CONTENTS
FIGURES
TABLE
Chapter 2 reviews basic TRZ concepts required to understand how TRZs work, the circumstances appropriate for their use, and the legal framework currently governing TRZs in Texas and Utah. This chapter consists of three sections. The first section outlines the TRZ terminology used in this primer. The second section discusses the circumstances that frequently motivate local governments to create a TRZ to fund a transportation project. Finally, the third section discusses the legal framework and authority governing TRZs as a value capture mechanism in Texas and Utah.
For the purposes of this primer, a TRZ is defined as a contiguous area around a transportation project designated by a local government as an impact zone. It is an area where a portion of the annual increment in future local property and/or sales tax revenues resulting from the growth in the zone’s tax base will be captured and used to support funding and financing of the project.
Other concepts associated with this definition are described in the bullets below and illustrated in Figure 1,viii using a property tax example based on Texas law.iv
Annual tax increment revenues (triangle [c]) are obtained by subtracting the tax increment base (rectangle [b]) from the captured appraised value in each future year and multiplying it by the property tax rate of the local government creating the TRZ. Then, some or all of the resulting annual tax increment revenue is deposited in a separate “ad valorem tax increment account”ix to fund the project or repay debt (if future TRZ revenues have been used as collateral to secure a loan or issue bonds).
Figure 1. Relationships among TRZ elements(6).
A TRZ is a value capture mechanism that enhances the ability of a local government to expedite the delivery of critical transportation projects for its community. TRZs are generally not used to fully fund a project, but instead are used to leverage other transportation funding sources and help close funding gaps. However, closing these gaps has allowed communities to expedite, or make possible in some instances, the delivery of transportation improvements that otherwise would have been implemented much later.
A TRZ can be created to support a single or multiple transportation improvements. As described next in Section 2.3.1, Texas law gives local governments multiple options for using TRZ revenues. For example, it is possible for neighboring local governments to partner with each other to deliver TRZ-funded projects that enhance mobility and spur economic development regionally. Texas law allows a local government to create a TRZ with the objective of funding a project that is partially or completely outside its boundaries in one or more neighboring jurisdictions. Texas law only requires that a TRZ be designated for the same project by one or more counties or municipalities in whose boundaries the project is located, and that the local governments involved enter an agreement for "joint support." For example, neighboring local governments or jurisdictions that overlap geographically (e.g., a municipality and a port authority) could each set up a TRZ and use the revenue to jointly support funding of a project of common interest located outside the boundaries of one of them.
Like other value capture techniques, TRZs can promote equity and economic efficiency through the beneficiary pays principle. In the transportation context, this economic principle holds that the most efficient allocation of resources occurs when those who use and benefit from the transportation system (or improvements to it) pay—in proportion to the benefit they receive—for some of its capital costs. Beneficiaries can include property owners and developers within the zone who benefit from increases in property values due to proximity to new or improved infrastructure. Beneficiaries may also include business owners if the improved infrastructure lowers transportation costs for nearby businesses or makes markets more accessible (1).
Legislation in Texas and Utah allows local governments to create TRZs in certain circumstances and for specific projects. Texas first adopted legislation authorizing the creation of TRZs in 2007, with the first TRZs being created in 2010. As of 2020, 16 active TRZs in Texas supported a wide variety of transportation projects (see Table 4 in Appendix A). On the other hand, the State of Utah enacted its TRZ-enabling legislation in 2018 and amended it in 2019. To date, no TRZs have been created in Utah. The following paragraphs summarize the legal framework governing TRZs in Texas and Utah.
The legal framework for TRZs in the State of Texas originated with legislation first enacted by Senate Bill (SB) 1266 in the 80th Legislative Session in 2007. SB 1266 amended Chapter 222 of the Transportation Code, and the TRZ provisions currently appear in Sections 222.105–111. The legal framework evolved in subsequent legislative sessions primarily in response to the experiences of first adopters––municipalities and counties that created TRZs or considered creating TRZs under the original legislation and identified issues that required clarification or amendments that could expand their practical use. As a result, subsequent legislative sessions passed amendments to the law that expanded the use of TRZs and clarified the process or requirements to establish one(5).
In 2007, SB 1266 provided for the development of two types of TRZs with a focus on State highway infrastructure, municipal TRZs, and county TRZs. It is important to note that while Texas counties are explicitly allowed to create TRZs, their ability to use tax increment revenue as collateral for a loan or to issue bonds could be constitutionally challenged. Several Texas Attorney General opinions have made it clear that use of county TRZ revenue as debt collateral could be constitutionally challenged, and that even collecting and using county TRZ funds on a pay-as-you-go basis may also be subject to constitutional challenge. More specifically, the Attorney General opinions indicate that a county is prevented by the State constitution’s equal and uniform provision from pledging tax increment revenue from an area to repay debt issued for a project (including a transportation project) aimed at developing or redeveloping that area. This has rendered Texas counties unable to use TRZ revenue to fund transportation improvements, which effectively prevents them from considering TRZs as a value capture technique for generating transportation funding.x
As noted earlier, the legal framework governing TRZs has been amended several times since 2007. In 2011, legislation was enacted to make procedural changes regarding implementation and to allow for increased flexibility in the adoption and implementation of TRZs. In 2013, new amendments expanded the concept to all modes of transportation and enabled port authorities and navigation districts to establish port authority TRZs. This expanded the modes and types of projects eligible for TRZ funding to rail, transit, parking lots, ferries, and airports, among others. Changes were also introduced to allow local governments to complete multiple projects within the same TRZ, as well as create TRZs to support projects located in other jurisdictions, as noted earlier(5).
Today, the Texas Transportation Code includes relatively detailed requirements for local governments to pursue the implementation of TRZs. Section 222.106(c) gives a local government the ability to create a TRZ if it determines:xi
Note: A finding of blight is not a requirement to set up a TRZ.
The types of projects eligible for TRZ funding follow the definitions of transportation projects set forth in Sections 370.003 and 55.001 of the Texas Transportation Code and includes the following for municipal and county TRZs:
Port authority and navigation district TRZ funding can be used for “a port project,” which is defined as “a project that is necessary or convenient for the proper operation of a maritime port or waterway and that will improve the security, movement, and intermodal transportation of cargo or passengers in commerce and trade, including dredging, disposal, and other projects.”xii
As noted in the introduction, a TRZ can only be initiated by a local government and requires approval only from its governing body (city council or commissioner’s court) after public hearings are held.xiii The Texas law does not limit the maximum size or footprint of a TRZ if it falls within the local government’s jurisdiction and conforms to a contiguous geographic area.xiv The boundaries of a TRZ may be amended at any time to accommodate changes in the limits of the project for which the zone was originally created. However, property already within the zone may not be removed or excluded from the zone if the local government has already assigned any part of the increment to secure debt or other obligations to fund the project. Conversely, TRZ boundaries can be expanded and properties added to the zone provided that the local government goes through the same process required to originally create the zone (including public notices and hearings required by law).xv A newly created TRZ can include within its boundaries property that is part of a pre-existing TIF arrangement, a tax abatement, or other tax incentives. However, property tax increment revenue from such property is not payable into the TRZ tax increment account until commitments related to the preexisting arrangement, agreement, or abatement are fulfilled or expire.xvi
Texas law does not require local governments to dedicate 100 percent of the annual tax increment revenue to a project. All or a portion of the funds specified by the local government within the zone must be used to fund the transportation project (or projects) for which the zone was created. The remaining portion of the tax increment collected within the zone may be retained by the local government and used for any other general revenue fund purposes.xvii
In practice, this means that local governments retain a great deal of flexibility in deciding what percentage of the annual tax increment revenues is dedicated to paying for a project. Texas law also requires that annual property tax increments from property within the zone be deposited into a tax increment account.xviii The local government may then enter into an agreement with a public or private entity to implement a project within the zone and pledge all or a specified amount of the tax increment revenue to the payment of the costs of that project.xix
Texas law states that a TRZ terminates on December 31 of the year in which the local government completes any contractual requirement that included the pledge of TRZ revenue. In addition, a TRZ terminates on December 31 of the 10th year after the year the zone was designated, if the local government has not used the zone for its designated purpose prior to that date.xx
Finally, Texas law sets forth specific requirements governing the implementation of a TRZ. These requirements are covered in detail in Chapter 3.
The Utah State Legislature approved SB 136 in its 2018 General Session, enacting Utah Code Section 11-13-227, which lays out the State’s legal framework for TRZs. Amendments were approved in the 2019 General Session (SB 72) to add clarifications on the independence of TRZ agreements from other local government decisions dealing with transit services, land use, and the sale or acquisition of local government-owned real property. More specifically, SB 72 clarifies that entering into a TRZ agreement does not affect or depend on:
In general, the legal framework for TRZs in Utah is broader and less detailed than it is in Texas. Although this may allow for more flexibility, the experience in Texas has shown that adding more specific guidance to the original enabling legislation has encouraged more local governments to consider using the tool(5).
In terms of initiating a TRZ, Utah law requires two or more public agencies, one of which must have land use authority over the proposed zone, to agree upon the basic elements of the zone, including transportation infrastructure need and proposed improvement, boundaries and base year, and terms for sharing future sales and/or property tax revenue.xxii Before an agreement is approved as required in Section 11-13-202.5, and before a TRZ agreement is approved, Utah law requires holding a public hearing regarding the details of the proposed TRZ.xxiii There is no requirement for determining whether the area is unproductive or underdeveloped, or for a finding of blight.
Regarding which entities are authorized to establish a TRZ, Utah law allows several different types of public agencies to participate in creating a TRZ, as long as one of them has land use authority within the zone’s boundaries.xiv Public agencies with land use authority in Utah include municipalities and counties. Other eligible public agencies without land use authority may include the State and political subdivisions, departments or divisions of the State. A Utah TRZ is governed by an interlocal agreement(s) between the establishing public entities.xxv Utah law is mute regarding the duration of a TRZ.
Utah law does not explicitly allow or disallow changes in the footprint or boundaries of a TRZ once it has been created and is mute regarding limitations on the size of its boundaries. However, given that a requirement for the creation of a TRZ is that at least one of the agencies has land use authority over the zone, it can be inferred that the zone boundaries must be within such agency’s jurisdiction.
The use of TRZ funds is not limited to local, State, or Federal transportation projects. Utah law is flexible by allowing the participating public agencies to determine the transportation need and improvement within the zone, instead of defining which transportation improvements are eligible.xxvi
vii Tables and figures included throughout this document were created for this primer, unless otherwise indicated.
iv Texas Transportation Code § 222.105-111
ix An ad valorem tax is a tax based on the determined value of the item being taxed. In the context of TRZs, the term refers to local property and sales taxes. The term “ad valorem tax increment account” is used in Sections 222.107(f) and 222.1075(f) of the Texas Transportation Code. See Appendix B.
xThe Texas Attorney General cites article VIII, section 1(a) of the Texas constitution. See letter from Texas Attorney General Ken Paxton to Representative Joseph C. Pickett dated February 26, 2015: https://www2.texasattorneygeneral.gov/opinions/opinions/51paxton/op/2015/kp0004.pdf
xi The requirements to form a TRZ for port authorities and navigation districts are somewhat different from those for a municipality or county and are laid out in Section 222.1075 of the Texas Transportation Code. The law authorizes port authorities and navigation districts to form a TRZ after finding that (a) the area within the TRZ is unproductive and underdeveloped, and (b) that forming the TRZ would improve the security, movement, and intermodal transportation of cargo or passengers in commerce and trade.
xii Texas Transportation Code § 222.105–1075.
xiii Texas Transportation Code § 222.106(c)–(e).
xiv Texas Transportation Code § 222.106(c).
xv Texas Transportation Code § 222.106(i-2).
xvi Texas Transportation Code § 222.106(h).
xvii Texas Transportation Code § 222.106(i).
xviii Texas Transportation Code § 222.106(h).
xix Texas Transportation Code § 222.106(i-1).
x Texas Transportation Code § 222.106(j).
xxi Relevant Utah Code sections: § 10-8-2; § 10-9a, § 17-27a, and § 17-50-312.
xxii Utah Code § 11-13-227(2)(a)-(e).
xxiii Utah Code § 11-13-227(2)(f).
xxiv Utah Code § 11-13-227(2).
xxv Utah Code §§ 11-13-202, 11-13-202.5, 11-13-206, and 11-13-207.
xxvi Utah Code § 11-13-227(2)(a).
