Getting ourselves in a TIRZ-Y: Texas, Taxes, and TIRZ

“Tax reform is when you take the taxes off things that have been taxed in the past and put taxes on things that haven’t been taxed before.” – Art Buchwald 

As always, Texas does it bigger, better, and different—including when it comes to city planning. Tax Increment Reinvestment Zones (TIRZ) only exist in Texas. City Councils create these ‘special’ zones to attract new investment in the area. 

Anyone who has casually flipped through a Texas business publication has seen this term; but what exactly does it mean? Fear not; we’re here to answer all your pressing TIRZ-related questions. 

How does a TIRZ work?

On its most basic level, a TIRZ is its own political subdivision, which captures the projected increase in property tax revenue that is created by re-development in an area defined for reinvestment/investment.[1] A TIRZ must have a justification founded on improving the economic situation of the TIRZ-creating body, and is used to reinvest funds into public improvements and developments that benefit the zone.[2] TIRZ funds can be used for a range of improvements, including roads, drainage, utilities, street lights, sidewalks, and parks.[3]

So, what’s this look like practically? The City and a developer form a partnership through the TIRZ to reinvest a pre-determined amount of the increased property tax revenues associated with the developer’s project back into the development area for a specified time. Simply put, a developer will front money to build in an area and the TIRZ pays them back as the area’s tax base grows.

For example, the City could create a TIRZ in a mostly undeveloped area that has about $1 million in assessed value (it’s always good for a TIRZ to pick a bad year as its base level when the property and sales taxes are not particularly good). A developer may present a proposal to build infrastructure that would help increased that area’s assessed value to $60 million over a period of 20 years. The TIRZ would then reflect the development in that area and guarantee that 50% of the City’s share of the property taxes that were collected due to the increased assessed value within the TIRZ would be reinvested into capital improvements in that area.

TIRZ expenses are restricted to building capital assets and can be limited in terms of the total amount and duration.[4] When the TIRZ comes to the end of its term, all property tax revenues are then directed back to the City.[5]

Why create a TIRZ?

A TIRZ is created to attract new investments to areas that need revitalization through Tax Increment Financing (TIF).[6] TIF is a type of financing that local governments can use to pay for improvements to help bring investments into an area by redirecting some of the ad valorem tax from the property within the TIRZ to pay for improvements.

A TIRZ provides a way for cities to build much needed public infrastructure. Through this type of funding, private development is encouraged, and the cost of building is reduced. One of the major advantages is that the funding does not come from the existing tax base. TIRZ monies are a direct result of economic expansion. So it makes sense that developing a TIRZ is an increasingly popular way to develop an area based on its potential value.

What are the benefits of a TIRZ?

Many municipalities find a TIRZ appealing, because it:

1. Does not affect revenue currently going to the general fund of the City;

2. Allows for reinvestment of tax funds in those areas which created the funds;

3. Creates an opportunity to include other taxing jurisdictions in providing the tax incentives used for new public infrastructure and revitalization efforts;

4. Captures only taxes on real property—not business, personal property, inventory, sales taxes, and the undedicated portion of real property—leaving those revenues available to support any increase in general budget costs;

5. Does not involve forgiveness of taxes;

6. Lessens the cost of private development by providing reimbursement for qualified public improvements; and

7. Builds needed public infrastructure in areas lacking sufficient improvement to draw businesses.

Are there any disadvantages to a TIRZ?

Like everything in this life, there are downsides. For a TIRZ, these include:

1. Real property taxes, above and beyond your “base tax value” number, go into the TIRZ; and

2. The City has to pay for support services, such as the police and fire departments, out of its general fund.

To view the Tax Increment Financing Act directly, please visit https://statutes.capitol.texas.gov/Docs/TX/htm/TX.311.htm.

Additionally, the Texas Comptroller provides information on Tax Increment Reinvestment Zone creation in Texas at https://comptroller.texas.gov/economy/local/ch311/.

[1] Tex. Tax Code § 311.012(c).

[2] Id. at § 311.003(a).

[3] Id. at § 311.008(b)(4).

[4] Id. at § 311.011(a).

[5] Id. at § 311.017.

[6] Id. at §§ 311.001(a), 311.005.

Cobb & Johns are Special Forces for Complex Property and Government Disputes.