The sales tax for economic development has been one of the most popular and effective tools used by cities to promote economic development. Although only first authorized in 1989, more than 558 cities have levied an economic development sales tax.
The Texas Legislature passed the Development Corporation Act of 1979 which allows municipalities to create nonprofit development corporations that promote the creation of new and expanded industry and manufacturing activity within the municipality and its vicinity. The development corporations operate separately from the municipalities, with boards of directors that oversee their efforts. These corporations, in conjunction with industrial foundations and other private entities, work to promote local business development.
In 1989, the Texas Legislature amended the Act by adding Section 4A, which allowed the creation of a new type of development corporation, which could be the imposition of a local sales and use tax dedicated to economic development.
In 1991 the Legislature authorized a Section 4B sales tax, a one-half cent sales tax to be used by certain cities to promote a wide range of civic and commercial projects
The Section 4B tax also can be used to fund the provision of land, buildings, equipment, facilities, expenditures, targeted infrastructure and improvements that are for the creation or retention of primary jobs for projects such as manufacturing and industrial facilities, research and development facilities, military facilities, including closed or realigned military bases, transportation facilities, sewage or solid waste disposal facilities, recycling facilities, air or water pollution control facilities, distribution centers, small warehouse facilities, primary job training facilities for use by institutions of higher education, regional or national corporate headquarters facilities, eligible job training classes, certain career centers and certain infrastructural improvements that promote or develop new or expanded business enterprises.
However, the Section 4B tax can additionally fund projects that are typically considered to be community development initiatives. For example, authorized categories under Section 4B include, among other items, land, buildings, equipment, facilities, expenditures, and improvements for professional and amateur sports facilities, park facilities and events, entertainment and tourist facilities, and affordable housing. Also, the Section 4B tax may be expended for the development of water supply facilities or water conservation programs. As of September 1, 2005, certain Section 4B development corporations are allowed to do projects that promote new and expanded business development, which could include retail projects.
Most Section 4B projects must now create or retain primary jobs. Yet not all projects contain this requirement. “Primary job” is defined to mean a job that is “available at a company for which a majority of the products or services of that company are ultimately exported to regional, statewide, national, or international markets infusing new dollars into the local economy;” and meet any one of a certain enumerated sector numbers of the North American Industry Classification System (NAICS)
Additionally, Section 4B corporations may provide land, buildings, equipment, facilities and improvements found by the board of directors to promote or develop new or expanded business enterprises that create or retain primary jobs, including a project to provide:
Some section 4B projects do not require the creation or retention of primary jobs. The following categories are also authorized Section 4B projects pursuant to Section 2(11) of the Act.
Previously, a Section 4B corporation was required to hold at least one public hearing on any proposed project, including a proposal to expend funds on maintenance and operating expenses of a project. However, in 2007, the Act was amended to provide that a corporation created by an eligible city with a population of less than 20,000 is not required to hold a public hearing under this subsection if the proposed project is defined by Section 2 of this Act. If a public hearing is required, the hearing must be held before the corporation expends any Section 4B funds on the project. After the projects have been considered at a public hearing and 60 days have passed since the first public notice of the nature of the projects, the development corporation is free to make expenditures related to the projects pursuant to the adopted budget.
The public has a right to gather a petition objecting to a particular Section 4B project. The petition must be submitted within 60 days of the first published notice of a specific project or type of project and must be signed by more than 10 percent of the registered voters of the city.
If a petition is pursued by the public, the petition can ask that the city hold an election on the issue before that specific project or type of project is undertaken. If the petition is submitted in a timely manner and an election is required, the corporation may not undertake the project until the voters approve the project at an election on the issue. If the voters disapprove the project at the election, the Section 4B tax proceeds may not be used for that purpose.
In the 2001 Legislative Session, the Texas Legislature clarified the use of Section 4B proceeds for promotional expenses. Now, Section 4B(b) limits Section 4B corporations to spending no more than 10 percent of the corporate revenues (Section 4B tax proceeds) for promotional purposes. Yet, the Attorney General has concluded a promotional expenditure “must advertise or publicize the city for the purpose of developing new and expanded business enterprises.”
Further, a corporation is limited to spending not more than 10 percent of its current annual revenues for promotional purposes in any given year. Nonetheless, unexpended revenues specifically set aside for promotional purposes in past years may be expended along with 10 percent of current revenues without violating the cap.
A Section 4B corporation is governed by a seven-member board of directors. The seven directors are appointed by a majority vote of the city council at an open meeting. Prior to September 1, 1999, Texas law required a Section 4B director to be a city resident. Today there are two exceptions to this residency requirement.
First, in a city of less than 20,000 in population, a Section 4B director may either be a resident of the city, a resident of the county in which the major part of the area of the city is located, or reside in a place that is within 10 miles of the city’s boundaries and is in a county bordering the county in which a major portion of the city is located. Second, the Act provides that a person may serve on a Section 4B board if that person was a Section 4A director at the time that a Section 4A corporation was dissolved and the 4A corporation was replaced with a Section 4B corporation. State law also limits the number of Section 4B directors who are also city officers or employees:
It states that no more than four of the seven directors may also be elected city officials or city employees. A director serves at the pleasure of the city council for a term of two years; however, the city council may vote to remove a director at any time without having to specify cause.
A majority of the board (four members) constitutes a quorum. The industrial development corporation board of directors is subject to both the Open Meetings Act and the Public Information Act. Additionally, the Act requires the board to conduct all of its meetings within the city limits
Section 4B industrial development corporations have the following general powers and duties:
Section 4B corporations cannot simply provide gifts of sales tax proceeds. The Texas Attorney General has noted expenditures of sales tax proceeds must be made pursuant to a contract or other arrangement sufficient to ensure that the funds are used for the intended and authorized purposes. In 2003, legislation was passed requiring certain written performance agreements.
The Texas Legislature now requires Section 4B corporations to enter into a written performance agreement with a business enterprise when corporations provide funding or make expenditures on behalf of a business enterprise in furtherance of a permissible Section 4B project. This performance agreement between the corporation and the business enterprise at a minimum must contain the following:
(1) a schedule of additional payroll or jobs to be created or retained; (2) the capital investment to be made by the business enterprise; and (3) the terms under which repayment must be made by the business enterprise to the Section 4B corporation should the business fail to meet the performance requirements specified in the agreement.
In 2007, the Texas Legislature passed House Bill 1196, which requires that both governmental entities and economic development corporations put certain language in any written agreement involving public subsidies to businesses, which would include those given by 4B corporations.
The language must specify that the business does not and will not knowingly employ an undocumented worker (which statement must also be any application for the subsidy). The language must also require repayment of the subsidy with specified rate and terms of interest if the business is convicted of federal immigration violations under 8 U.S. Code Section 1324a(f), not later than the 120th day after receiving notice of the violation from the public entity or economic development corporation.
When a Section 4B board pursues a project, it is required to obtain city council approval of the project.. They must provide public notice and hold a public hearing prior to pursuing a project, and the public has 60 days to petition for an election to be called on whether to pursue the project.
Section 21 of the Development Corporation Act provides that the city shall approve all programs and expenditures of the development corporation and shall annually review any financial statements of the corporation. It further provides that at all times the city will have access to the books and records of the corporation.
Section 4C of the Act, added during the 1997 Legislative Session, requires both Section 4A and Section 4B economic development corporations to submit an annual, one-page report to the State Comptroller’s Office. The report must be submitted by February 1 of each year and must be in the form required by the Comptroller.
A complete handbook for Economic Development is available online at the State Attorney General of Texas website.