The Houston Chronicle recently broke the story on a special purpose district in Austin that’s discovered a way to manipulate the law in its favor—a manipulation that has generated the district, and its board members, millions of dollars in profits.
Put simply, the SH130 Municipal Management District uses a tax workaround to exempt developers’ land from property taxes. They split the profits from not having to pay taxes, and the tax burden is passed on to the local populace.
To do so, the SH130 Municipal Management District creates an internal public facility corporation, or PFC. This public/private corporation buys property, which it then leases to developers. The developers are free to build on the property—with the requirement that they build some units of affordable housing.
Since the property is technically owned by the government, the property is then exempt from property taxes. The developers pay their rent to the PFC as a percentage of the taxes they saved—often millions of dollars going to the PFC, and even more millions saved by the developers.
However, this passes the lost local tax revenue burden on to the other residents in the area. Normally, these kinds of understandings are made between PFCs and local developers, with at least some input and oversight from people in the area. This allows residents to weigh in on the balance between increased taxes, affordable housing, and attracting developers.
However, the SH130 Municipal Management District is not just setting up these PFC-owned agreements in its area—it’s setting them up all over the state, passing costs on to people in San Antonio, Houston, and other areas, while reaping the benefits.
This process was also already ripe for corruption of the “I scratch your back, you scratch mine” variety. As the Chronicle reports, “Some of the deals also involve businesses tied to its board members, raising questions about how they are using the government entity they formed.”
This risk is exacerbated by the lack of local oversight at the SH130 Municipal Management District.
This scheme at SH130 Municipal Management District is a particularly bad but unsurprising result of convoluted, opaque tax law and the layers and layers of unaccountable, unelected special purpose districts.
Our tax law needs significant clarification and simplification, and these types of special purpose districts need, at the very least, better oversight, clearer reporting, and increased accountability, if not outright elimination. Special purpose districts should also be subject to sunset review—otherwise, we risk setting up taxing groups that never go away, even if they’re not needed.