Wind Energy and Economic Development

Monday, October 8, 2007
Contributed by: James Wester and Joel Griffith

In an effort to increase economic development throughout the State of Texas, the legislature has granted local governments the authority to enter into tax relief agreements with businesses that agree to large-scale capital investments within their jurisdictions. Wind farms in the Texas Panhandle have been an economic boom for a number of rural areas.

Chapter 312 of the Tax Code, entitled "the Property Redevelopment and Tax Abatement Act," gives municipalities and counties the authority to enter into tax abatement agreements with real property developers.

Chapter 313, entitled "the Texas Economic Development Act," empowers school districts to enter into agreements with developers that limit the assessed value of newly developed property. These tax relief agreements are limited to ten years of relief for the taxpayer.

The continued widespread development of wind farms throughout the State of Texas creates opportunities for school districts, counties, and municipalities to enhance their tax bases and increase revenue streams for many years into the future.

The Property Redevelopment and Tax Abatement Act

The Property Redevelopment and Tax Abatement Act allows counties and municipalities to enter into tax abatement agreements to attract major investment, including the construction of wind farms. To become eligible to participate in an agreement under this act, a county or municipality must: (1) establish guidelines and criteria governing the tax abatement agreements; (2) adopt a resolution stating that the taxing unit elects to become eligible to participate in tax abatements; and (3) designate an area located within its jurisdiction as a "reinvestment zone."

Once eligible to participate, a city or county may negotiate a tax abatement agreement with an owner of real property within the reinvestment zone. The agreement may exempt a portion of the value of the property from taxation for a period not to exceed ten years on the condition that the owner of the property make specific improvements or repairs to the property.

The Texas Economic Development Act

The Texas Economic Development Act grants school districts the authority to enter into a limitation on appraised value agreement with companies willing to invest in capital intensive projects, such as wind farms. To become eligible to participate in an agreement under this act, the school district must designate an area entirely within the territory of the school district as a reinvestment zone. Before an agreement is reached with a developer, a detailed application process is required, including an extensive study of the economic impact the agreement may have on the school district. This process involves participation by the Texas Comptroller and the Texas Education Agency, as well as the school district and developer.

The limitation on appraised value applies only to the school district's maintenance and operations portion of the ad valorem tax. The amount of limitation a school district may grant and the minimum amount of investment needed to qualify under this act vary according to the size of the school district.

The limitation agreement lasts a total of ten years, comprised of a two-year construction period and an eight-year period of limitation on appraised value. While the developer must pay property taxes during the first two years, taxes paid during this construction period are taken as credits over years three through ten of the agreement. In addition, the agreement must include certain provisions to protect the school district from a loss of revenue. One of the most important terms that should be included in an agreement under this act is a provision for support payments to the school district. For example, school districts may negotiate for a provision stipulating that part of the tax benefit granted to the entity be returned to the school district as a support payment.

Wind farms provide an opportunity for taxing authorities to create a reinvestment zone that has the potential to increase economic development and benefit all of the taxing authorities. Consequently, the various taxing authorities should consider a cooperative effort for their mutual benefit.

For more information, please contact one of Underwood Law Firm's wind energy attorneys.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.