Texas Commission on Environmental Quality INTEROFFICE MEMORANDUM To: Commissioners Date: Thru: LaDonna Castañuela, Chief Clerk Glenn Shankle, Executive Director From: Mark Vickery, P.G., Deputy Director Docket No.: Subject: 2007-1228-RUL Commission Approval for Rulemaking Adoption Chapter 17, Tax Relief for Property Used for Environmental Protection Chapter 18, Rollback Relief for Pollution Control Requirements HB 3732: Property Tax Exemptions Rule Project No. 2007-055-017-AS Scope of the rulemaking: This adoption would implement the changes required by House Bill (HB) 3732 involving amendments to Texas Tax Code (TTC), '11.31, (Property) as well as TTC, 26.045, (Rollback), which required the creation of 30 TAC Chapter 18: Rollback Relief for Pollution Control Requirements. Additionally, it would: add equipment currently listed in the Predetermined Equipment List (amended) as Part A of the Equipment and Categories List, create the Equipment and Categories List Part B, from the list described in TTC, 11.31(k), (Property), allow for electronic payment of application fees, create an Equipment and Categories List review process of at least once every three years, modify the application review process in order to implement the requirements of TTC, 11.31(m) (Property) and TTC, 26.045(h) (Rollback), create a separate fee level specific to those applications which contain only property listed on Part B of the Equipment and Categories List, the fee is set at $500, update the agency name, and fix grammar. Reasons for the rule package: The 80th Legislature, 2007, enacted HB 3732. HB 3732, Section 4 amended TTC, '11.31, (Property), by adding three new subsections. The first new subsection, TTC, '11.31(k), (Property), requires the commission to adopt by rule a list of 18 pollution control property categories, including 17 specific categories of equipment and one general category of equipment. The second new subsection, TTC, '11.31(l), (Property), requires the commission to adopt a procedure to review the list at least once every three years. It also allows for the removal of categories from the list if the commission finds compelling evidence that a category does not provide pollution control benefits. The third subsection, TTC, '11.31(m), (Property), requires the commission to review applications containing equipment included in the TTC, 11.31(k), (Property), within 30 days of receiving the required application documents and to issue a determination without regard to whether the environmental benefit information required by TTC, '11.31(c)(1), (Property) has been submitted.
Page 2 Section 5 of HB 3732 adds subsections (f), (g) and (h), to TTC, 26.045, Rollback Relief for Pollution Control Requirements. These subsections are identical to TTC, 11.31(k), (l), and (m), as described above. In addition, this rulemaking would create new 30 TAC Chapter 18: Rollback Relief for Pollution Control Requirements. Existing TTC, 26.045(e) (Rollback) allowed the commission to adopt rules, but new TTC, 26.045(f) (Rollback) requires the commission to adopt rules. Chapter 18 only applies to political subdivisions of this state. Statutory Authority: The amendments to 30 TAC Chapter 17: Tax Relief for Property Used for Environmental Protection and the creation of 30 TAC Chapter 18: Rollback Relief for Pollution Control Requirements are adopted under Texas Water Code (TWC), 5.102, which authorizes the commission to perform any acts authorized by the TWC or other laws which are necessary and convenient to the exercise of its jurisdiction and powers, and 5.103, which authorizes the commission to adopt rules necessary to carry out its powers and duties under TWC. The amendments and new chapter are also adopted under TTC, 11.31, (Property), which authorizes the commission to adopt rules to implement the Pollution Control Property Tax Exemption program, and TTC, 26.045, (Rollback), which requires the commission to adopt rules to implement the Rollback Relief for Pollution Control Requirements program. Potentially controversial matters: Historically, tax exemptions for pollution control property are considered to have limited impact on property tax collections. The property becomes exempt in the year that it is installed so the property s value never goes on the tax rolls, taxes are never collected on the property, and the political subdivisions do not see a change in revenue. However, the eighteen categories of equipment included in HB 3732 include property which has previously not been considered pollution control property. With this statutory change, applicants would be able to file for and potentially receive positive determinations and exemptions for this equipment. While applicants would not be able to receive a refund of taxes paid, they would cease paying taxes on the equipment for which they may have paid taxes in previous years. Several comments were received requesting the commission make changes that the executive director believes would be contrary to the Texas Tax Code. Texas Oil & Gas Association and Marathon Petroleum, LLC. requested that sulfur recovery equipment be added to the list in addition to providing comment regarding environmental benefit at the site. Pritchard and Abbott provided numerous comments not specifically related to the rule proposal but as to the appeals process. NRG provided comment that clarification is needed to show components of advanced clean energy that are not listed in B-1 through B-17 of the Part B list will be eligible for a use determination review as Tier IV applications. Public comment: Comments were received from: State Representative Dennis Bonnen, State Representative Lon Burnam, State Representative Myra Crownover, State Representative Joe Deshotel, State Representative Richard L. Rick Hardcastle, State Representative Tan Parker, State Representative Mike O Day, State Representative Dora Olivo, State Representative Alan B. Ritter, State Representative Beverly Woolley, State Senator Chris Harris, State Senator Robert L. Nichols, State Senator Tommy Williams, City of Houston Mayor Bill White, Harris County Judge Ed Emmett, Jefferson County Judge Ronald Walker, Newton County Judge Truman Dougharty, Nueces County Judge Samuel L. Neal, Jr., Orange County Judge Carl K. Thibodeaux, San
Page 3 Patricio County Judge Terry Simpson, Harris County Precinct 2 Commissioner Sylvia R. Garcia, Harris County Attorney s Office, Dallas Central Appraisal District Chief Appraiser W. Kenneth Nolan, Deer Park Independent School District Superintendent Arnold Adair and Board President Rhonda Lowe, Pasadena Independent School District Superintendent Kirk Lewis, Port Arthur Independent School District Superintendent Johnny E. Browen, Ph.D., Port Neches-Groves Independent School District Superintendent Dr. Lani Randall, Association of Electric Companies of Texas, Inc., Clean Coal Technology Foundation of Texas, County Judges & Commissioners Association of Texas, Texas Association of Business, Texas Association of Counties, Texas Association of School Administrators, Texas Chemical Council, Texas Conference of Urban Counties, Texas Mining and Reclamation Association, Texas Oil & Gas Association, Texas Tax Payers and Research Association, Jackson Walker, L.L.P., Marathon Petroleum Company LLC., NRG Texas LLC., Pritchard & Abbott Inc., Sierra Club, and one Individual. During the proposal agenda the Commissioners solicited comments on three specific questions. Comments were received regarding the Commissioners solicited comments. With regard to the appropriate format and process for notifying the chief appraiser, three general types of comments were received. The comments are: 1) that the commission should maintain the current notification process; 2) that the commission should provide a complete application to the chief appraiser; and 3) that the commission should allow the chief appraiser an opportunity to comment. With regard to whether Part B should be limited to advanced clean energy projects, two commenters suggested that the purpose of the bill was to provide incentives to electric generation projects, all other commenters commented that Part B of the ECL should not be limited. With regard to the requirement that an environmental benefit exist at the site, three general types of comments were received. There were numerous comments in support of the current process, one comment that the environmental benefit did not have to be at the site, and one comment that HB 3732 does not address the on-site versus off-site benefits issue and should not be invoked in the context of a debate about environmental benefit at the site. Based on the comments received regarding these three questions, no changes are proposed at this time. A public hearing on this rulemaking was held in Austin on October 26, 2007, at 10:00 a.m. at the Texas Commission on Environmental Quality complex located at 12100 Park 35 Circle in Building E, Room 201S. The close of comments date for this rulemaking was Monday November 5, 2007. Significant changes from proposal: In response to comments received from City of Houston Mayor Bill White, Pritchard and Abbott, Sierra Club, Texas Association of Counties, Texas Conference of Urban Counties and others in support of their comments the following changes are proposed: Modify the Decision Flow Chart (Figure 17.15(a)) so that a partial analysis must be done in order to determine the appropriate application tier level. Several comments were received regarding equipment used partially for pollution control. The flow chart is modified to clarify that a partial analysis must be completed by the applicant in order to determine the appropriate tier level. Add language in order to define the basis for calculating the incremental cost difference. This is added to the end of the description paragraph, in Part A of the ECL (Figure 17.14(a) and Figure 18.25(a)): For items where the description limits the use determination percentage to the incremental cost difference, the cost of the property or device without the pollution control feature is compared to a similar device or property that does have the pollution control feature. This language is added based on comments received regarding replacement equipment that provides pollution
Page 4 control benefit and a calculation method for determining the percentage of pollution control. Using the incremental cost difference allows the applicant to receive an exemption for the whole portion of the new equipment which provides pollution control. Change the description of item A-112 on Part A of the ECL (Figure 17.14(a) and Figure 18.25(a)) to read: The incremental cost difference between the cost of the original equipment and the replacement equipment is eligible only when the replacement of these parts is done for the sole purpose of eliminating fugitive emissions of volatile organic compounds. New systems do not qualify for this item. This is proposed to clarify the incremental cost difference. Add five item related to painting and blasting to Part A of the ECL (Figure 17.14(a) and Figure 18.25(a)). These items had been on the former PEL but were left out of Part A of the ECL. We propose adding them back in as a result of the discussions regarding incremental cost difference. In response to comments received from Sierra Club the following changes are proposed: Add but that is not on the Equipment and Categories List, located in 17.14(a) of this title (relating to Equipment and Categories List) to the definition of Tier III ( 17.2(15)). The added language is to clarify that items on Part A may also be partial determinations but do not require a Tier III analysis. Add the following language to the description paragraph, in Part B of the ECL (Figure 17.14(a) and Figure 18.25(a)) Applicants should first view Part A of the Equipment and Categories List to see if their equipment is already on that list. This is added to encourage applicants to file Tier I applications in lieu of Tier IV applications when the equipment could qualify under both process tiers. For clarification, add two references to the Part B Decision Flow Chart (Figure 17.15(b)) so that they state that the reference is the Decision Flow Chart located in 17.15(a). In response to comments from Texas Conference of Urban Counties and others in support of their comment, the following change is proposed: Add the following language to the description paragraph, in Part A of the ECL (Figure 17.14(a) and Figure 18.25(a)), before The commission will review The new language is: "The use percentages on Part A of the ECL are established based on standard uses of the pieces of equipment involved. If the Executive Director determines that the equipment is not being used in a standard manner, the Executive Director may require that a Tier III analysis, using the Cost Analysis Procedure, be conducted by the applicant in order to calculate the appropriate use determination percentage. The Executive Director may also use the Cost Analysis Procedure where it is appropriate to do so to more accurately reflect the environmental benefit at the site." This is added to allow the Executive Director to issue a Tier I application determination with a percentage other than that listed based on the specific use. The change would be key if a rule change was required to remove an item from Part A of the ECL while applications for the item were under review. In response to comments from Sierra Club, Texas Association of Counties, Texas Conference of Urban Counties and others in support of their comments the following change is proposed: Insert into 17.10(a)(1) and one copy to require a duplicate application be submitted. This will allow the TCEQ to more quickly share the complete application with the appraisal district as part of the required notification. Key points in adoption rulemaking schedule: Texas Register proposal publication date: October 5, 2007 Six-month Texas Register filing deadline: March 19, 2008
Page 5 Anticipated Texas Register publication date: January 4, 2008 Anticipated effective date: January 10, 2008 Agency contacts: Ron Hatlett, Rule Project Manager, 239-6348, SBEA Chris Ekoh, Staff Attorney, Environmental Law Division, 239-5487 Kristin Smith, Texas Register Coordinator, 239-0177 Attachments cc: Chief Clerk, 5 copies Executive Director s Office David C. Schanbacher, P.E. Daniel Womack Ashley K. Wadick Zak Covar Office of General Counsel Ron Hatlett Kristin Smith