Since the 1993 law, that safety net is gone. And the school funding changes go even further. They require that all property, even property that wasn't being taxed because of abatements, be included when school districts calculate their total taxable property value--calculations used to determine how much state money each district receives.

The law is meant to discourage abatements--when districts' property values go up, state aid becomes less generous.

Of course, civic officials and corporate prospects have found a way around calling a tax deal an outright tax deal. State tax law still permits localities to take property off the tax rolls by leasing land or facilities to businesses and claiming a "public use."

In Fort Worth, the city is technically leasing the $110 million, 160,000-seat site to the proprietors of the new Texas International Speedway. The track, opening next month to host its first major stock car race, will be exempt from paying any property taxes even though it is expected to turn a huge profit.

"This is a bad way for the state and localities to do business," said Buck Wood, a school finance lawyer in Austin who supports a ban on school tax abatements. "Texas is a low-tax state. We've got some good schools, a good quality of life. We don't have to give it all away."

He is trying to make the case for legislation that makes public-use exemptions harder to get.

Bending to Peer Pressure

Tax deals are a two-way street. While they are sought by businesses, they are granted by the local officials whose agencies then suffer.

Technically, Texas law gives school districts the right to refuse abatement plans drawn up by cities or counties. And many school officials say they are well aware of the financial losses that tax abatements cause schools. But lobbying from local officials, business leaders, and constituents makes it hard not to grant them.

"The pressure to go along with these plans is enormous," said James Crow, the executive director of the Texas Association of School Boards. "It's been a problem for years. There's pressure from local officials who have much less to lose, constant phone calls from constituents ... we've even heard of death threats."

Mr. Crow said that the school boards' group, usually "a staunch advocate of local control," is supporting the plan backed by Sen. Sibley to ban tax abatements that would affect school budgets.

Louann H. Martinez, the governmental relations director for the Texas Association of School Administrators, said superintendents see the issue the same way.

"Nothing's worse than having the city and county and all the people excited about a deal and schools saying, 'We don't want it,'" Ms. Martinez said.

A recent survey by the administrators' group found that 82 percent of its members support a legislative ban.

Even in school districts that don't grant tax breaks, officials say they see the effect, since the loss of taxable property affects the overall pool of money available to the state's schools.

"These deals raise state and local taxes for the average taxpayer and take away from the whole state pot, which has been declining anyway," said Mike Jolly, the business manager for the Round Rock Independent School District outside Austin. "The time has come to do away with them."

Does Money Matter?

So why not just say that schools' money is off the table?

Built on the premise that good schools are a bigger attraction than lower taxes, Mr. Sibley's bill would do just that: ban school tax abatements. He is opposed here, however, by business leaders and economic-development officials.

Business lobbyists concede that tax abatements are a problem for school districts, but they take issue with Mr. Sibley's notion that the breaks are an irrelevant sweetener. Limiting tax breaks for businesses, they argue, could undermine the state's ability to attract, add, and keep jobs.

"It comes down to what's good for education versus what's good for the economy. But things aren't that simple," said Bob Kamm, the senior vice president for governmental affairs for the Texas Association of Business and Chambers of Commerce.

Rather than a ban, the business group supports "exploring alternatives": increasing state incentive funds or revising the school funding formula so it is not so reliant on property taxes.

But officials do not have many options.

Texas is one of the few states without an income tax, and resistance to enacting one makes property taxes a prime source of government funding. Many Texas schools have raised tax rates to near the state-imposed limit, so officials are forced to re-examine loopholes and abatements.

Mr. Sibley said that while businesses have come to expect a property-tax break in exchange for jobs, executives actually rank it as a minor reason for choosing a location. The senator, a lawyer and former oral surgeon, cites a 1994 survey of corporate executives which found that tax incentives ranked 14th of 17 factors a company considers when relocating or expanding.

Red Bird Mall, one of Dallas' largest shopping centers, received a $12 million break on local taxes between 1995 and 2006. William H. Ritterling, a mall official who helped negotiate the deal, called the abatement offer "completely important" to going ahead with an expansion.

Eventually, he said, more business at the mall should help everyone, including the Dallas schools. "It was a bottom line decision," Mr. Ritterling said. "We knew this [abatement program] meant a major revenue loss for schools initially."

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