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Chapter 5 discusses the opportunities and challenges associated with local governments using TRZs as a funding source for transportation projects.
A TRZ offers four main opportunities to local governments. These include: (1) political and public support, (2) acceleration of project delivery, (3) interagency collaboration, and (4) promotion of equity and economic efficiency.
From the political and public support standpoint, TRZs are not a new tax and do not cause or require an increase in tax rates. Creating a TRZ to fund a transportation project does not require an increase in existing property or sales tax rates. Zone revenue is only realized if the real property tax base within it grows through land development, land use upzoning, land value increase, or a combination of these. In the case of sales tax TRZs, revenues are generated by increases in economic and business activity within the zone that eventually translates into an increase in sales tax collection. As a result, local governments face little to no political or public resistance when creating TRZs.
As illustrated in the case study presented in Chapter 6, TRZs have helped communities expedite, or in some cases make possible, the delivery of critical transportation projects that would otherwise have been delayed for years. Expediting projects like these may enhance mobility and promote economic development and business activity well beyond the zone, which could benefit local communities. As noted earlier, the land development and value impacts of a highway improvement project can extend up to 2 miles from the centerline of the improvement, which is well beyond the limits of most TRZs.(4). The resulting increases in business activity and the value of the local government’s tax base in turn result in tax revenue increases (assuming a constant tax rate) that may benefit the community at large.
Creating a TRZ generally entails a great deal of interagency collaboration, which provides opportunities to leverage funds across agencies, including the State DOT, the regional MPO, neighboring local governments, and others. When a local government considers creating a TRZ to support a regionally significant project, it signals to other stakeholders in the region not only that the project is a priority, but also that the local government is open to finding collaborative and creative ways to improve the region’s mobility. Experience in Texas has shown that the resulting interagency trust and collaboration has helped accelerate projects across entire regions, not only within a single local jurisdiction, and developed creative financing approaches that leverage resources from all stakeholders.(5)
As noted in Section 2.2, TRZs are a funding mechanism that can promote equity and economic efficiency through the beneficiary pays principle. In fact, TRZ revenues partly reflect the benefits resulting from increased accessibility accruing to property owners, developers, and businesses within the zone through increased property values and increased sales and economic activity.
Like other value capture techniques, TRZs have certain challenges associated with their use as a funding source for transportation projects. These challenges can be classified into three categories: (1) political and public support, (2) revenue uncertainty, and (3) legal issues (applicable only to counties in Texas).
In Texas, citizens have occasionally expressed concerns at public hearings about the local government’s ability to sustain services within the zone as a result of dedicating a portion of the incremental property tax revenue to a transportation project. As noted in the case study presented in Chapter 6, TRZs are a relatively new tool for local governments, and sometimes these concerns arise when local policy makers and the public are not familiar with how they work. Typically, these concerns are eased when citizens learn that the transportation project is likely to result in increased property tax revenue well beyond the TRZ boundaries, resulting in a net increase in the ability of the local government to provide services. No TRZs have been established in Utah yet, so there is no record of public hearing objections at this time.
TRZ revenues are subject to uncertainty because they are driven by conditions in the real estate market (in the case of property tax TRZs), and/or by business and economic activity (in the case of a sales tax TRZ), within the zone. Two real estate market forces drive TRZ property tax revenue. The first is the demand for development of undeveloped land and/or redevelopment of already developed land; both increase the value of properties. The second market force is the general increase in existing property values, also driven by demand. Similarly, sales tax TRZ revenue is driven by business activity (particularly retail), which generally follows real estate development. An economic recession is likely to have a detrimental effect on business activity, property values, and the real estate market in general. Depending on how long a recession lasts, it may significantly affect future incremental property and sales tax revenues. These challenges are frequently translated into a high cost of borrowing from private capital markets. As a result, SIB loans have been one of the most cost-effective financing options for local governments for projects that are on the State highway system(6).
Counties in Texas have not been able to use TRZ revenues to secure long-term financing to pay for transportation projects. Although Texas law explicitly allows counties to create TRZs, there are questions as to whether the Texas constitution allows counties to borrow funds to pay for a project. According to a Texas Attorney General opinion, the equal and uniform taxation requirement in the Texas Constitution Article VIII, Section 1A may prohibit a county from using TRZ/TIRZ revenue to pay for a project (including a transportation project) aimed at developing or redeveloping a specific area within the county. The creation of a zone and use of its incremental tax revenue for a project may be considered to cause an unequal distribution of the ad valorem tax burden. xxxviii
xxxviii 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
