March 15, 2010

On March 12, 2010, the Tax Relief for Pollution Control Property Advisory Committee to the Texas Commission on Environmental Quality (TCEQ) met to consider a number of issues related to tax exemptions for pollution control equipment. Background information related to this topic was included in a document published earlier by the Legislative Budget Board.

In 1993, Texas voters approved a constitutional amendment permitting an exemption from property taxation for pollution control equipment, which is any facility, device, or method used for the control of air, water, or land pollution.  This exemption applied to pollution control equipment installed on or after January 1, 1994.  According to the Texas Constitution, Article 8, Section 1-1, pollution control property exempted from ad valorem taxation must be “all or part of real and personal property used, constructed, acquired, or installed whole or partly to meet or exceed rules or regulations adopted by any environmental protection agency of the United States, this state, or a political subdivision of this state for the prevention, monitoring, control, or reduction of air, water, or land pollution.

In 2001, the Seventy-seventh Legislature directed the Texas Commission on Environmental Quality (TCEQ) to adopt specific standards for evaluating applications and a formal procedure for applicants and appraisal districts to appeal a determination.

At a meeting of the TCEQ on January 13, 2010, there was discussion regarding a pending request from Valero Refining regarding tax exemption for some equipment installed at Valero facilities to remove sulfur from gasoline and related products.  This request was initially filed in 2007. While a final decision has not been made, two of the three TCEQ Commissioners voted to overrule the Executive Director’s recommendation against granting the requested exemption at this meeting. 

While no final action has been taken on the Valero case, TCEQ recently appointed an Advisory Committee on Tax Relief for Pollution Control Property to review its rules relating to the exemption, as required by statutory changes made last year.   While TCEQ staff pointed out that any new rules adopted would not apply to the Valero Refining request but only to new requests, there is at least one school of thought that the Advisory Committee’s recommendations on rule changes could influence the final determination of the Valero appeal.

It is important to note that these exemptions are not exclusively available to refineries,  petro-chemical businesses, and electric generating operations.  It is very likely that other industries will submit applications for exemptions in the future.  In addition, there is no mechanism in place that phases the pollution control property off the exemption list if at some point in the future the property becomes standard use within the industry.

Governmental entities expressed concern regarding the possible impact of decisions related to the Valero case and future requests.  School districts located in areas where a significant portion of the property value can be attributed to industrial property anticipate financial problems if large tax exemptions are granted.  In some cases, it appears that school districts could be required to refund several million dollars in taxes collected in current and previous years.  There appears to be no mechanism in state law for an appeal by school districts for additional state funds to replace this lost revenue (with the exception of an adjustment for current year).  There is also concern regarding the impact on the Debt Service portion of the tax rate since there is no state “hold harmless” for this portion of the tax rate.

The definition of property eligible for tax exemption was debated at length by Advisory Committee Members.  Certain types of equipment installed at refineries are used for the purpose of reducing the amount of sulfur in fuel products which serves to reduce air pollution wherever the fuel is used.  There is apparently little reduction in pollution at the refinery site and, in fact, may increase emissions at the site (although there is some debate about this).  Current rules require that the pollution control equipment reduce pollution “at the site” in order to be eligible for tax exemption.  The governmental jurisdictions argued that it is unfair for local communities to bear the burden of the tax exemption for this reduction in pollution in products sold elsewhere in Texas and out of state, when the reduction is not evident in their communities.  Apparently there is room for disagreement because the Constitutional Amendment is silent with regard to location of the reduction in pollution.

A representative of the Harris County Appraisal District stated that it would be helpful if the TCEQ could rule on requests more quickly.  Apparently, some requests are delayed months or years, as is indicated in the Valero case.  In the meantime, taxes have been collected and spent before a ruling is made.  Comments by staff and others indicated that the department that handles all the requests throughout the State of Texas only has three staff members.

Valero also indicated that they wish to submit written comments to the Advisory Committee.

A representative of the Texas Taxpayers and Research Association pointed out that TCEQ is not responsible for the fact that granting tax exemptions allowed by the Constitution will lead to a loss of tax revenue.

The Advisory Committee plans to meet again on March 26, 2010.