Legislative Issues to Watch this Session

By Robert D. Miller and Amy Hunt
Locke Liddell & Sapp LLP

The Texas legislature will consider a myriad of issues of interest to the commercial real estate industry during the 80th Legislative Session, and we highlight a few of the major ones in this article. Unlike recent sessions, there is a large budget surplus and there is not an unconstitutional school finance system hanging over the legislature’s head. Yet, the following issues are similarly complex, and partisan divisions continue to deepen.

Comptroller Susan Combs reported in her Biennial Revenue Estimate that the 80^th Texas Legislature will have a $14.3 billion surplus to spend in the 2008-2009 state budget. She warned, however, of a cooling economy due to a slowing housing market, lower oil and gas prices, and a decrease in consumer spending. Lt. Governor David Dewhurst and Speaker Tom Craddick welcomed the surplus news but explained that the $14.3 billion surplus should actually be better understood as a $2.5 billion surplus. Why? The legislature will have to restore funding to state agencies for past budget cuts and set aside money for the property tax cuts in 2010 and 2011.

Thankfully, lower property taxes are on the horizon due to school finance reform. However, this reduction will force the legislature to confront constitutional limits imposed on state spending. To explain, our state constitution prohibits discretionary state spending from increasing at a faster rate than the growth of the Texas economy. Increases in public education and healthcare expenditures alone may very well exceed this discretionary spending limit. Thus, lawmakers will explore different solutions for complying with the cap, such as asking voters to amend the state constitution in May or overriding the constitutional limit.

Business Tax The legislature will consider revisions to the new business margins tax (enacted by the 79th Legislature in 2006); these revisions would be retroactive to January 1, 2007. Changes being sought by the Texas Building Owners and Managers Association (Texas BOMA) include: eliminating flow-through payments from the margin tax under both gross rent and net rent leases; expanding the cost of goods sold deduction to apply to commercial real estate; and an express legislative acknowledgement that a portion of the margin tax is a substitute for ad valorem taxes. This last acknowledgment would in many cases allow the landlord to pass a portion of the margin tax through to tenants as property operating costs.

Property Tax The Texas Task Force on Appraisal Reform sent its plan to Governor Perry in January, and it seems both the Governor and legislature are quite receptive to the plan. Recommendations include: requiring voter approval before any local taxing entity may charge or collect ad valorem tax revenue more than 5 percent greater than the prior year’s tax revenue (commonly called a 5 percent revenue cap); giving taxpayers the option of calculating their property taxes using a five-year rolling average of the property’s appraisal value; and allowing local governments the option of conducting an election to enact a half-cent countywide sales tax constitutionally dedicated to property tax reduction.

Additionally, the Task Force has recommended changing the composure of the Board of Directors of the Appraisal District. Currently, the Board is appointed by local taxing entities. The Task Force has proposed creating a five-member board, comprised of two members appointed by local taxing entities, two taxpayer representatives, and the elected tax assessor collector in that county. Moreover, the Task Force recommended measures to ensure a fair and balanced appraisal process, including establishing minimum Appraisal Review Board educational and experience qualifications. Legislation has also been filed prohibiting the linking of the chief appraiser’s compensation to an increase in the total value of the property in the district.

Unfortunately, as the Task Force recommends, the legislature will also consider mandating the disclosure of real estate sales prices to assist appraisers in determining property values. Opponents (including Texas BOMA) of the sales price disclosure argue that disclosure erodes confidentiality and will stimulate "sales chasing"—the practice of appraisers relying primarily on sales prices rather than on the physical and market specifics of the property being appraised. Texas BOMA believes that sales price is generally not the best indicator of value for commercial properties. Usually, the income approach is a better, and fairer, valuation method.

Lawmakers will be considering ways to crack down on illegal immigrants. One bill requires proof of citizenship in order to obtain an occupational permit, while another restricts illegal immigrant access to health services and education. Other proposals include requiring state agencies to gather statistics on the cost of services and benefits provided to illegal immigrants and suing the federal government to recover costs that stem from illegal immigration. Texas BOMA is carefully watching for any legislation that would add greater responsibility on employers, as opposed to federal or state government, to deter illegal immigration.

Since deregulation’s inception in 2002, only 30 percent of Texans have switched electric companies and consumers have complained of sky-high rates. Legislation has been filed to put a cap on electric rates and force TXU to either divest itself or auction off some of its generating plants. The bill also would reinstate a rate discount program for low-income customers and sanction companies that do not aggressively market outside their home service territory. Another bill directs the Public Utility Commission (PUC) to send ballots, listing alternative providers and prices, to customers who have not switched electric service. Opponents of the legislation will counter that legislators should allow the market to work. Texas BOMA is monitoring this legislation closely from the perspective of commercial property owners.

Finally, the TREC is one of 23 agencies that will be reviewed by the Sunset Advisory Commission this biennium. The Commission will review the policies and programs of TREC and consider changes to improve its operations and activities.