Working Every Angle

The city of Houston is exploiting loopholes in state law to lavish big bucks on private developers

The city's claim that the Galleria area will see nearly $200 million in new development within two years of creating a TIRZ there is equally specious. At least $180 million in projects were already on the table when Uptown Houston District, a group that looks after the interests of Galleria-area property owners, proposed creation of the zone. Not only will taxpayers lose the revenues from that development, but the TIRZ will end up subsidizing all future development in the Galleria area to the tune of millions in lost revenues.

Assistant director of planning Bill Calderon acknowledges that almost all of the development that the Upper Kirby TIRZ was ostensibly created to encourage is on the ground or under way. But, he says, the property tax revenues that will be generated by that development, as well as income derived from completed or nearly completed projects in the Galleria area, won't be available for more than a year, and therefore should go to the TIRZs.

While that reasoning does nothing to support the contention that the Upper Kirby and Galleria areas need TIRZs to entice private development, Calderon says it "doesn't necessarily mean" there isn't a need for the zones.

City councilwoman Annise Parker says there is a "real disconnect" between the city's TIRZ policy and state law.
Phillippe Diederich
City councilwoman Annise Parker says there is a "real disconnect" between the city's TIRZ policy and state law.
Market-driven development in the Upper Kirby area belies the need for a TIRZ.
Phillippe Diederich
Market-driven development in the Upper Kirby area belies the need for a TIRZ.

"The state law doesn't state that you can't include ongoing development projects within the boundary lines of a zone," says Calderon. "In fact there is some advantage to doing that."

The property taxes collected on current development taking place in the new TIRZ will "jump-start the revenue stream" needed to carry out public improvements that will support future projects in the zone, Calderon says. "Nowhere does it say we're going to give money back to the guys who are doing construction there today," he insists.

Maybe not, says Councilmember Annise Parker, but that doesn't mean it's the proper use of tax-increment reinvestment. Parker says the Upper Kirby zone reflects "a real disconnect" between the Brown administration and the state TIRZ law. "The subject of all the development occurring there came up," Parker says. "But no one dwelled on it or discussed it much. I don't think we need to be tying up our money that way."

Indeed, the Upper Kirby and Galleria zones appear to turn the state TIRZ law on its head. One criterion for a new zone is the "but for" standard -- that is, "but for" the TIRZ, the area would not attract new development. By designating as TIRZs areas that are developing on their own, the city has created a new "but for" standard: "but for" the TIRZ, new revenues from market-driven development would go to the general fund coffers of the city, Harris County and the Houston Independent School District.

Tax-increment reinvestment has been controversial since the moment it was first proposed, back in 1977. That's when the Legislature passed a bill that would allow cities to redevelop certain "blighted" urban areas using future property tax revenues. The 1977 law was, however, contingent on passage of a constitutional amendment, a ballot measure that failed in November 1978.

During the 1979 legislative session, lawmakers again passed a TIRZ bill, this time without requiring a constitutional amendment. That bill became law for about a minute. In May 1981, then-attorney general Mark White ruled that the TIRZ law violated the state constitutional requirement that taxation be "equal and uniform." In White's view, using property taxes to fund improvements in a specific area meant that the property was not contributing its fair share to the general fund.

The issue was thrown back to the voters, who approved a constitutional amendment in November 1981 that authorized cities to "issue bonds or notes to finance the development or redevelopment of an unproductive, underdeveloped or blighted areaŠ." The law allowed the "bonds or notes" to be repaid from increases in ad valorem tax revenues produced by the new development.

The Tax Increment Financing Act of 1981 was again challenged on constitutional grounds in 1987, in a case that made it to the Texas Supreme Court. While the court upheld the law, it also underscored the legislative restrictions on its application: "Tax increment financing," stated the court's ruling, "is designed to aid cities and towns in financing public improvements in blighted or undeveloped areas."

Until May 1996, when Steve Peacock proposed a TIRZ to subsidize his Village Enclaves subdivision in far west Houston, the city seemed content to adhere to the Supreme Court's interpretation of the law. To that point, the city had created zones in only three places -- Lamar Terrace, south of the Galleria; Midtown, between downtown and the Texas Medical Center; and Market Square, in the heart of the central business district. All three areas had suffered significant declines in their property tax bases as residents and businesses fled to the suburbs, discouraging private investment in the inner city.

"TIRZs work," says Garnet Coleman, whose predominantly urban district includes four TIRZs. "Look at the assessed valuation in Midtown compared to before. That would have never happened, if not for the TIRZ."

Indeed, upon first reviewing Peacock's TIRZ proposal in early 1996, city planning director Bob Litke was not convinced the developer had met the all-important "but for" standard. In a memo to other city officials regarding the Village Enclaves project, Litke noted that Peacock's contention that his land would not be developed unless the city paid for the infrastructure was based on "nothing but a judgment."

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