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<br />TEXAS CITY ATTORNEYS ASSOCIATION
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<br />4N4B Sales Tax:
<br />Any Use After
<br />H.B. 2912?
<br />
<br />Bennett Sandlin, TML Legal Services Director
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<br />Introduction
<br />
<br />The Texas Legislature created economic development corporations
<br />(EDCs) in 1979. At the time, the concept of economic development as a
<br />legitimate governmental function was in its infancy. In fact, city expendi-
<br />tures to attract business were arguably unconstitutional under Article III,
<br />S 52 of the Texas Constitution. As a result, early EDCs were reliant on
<br />donations and were largely ineffective until a 1987 amendment that stat-
<br />ed economic development pursuits serve a public purpose.
<br />
<br />Legislation passed in 1989 and 1991 gave EDCs teeth by authorizing the
<br />4A and 4B sales ta..xes. The sales tax was initially envisioned by the legis-
<br />lators who created it as a vehicle for fostering manufacturing and indus-
<br />trial jobs. After their initial involvement in creating the tax, the attention
<br />of many of these legislators turned to other matters for the ne).,'! decade.
<br />Meanwhile, every legislative session thereafter saw a gradual expansion of
<br />the permissible uses of 4A and 4B ta..xes. First, 4B EDCs \vere given gen-
<br />eral authority to attract commercial and retail business. Next, 4B EDCs,
<br />and to a lesser extent 4A. EDCs, were given authority to fund certain
<br />municipal improvements such as parks and city buildings. . Finally, 41\.$
<br />were later given the same broad commercial and retail business authori-
<br />ty that their 4B cousins already possessed. '
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<br />Prior to the 2003 regular session, some of the legislators who had a hand
<br />in creating the initial EDC sales !:Lxes were motivated to refocus on the
<br />issue based on alleged "abuses" of the !:Lx. In reality, it is more likely that
<br />these legislators were simply shocked by the broad, but legal, expansion
<br />of the two taxes over the past decade. Some of these legislators sent out
<br />warning shots that the very existence of the !:Lx was in jeopardy. In a sort
<br />of preemptive strike, professional economic development organizations
<br />took the lead in drafting legislation designed to placate the legislature.
<br />The result was House Bill 2912. H.B. 2912, passed during the 2003 reg-
<br />ular session, is essentially a restrictive rewrite of 4A and 4B laws.
<br />
<br />Goodbye to Commercial, Retail, and Service'"
<br />
<br />Among many important changes, the main significance of H.B.'2912 is
<br />that it effectively cancels the authority of both 4A and 4B EDCs to' engage
<br />in direct commercial and retail economic development. For 4As, the can-
<br />cellation \vas straightforward. The phrase "to promote new and expand-
<br />ed business development" was struck from an introductory section of the
<br />law that defined eligible projects. It was this section that had essentially
<br />added commercial and retail authority to 4As in the late 1990s. For 4Bs,
<br />there is still language that permits expenditures to "promote or develop
<br />new or expanded business enterprises." However, H.B. 29121imited
<br />such expenditures for both 4A and 4B to projects that create "primary
<br />jobs." Primary jobs are a new concept introduced by the bill, and are
<br />defined in a way that includes jobs mostly related to "blue collar" and
<br />financial type industries: crop production, animal production, forestry
<br />and logging, commercial fishing, support activities for agriculture and
<br />forestry, mining, utilities, manufacturing, wholesale trade, transportation
<br />and warehousing, information, securities, commodity contracts, certain
<br />financial investments and related activities, insurance carriers and relat-
<br />ed activities, scientific research and development semces, and manage-
<br />ment of companies and enterprises. Conspicuously absent from this list
<br />are jobs related to basic commercial, retail, and services industries.
<br />Unless a 4A or 4B project creates a "primary job," as defined above, the
<br />project is likely prohibited. Thus, both 4A and 4B EDCs are no longer
<br />permitted to engage in attracting commercial, retail, or service business-
<br />es (existing projects were grandfathered).
<br />
<br />Other Limitations
<br />
<br />H.B. 2912 cancelled the authority of 4B EDes to spend sales tax proceeds
<br />on learning centers or city buildings. The bill also restricted the ability of
<br />any EDC to provide a direct financial incentive to a business prospect (as
<br />opposed to preparing land or infrastructure for use by the business)
<br />unless the incentive is pursuant to a performance agreement. Finally, the
<br />bill limited who can offer required training in 4N4B laws to city officials.
<br />
<br />What Good Now?
<br />
<br />City officials are only now coming to grips with the question of ~hether
<br />4A and 4B sales taxes are desirable in the aftermath of H.B. 2912. A
<br />great many of the EDCs created over the years were created after the var-
<br />ious expansions in the use of the tax. It is arguable that given the limita-
<br />tions of H.B. 2912, city officials would not today have voted to create the
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<br />TCAA
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<br />Texas City Attorneys Association
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