Senate Interim Committee on Economic Development

Senate Interim Committee on Economic Development

ECONOMIC DEVELOPMENT INCENTIVES
Charge

Review and make recommendations regarding the cost benefit analysis or other evaluation reports performed by the Comptroller of Public Accounts and the State Auditor on the tax abatement program, enterprise zone program or other state financial incentive programs.
Background

The Senate Economic Development Committee was asked to determine whether there is a need to abolish, modify, or improve key state and local incentive programs. The committee focused on the following: property tax abatements, tax increment financing, economic development sales taxes, and enterprise zones.
Major Recommendations

Allow local taxing jurisdictions to grant different abatement terms.

Allow county commissioners courts to determine whether special districts under their authority will participate in county tax abatement agreements.

Require local governments to adopt performance-based tax abatement contracts.

Require annual certification of performance measures as a condition for continued tax abatement benefits.

Require the performance of a cost-benefit analysis prior to granting a tax abatement.

Transfer tax increment financing reporting responsibility from the Office of the Attorney General to the State Comptroller of Public Accounts.

Require economic development corporations to file annual reports with the state comptroller.

Restrict the use of Section 4B of the Development Act to cities that have adopted an economic development sales tax.

Extend the reauthorization date for enterprise projects from every two years to every four or six years.

Abolish one-time incentives for enterprise projects.

TELECOMMUNICATIONS
Charges

Monitor the implementation of the provisions of H.B. 2128, 74th Legislature (the telecommunications bill, or PURA 95) including:

Assessing its effectiveness in increasing competition in the local exchange market;

Determining the extent to which local exchange companies have increased their investment in the telecommunications infrastructure in Texas and identify which areas of the state, if any, have not fully benefited from such investments; and

Assessing the effectiveness of the uses of the telecommunications infrastructure fund improving the capabilities of Texas schools, libraries and hospitals.
Background

During the 74th Session, the legislature determined that it would encourage the development of distance learning and telemedicine in Texas through the creation of a Telecommunications Infrastructure Fund (TIF), which was to be funded by assessments under PURA 95 at an annual level of $150 million for 10 years. Subsequently, the TIF was challenged in federal and state courts by various companies (primarily cellular companies). The federal action was dismissed on jurisdictional grounds; however, on January 24, 1996, in state court action, Judge McCown ruled that the TIF assessment scheme violated the Texas Constitution's uniform and equal taxation clause. The ruling has had the effect of reducing the annual assessment which funds the TIF by nearly $57 million, to a level of approximately $93 million per year.

An additional aspect of the legislative scheme established by PURA 95 was the separation of the TIF into two separate accounts, each having separate funding objectives. In particular, the telecommunications utility account was to be used to fund wiring and equipment purchases for public schools (i.e., K-12). The commercial mobile service providers account, on the other hand, was to be used for equipment purchases, wiring, materials, program development, training, and installation for all qualifying entities. Each was to be funded to a level of $75 million per year, though from separate assessments. Judge McCown's remedy provided that rates were to be calculated as statutorily prescribed; however, once both rates were calculated, the lower of the two rates is to apply to both telecommunications utilities and commercial mobile service providers. The net effect under McCown's scheme is that the commercial mobile service providers account is underfunded by approximately $57 million.

As originally enacted, TIF assessment provisions were intended to include telecommunications utilities and commercial mobile service providers. Despite this, the language of PURA 95 arguably includes certain unforeseen entities. For example, hotels or motels that charge for local calls, mark up long-distance services, or charge for fax services are considered telecommunications utilities for the purpose of the TIF assessment. Telephone debit card sellers that are responsible for collecting tax on the cards are also considered telecommunications utilities for purposes of the TIF assessment.
Recommendations

In order to restore the original level of funding established during the 74th session, i.e., $75 million per year in each of two accounts, the legislature should amend PURA 95 to assess all parties at an identical rate. The legislature should further direct the comptroller to channel proceeds of the amended assessments into two separate accounts to be used in accordance with the purposes originally set forth in PURA 95.

The legislature should refine the definitions of a telecommunications utility and commercial mobile service provider so as to limit the application of TIF assessments to those entities originally envisioned.

Senate Bill 1, enacted by the 74th Legislature, revised the Education Code and had the additional effect of invalidating PURA 95's citation to the definition of a "school district." The legislature should amend PURA 95 to correctly reference the current Education Code definition of a school district.

In order to restore the original level of TIF funding established during the 74th Session, i.e., $150 million per year, the legislature should redirect the comptroller, through suitable legislation, to collect the annual amount of $150 million per year.

Under PURA 95, the TIF Board is authorized to award grants and loans to qualifying entities. However, the TIF Board's loan powers are not defined. The legislature should amend PURA 95 to delineate the TIF Board's loan powers. In particular, the legislature should consider specifying qualification criteria and loan repayment terms and conditions.

Under PURA 95, qualifying entities are not currently required to receive competitive bids for services and/or equipment acquired through the use of TIF funds. To protect both the integrity of the TIF and its intended beneficiaries, the legislature should require schools, hospitals and libraries that qualify for grants/loans to conduct a bid process when selecting vendors/suppliers.

Statewide networks (e.g., TEX-ANIII) may apply for and receive grants and loans from the TIF. Currently, all state agencies, state universities (not including private universities), political subdivisions, MHMR regional centers, and some school districts have access to the network. Because the TlF makes funds available to both public and private entities on an equal and uniform basis, the legislature should ensure that statewide telecommunications networks, which are eligible to receive funds from the TIF, are themselves available to all qualifying schools, libraries or hospitals on an equal and uniform basis.

Both the Senate and House overwhelmingly passed H.B. 2128 during the 74th legislative session. The time and effort expended by both the House and Senate during the last four years on this legislation demands that all efforts be made to keep it whole. The Senate Economic Development Committee urges the Attorney General for the State of Texas, and the members and staff of the PUC to aggressively defend the state's telecommunications law, PURA 95, before the FCC in any judicial forum in which the law is being challenged.

MEDICAL SAVINGS ACCOUNTS
Charge

Study the potential benefits and liabilities of medical savings accounts (MSAs) as an additional health care option for individuals and employers.
Background

An MSA is an income tax-exempt account to which eligible employers and employees contribute in order to withdraw from for routine medical care. In most cases, an MSA is set up for and owned by an individual, and the funds in the account are provided by the individual's employer. They are generally coupled with a low-premium, high-deductible health plan to protect against the costs of a catastrophic illness. MSAs provide direct incentives to consumers to control costs and stimulate market cost-control competition. The MSA is the property of the employee and unused balances accumulate over time with interest, pre-funding future health care needs. Since unused funds accumulate from year to year on a tax-deferred basis, MSAs provide consumers with incentives to make cost-conscious choices when purchasing health care services. MSA money can eventually be used for medical expenses after retirement, rolled over into an individual retirement account (IRA) or pension plan, or left as part of the person's estate. There have been a number of bills to establish MSAs introduced in Congress since 1992. At the time of the writing of the committee's report in July, none of these efforts in Congress had been successful. In August, however, a pilot MSA program was established as part of the Kennedy-Kassebaum Health Insurance Portability Act.

Findings and Recommendations

The report makes no recommendations but finds that the state's current tax system does not provide an adequate personal tax mechanism to make the use of MSAs viable at the state level.