Texas Sales Tax-Funded Economic Development Model

August 20, 2010 at 5:33 am Leave a comment

In 1989, the State of Texas Legislature passed to give Texas cities new financial power to create Economic Development Corporations through a voter-approved economic development sales tax. Cities are able to enact a ½-cent or 1-cent sales tax to fund programs as diverse as infrastructure projects to marketing campaigns.
Historically, the State of Texas has empowered local governments to support their growth by allowing taxing power on sales and property. Without a state income tax, state government has pushed responsibility for expenditures on roads, utilities, and public education onto the backs of cities and counties. Economic development has been treated much the same. The state’s Department of Commerce (now Economic Development) has struggled with meeting the needs of a geographically and industrial diverse state. Not surprisingly, many cities, particularly those in more rural areas perceived weakness by state government to deliver funds and attention for economic development in their home.
THE PROGRAM
One response was to create the Economic Development Sales Tax option for cities. By allowing citizens to vote on raising taxes in order to invest in economic projects, the state essentially put control back in thehands of local governments. The program has been widely adopted. As of 2005, voters in 537 cities haveapproved economic development sales taxes, raising nearly $400 million for their economic development efforts.
The program was principally designed to promote the creation of primary jobs in Texas, but revenue can also be designated towards infrastructure projects, sports facilities, and tourism venues. The program is known as 4A/4B in the state due to the two categories of projects that are allowed under each. The 4A tax was enacted in 1989 to allow a ½ cent sales tax for cities that get voter approval and is primarily for investing in projects that create primary jobs: industrial and manufacturing facilities, recycling facilities, distribution centers, small warehouse facilities, closed or realigned military bases, business airport facilities and port related facilities. In 1997, the 4B tax was created to allow funding of projects in tourism and sports facilities and quality of life projects: park-related facilities, professional and amateur sports and athletic facilities,tourism and entertainment facilities, affordable housing and other improvements or facilities that promote new or expanded business enterprises that create or retain primary jobs.
Some cities have both 4A and 4B sales taxes enacted, but the more common option is enacting the broader and more flexible 4B sales tax. Texas has an extremely high rate of voter approval for economic development sales taxes: In 2001, 49 cities adopted new economic development sales taxes, 3 cities voted down the creation of a new tax, while 5 cities voted to stop collecting the ED sales tax.
Expenditures can be made on a variety of hard and soft investments, from operational expenses (salaries, rents, etc.) to facility acquisition, to infrastructure (roads, utilities), to marketing expenses (website, sales trips, advertising). In addition, EDCs are offered significant flexibility in how they use 4A funds to incentivize relocating businesses, including relocation expenses to free land to development cost buy-downs. Affordable housing is also allowable under 4B funding, but few projects to date have been pursued.
Source: Angelou Economics
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Entry filed under: Sustainable ED Funding Model, Texas Sales Tax Funded ED Model. Tags: , , .

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